In public utility regulation, decoupling refers to the disassociation of a utility profit's from its sales of the energy commodity. Instead, a rate of return is aligned with meeting revenue targets, and rates are trued up or down to meet the target at the end of the adjustment period. This makes the utility indifferent to selling less product and improves the ability of energy efficiency and distributed generation to operate within the utility environment. Ideally, utilities should be rewarded based on how well they meet their customers' energy service needs. However, most current rate design instead places the focus on commodity sales, tying a distribution company's recovery of fixed costs directly to its commodity sales.

In order to motivate utilities to consider all the options when planning and making resource decisions on how to meet their customers' needs, the sales-revenue link in current rate design must be broken. Breaking that link between the utility's commodity sales and revenues, removes both the incentive to increase electricity sales and the disincentive to run effective energy efficiency programs or invest in other activities that may reduce load. Decision-making then refocuses on making least-cost investments to deliver reliable energy services to customers even when such investments reduce throughput. The result is a better alignment of shareholder and customer interests to provide for more economically and environmentally efficient resource decisions. As an added benefit, breaking the sales-revenue link streamlines the regulatory process for rate adjustments. Contention over sales forecasts consumes extensive time in every rate case. If the sales-revenue link is broken, these forecasts carry no economic weight, so the incentive to game forecasts of electricity sales is removed and rate cases become less adversarial. California and nine other states have already implemented legislation to that end.

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