Aligning Utility Incentives with Energy Efficiency Investment

1
Aligning Utility Incentives with Energy
Efficiency Investment

• Val Jensen
• ICF International

2
Context - National Action Plan for Energy
Efficiency

• July 2006 report included a recommendation to
  modify policies to align utility incentives with
  the delivery of cost-effective energy efficiency
  and modify ratemaking practices to promote energy
  efficiency investments.
• A key objective for Year 2 of the NAPEE effort is
  to, undertake efforts to support key
  recommendations of the Action Plan.
• ICF retained by EPA on behalf of the NAPEE to
  develop a White Paper extending the work
  underlying this recommendation and provide
  additional information on cost recovery and
  incentive mechanisms
• Original NAPEE and recommendations were focused
  on policy current work is designed to support
  implementation activities provide a resource.

3
The Hierarchy of Financial Implication (a.k.a the
3-legged stool)

• 3 types of costs/financial implications that must
  be considered
• Program cost recovery
• Avoidance or recovery of lost margins
• Utility performance incentives
• Each of these affect utility earnings/net
  operating margins
• It is the direction and magnitude of this effect
  that ultimately determines whether a utilitys
  financial interest is aligned with a policy
  interest in promoting utility investment in EE.

• Our Objectives
• Properly portray these implications from the
  perspectives of both utilities and policy makers.
• Examine alternative approaches to addressing the
  implications.
• Provide concrete examples/case studies.
• Search for new approaches

4
Mechanisms Examined
Lost Revenue Recovery Mechanism (LRAM)
Expense Rate Case Rider
Lost Margin Recovery
Program Cost Recovery
Earnings/Net Operating Margin
Capitalize Rate Case Deferral
Decoupling
Shared Savings
Performance Incentives
Performance Payment
ROR Adder
5
Current Landscape
6
Preliminary Observations

• Significant levels of investment (e.g., CT, VT,
  CA) will require
• All three levels of financial implication be
  addressed
• 3rd party administration may substitute to some
  degree
• But, what matters ultimately is the impact on
  earnings
• Can get there in a variety of ways.
• Policies dont operate in isolation influenced
  by
• General ratemaking policy
• Utility resource acquisition policy
• Climate policy
• Market structure policy
• Important differences exist between
• Investor-owned and publics/coops
• Electric and gas

7
More Preliminary Observations

• Policies need to address not only tangible costs,
  but also utilities perceptions of regulatory
  risk policy stability is important.
• Consistent policy with net positive impacts on
  earnings can play a major role in changing
  utility resource acquisition culture.
• Policies that leave a utility financially neutral
  (no reduction in earnings) will produce
  indifference to EE.
• Aligning IOU interests with a policy goal of
  aggressive investment in EE may require an
  ability to earn performance incentives.
• Climate legislation will likely change the
  utility benefit-cost calculus for EE

8
Challenging Issues

• Recovery of margins
• Are margins guaranteed?
• Do customers benefit?
• What is the proper utility business model?
• Performance Incentives
• Should utilities be doing this anyway?
• Could someone else do the job less expensively?

9
Process and Timeline

• Detailed outline - April
• Draft to Advisory Group - June
• Draft to Leadership Group for review and input -
  late July
• Final Draft September
• Distributed October

10
Advisory Group

• Utilities
• Duke Energy
• Tampa Electric Co.,
• PNM
• Questar Gas Co
• PGE
• Southern Company
• Austin Energy
• Southern California Edison
• Tri-State

• Utility Commissions
• Idaho PUC,
• Kansas Corporation Commission
• District of Columbia PSC
• New York PSC
• Others
• NRDC
• Environmental Defense
• CT Office of Consumer Counsel