Valuing Efficiency: A Review of Lost Revenue Adjustment Mechanisms

This study is one in a three-part ACEEE series on utility business models for energy efficiency. The two others are a state-by-state examination of utility performance incentives and, an overall analysis of the utility business model framework. This report examines one mechanism meant to deal with a utility’s disincentives to invest in energy efficiency: a lost revenue adjustment mechanism (LRAM). An LRAM is a rate adjustment mechanism that allows a utility to recover revenues that are reduced specifically as a result of energy efficiency programs.

An analysis of 17 states finds that:

• It is important that all parties understand and agree to evaluation procedures. The evaluation process should be rigorous and transparent, with appropriate checks along the way.
• Timing is critical to precise, efficient implementation of an LRAM. Energy efficiency decisions and ratemaking decisions should be aligned. Intervals between rate cases also matter.
• An LRAM alone will not fully incentivize efficiency nor remove the throughput incentive. It will do little to encourage investment in energy efficiency unless combined with other policy levers.

While LRAM is not a complete substitute for decoupling, it can help bring parties to the table and may be a temporary solution on the way to full revenue decoupling.