The Electric Rate Adjustment Mechanism (ERAM), adopted in 1982 by the
California Public Utilities Commission (CPUC) for the major investor-owned electric
utilities it regulates, represents a major departure from traditional ratemaking.
ERAM removes a prior anti-conservation bias by ensuring that the utility will fully
collect its authorized revenue requirement irrespective of its sales!! Over or
undercollections of revenues accrue to a balancing account and are amortized into
future rates. This mechanism protects the utility from the risk of sales deviating from
expectations for any reasono Shielding the utility in this way can confound other
policy actions that assume the utility faces incentives other than those created by
ERAM. In this paper, it is assumed that encouraging energy conservation and discouraging
bypass are both established CPUC policies. A study of special sales contracts
permitted between California utilities and their large industrial customers
shows ERAM establishes utility incentives that render these two policies incompatible
under normal regulatory practice. This conflict arises because ERAM guarantees
that any revenue shortfall arising from a contract will be made up on sales to atIler
customers: that is, the utilities are not hurt by signing contracts favorable to their
industrial customers.