Trends in Regulation: Energy Efficiency Policy in California

1
Trends in RegulationEnergy Efficiency Policy in
California
Tory Weber Southern California Edison

• CEE Program Meeting
• June 2007

2
OverviewEnergy Efficiency at SCE

• SCE is proud to be a part of CEE and its
  international success
• Background on SCE
• SCEs 15,000 employees serve a population of over
  13 million people
• 50,000 square-mile service territory in central
  and southern California
• System peak over 20,000 MW annual sales over
  100,000 GWh

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Public Policy Perspective Californias Energy
Efficiency Policy

• Reduces energy supply costs by reducing energy
  demand and peak electricity load
• Stabilizes per capita electricity consumption and
  reduces the need for new power plants
• Reduces air pollution associated with electricity
  generation from fossil fuels
• Supports economic development by lowering energy
  costs

4
Public Policy Perspective Californias Energy
Efficiency Policy

• The California Energy Action Plan, first adopted
  in 2003, specifies Californias energy policies
• Energy efficiency and demand response are first
  in the resource loading order
• DSM supports the diversification of Californias
  resource mix, reducing exposure to any single
  resource type, such as natural gas

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Public Policy Perspective California vs. US
Energy Efficiency
Source California Energy Commission
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Public Policy Perspective California Energy
Efficiency Policy

• Decoupling (2001) removes link between revenues
  sales
• Public Benefits Charge (2002) provides minimum
  EE funding
• EE Goals (2004) adopts 10-year goals for each
  utility
• Administration (2005) utilities are responsible
  for EE portfolios
• Policy Rules (2005) cost effectiveness other
  principles
• Avoided Costs (2005) adopts resource benefit
  values for EE
• Adoption of 2006-2008 Programs (2005-2006)
• EMV (2005-2006) adopts framework for
  measurement
• EE Incentives (2007?) performance incentives
  for EE

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Public Policy PerspectiveLost Revenue Issue
Build vs. Save

• Under Traditional Ratemaking
• Supply-Side
• Adds to rate base
• Earns a rate of return
• Demand-Side (aka Energy Efficiency)
• Reduces sales
• Reduces supply-side earnings

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Lost RevenuesAlternative 1 Lost Revenue
Adjustment Mechanisms

• Utility recoups the lost revenues from EE by
  estimating lost sales and multiplying by the
  fixed portion of utility prices
• (-) Use of ex post measurement adds to the cost
• (-) Without measurement uncertain accuracy
• (-) Lessens promotion of non-measured EE (i.e.,
  education for customer-driven EE )
• (-) Litigious

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Lost RevenuesAlternative 2 Fixed Charge
Ratemaking

• Shift in ratemaking to that which is less
  volumetric and more based upon a fixed charge per
  customer or declining block rates
• (-) reduce the volumetric price signal to
  customers, reducing the incentive for them to use
  energy wisely

10
Lost RevenuesAlternative 3 Decoupling

• Utility revenues are set in accordance with
  expected costs and fixed for a specified term
• () Utility authorized fixed costs recovered
  without regard for EE success or other factors
  such as weather or economic fluctuations
• () If a utility can reduce costs during the term
  through energy efficiency it will be able to
  increase its profits even with reduced sales
• () Simple true-ups at regular times no long,
  litigious process for estimating the energy
  savings impact on sales

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Decoupling in California Post Restructuring
(2001-)

• the CPUC should ensure that errors in estimates
  of demand elasticity or sales do not result in
  material over or undercollections of the
  electrical corporations AB29x

• Commission adopted decoupling mechanisms for each
  California electric utility as part of the
  subsequent rate cases
• Rate bases set and adjusted annually to reflect
  external factors
• Utilities track in balancing accounts the
  difference between actual and forecasted base
  rate revenues
• Overcollections refunded to ratepayers
• Undercollections recovered from ratepayer

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Decoupling in California Southern California
Edison

• Balancing account compares the authorized revenue
  requirement on a monthly basis to revenues
• Annual adjustments for inflation, productivity,
  number of customers served
• Distribution over/undercollections consolidated
  into distribution rate levels
• Generation over/undercollections consolidated
  into generation rate levels
• Z-factor to adjust for major issues outside of
  SCEs control

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Decoupling in California Impact on Energy
Efficiency

• Pre-restructuring - - Expenditures increase from
  under 100m to over 400m
• Peaked at over 550m in 1984
• Restructuring - -Expenditures drop to mandated
  levels just over 200m
• Post-restructuring - - Expenditures return to
  levels over 500m

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Energy Efficiency Funding Two Sources of EE
Funding in CA

• Public Goods Charge
• Legislatively-mandated, non-bypassable systems
  benefits charge
• Sets floor amount for energy efficiency
• Low income EE levels set on needs basis
• Procurement Funding
• Goals and amounts established in Long-Term
  Resource Plan
• Utilities apply for funding based on resource
  need
• Amount recovered in rates along with other
  generation-related expense

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Energy Efficiency Funding Energy Efficiency
at SCE 2006-8

• Over 800 million in funding (2b statewide),
  including
• Energy Efficiency
• Low Income Energy Efficiency
• EE Measurement and Evaluation
• Over 3 billion kWh 800 MW in impacts
• EE levels included in SCEs 2004 long-term
  procurement plan will satisfy approximately 10
  percent of SCEs future energy needs in 2014
• EE will meet SCEs energy needs at a cost lower
  than generation resources

16
Public Policy Perspective Shareholder
Incentives

• California makes a performance incentive
  mechanism a priority
• CA PUC recommends a risk/reward mechanism which
  shares benefits between utilities and ratepayers
• Risks/rewards tied to CA energy savings and
  demand reduction goals
• Earnings will depend upon the adopted sharing
  percentage between utilities and ratepayers

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Public Policy Perspective Shareholder
Incentives

• Multiple proposals currently before the CPUC
• Hearings held May 29 June 1 on
• Comparison of energy efficiency incentives to
  investor returns on supply-side assets
• Recommended shared savings rates
• Expect Commission Decision - Summer 2007

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Public Policy Perspective AB 32 Global
Warming Solutions Act of 2006

• Codifies the states emission reduction targets
  1990 levels by 2020
• Silent regarding the use of cap and trade
  mechanism The state board may include in the
  regulations the use of market-based compliance
  mechanisms

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Other Elements of SCEs Portfolio

• SCE Offers Customers More than Energy Efficiency
• Demand Response/Load Management
• Self Generation Incentives
• Low Income Energy Efficiency and Rate Discounts

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Next Steps in Energy Efficiency in CA

• CPUC Rulemaking
• Shareholder risk/reward incentive mechanism
• Embedded energy savings associated with water
  efficiency
• Evaluation, measurement and verification
• Update EE potential studies and 10-year savings
  goals, as necessary
• Planning process for 2009-2011 program cycle