Transcript Incentive Regulation

Sonny Popowsky
KEEA/PBI Energy Efficiency Conference
Harrisburg, PA October 1, 2013
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In the words of the economist Alfred Kahn,
“All regulation is incentive regulation.”
The question is who are we incentivizing and
what are we incentivizing them to do.
In the case of utility ratemaking, incentives
can affect the actions of both the utility and
the customers.
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Many retail electric providers (REPs) in Texas now
charge residential customers an additional fee if their
monthly usage falls below a specified minimum level,
typically 1000 kwh per month.
According to an August 2013 report, 36 of the 44
REPs offering fixed price residential service in the
Oncor (Dallas/Fort Worth area) service territory
charge their customers anywhere from $6.95 to
$20.00 per month if they use less than the specified
amount. (Texas ROSE Report on REP Fees 2013).
Note: these same Oncor customers also pay monthly
surcharges averaging $2.19 per month for smart
metering systems and $1.23 per month for an Energy
Efficiency Cost Recovery Factor (EECRF) to support
energy efficiency programs.
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In recent years, a number of electric and natural gas
utilities – including some in Pennsylvania – have
proposed a movement toward straight fixed variable
(SFV) rate design.
Under SFV rate design, all of a utility’s “fixed” costs
are moved into a flat monthly customer charge and
only “variable” costs are charged on a per kwh or per
mcf basis.
Since utilities contend that most of their costs
(particularly distribution costs) are fixed, this can lead
to very high monthly customer charges and very low
variable usage charges.
With SFV rate design, the utility’s revenue stream is
more assured, but the customer’s incentive to
conserve energy is greatly reduced.
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In establishing rates for utilities, there are
two ways to incentivize a desired action. One
is to reward the utility for achieving or
exceeding a specified goal; the other is to
penalize the utility for failure to meet that
goal.
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In 2006, National Fuel Gas Distribution Company
(NFG) in Erie filed a rate case that included a
proposed rate “decoupling” mechanism under
which the Company’s revenues would be
decoupled from its level of sales. That is, if the
Company’s sales declined due to the utility’s
energy conservation efforts or for any other
reason, the utility’s distribution rate per unit of
gas sold would increase. If sales increased
between base rate cases, the Company’s
distribution rate per unit of gas sold would
decrease.
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Over 1,260 individual consumer complaints
were filed against the NFG rate case, nearly
all in opposition to the decoupling proposal.
Consumers perceived decoupling to be a
“penalty” for conservation. That is, the less
gas they used, the higher the price per unit
they had to pay.
Public hearings were held in which numerous
customers opposed the decoupling proposal.
The NFG case was settled, with the Company
withdrawing its proposed decoupling clause.
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After the NFG decoupling fiasco, legislation
was introduced in the Pennsylvania House of
Representatives (HB 2954 of 2006) that would
have required the PUC to “disallow any
proposed rate, rate increase or rate surcharge
based in whole or in part on the utilization of
a revenue decoupling mechanism.”
The legislation was never taken up for a vote.
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In 2008 the General Assembly passed Act
129 of 2008, requiring Pennsylvania electric
utilities to help their customers save money
by reducing energy usage and peak demand.
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Act 129 for the first time imposed mandatory
energy efficiency and peak demand reduction
goals on Pennsylvania electric utilities.
But Act 129 did not provide for, and arguably
prohibited, revenue decoupling for electric
utilities.
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By July 1, 2009, each electric utility was
required to file an energy efficiency and
conservation plan.
Under the plan, the utility was required to
reduce total annual electricity consumption
by at least 1% by May 31, 2011; and by 3% by
May 31, 2013.
The utility also was required to reduce peak
demand during the 100 highest use hours of
the year by at least 4.5% by May 31, 2013.
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Act 129 allowed each utility to spend up to 2% of
its annual revenues to implement the plans, and
allowed the utility to recover all reasonable and
prudent costs of the programs from its
customers through an automatic adjustment
clause.
Under the statute, however, costs recovered
through the automatic adjustment clause, could
not include “decreased revenues of an electric
distribution company due to reduced energy
consumption or changes in energy demand.”
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Act 129 stated that “decreased revenues”
resulting from conservation measures could
only be recovered through normal base rate
proceedings.
This provision effectively precluded a
“decoupling” mechanism between base rate
cases.
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Act 129 provided no special “incentives” or
“rewards” for meeting the requirements of the
law.
Instead, Act 129 authorized the PUC to impose
penalties on utilities, in the form of $1 million to
$20 million fines, for failure to meet any of the
usage and peak demand reduction standards.
To quote Samuel Johnson (according to Boswell):
“Nothing concentrates one’s mind so much as the
realization that one is going to be hanged in the
morning.”
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According to the preliminary reports filed by the
utilities in July 2013, each of the electric
distribution companies exceeded the mandatory
cumulative energy efficiency savings required for
the Phase One plan period ending May 31, 2013.
Utilities reported achieved results ranging from
107% to 125% of the cumulative compliance
requirements as follows: Penelec -107%; Met Ed 108%; West Penn Power -108%; Penn Power 114%; PECO -121%; PPL – 124%; Duquesne –
125%.
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After reviewing the results to date of the initial
Act 129 Plans, the Commission proposed to
move forward with new energy efficiency
requirements for the period June 2013 through
May 2016, but did not adopt new goals for peak
demand reductions at this time.
EDCs’ new energy efficiency goals vary by
company and are based on the reductions that
can be obtained within the 2% annual revenue
limits that were included in the original
legislation.
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Under full decoupling, a utility’s revenues are “trued up”
between rate cases based on actual vs. projected sales,
regardless of whether or not any reduction in sales is due
to utility conservation efforts. As such, decoupling makes
a utility whole for lost sales due to economic recessions,
weather, etc., but the utility also does not get to keep
additional revenues resulting from sales increases.
Under a “lost revenue” approach, the utility is made whole
only for revenues lost due to utility conservation efforts.
So, for example, if a customer replaces incandescent light
bulbs with utility-subsidized compact fluorescent bulbs,
the utility recovers the lost revenue; but if that same
customer goes out and buys a 68” plasma television, the
utility keeps those additional revenues as well.
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Is it more important to give conservation
incentives to utilities or to customers?
In the same 2006 case in which NFG proposed a
decoupling mechanism, the Company proposed
to increase the fixed monthly customer charge by
72% (from $12.00 to $20.64) and to reduce the
distribution “tail block” rate by 87% (from
$1.95/mcf to $0.25/mcf).
Both of those proposed rate design changes
would have clearly reduced the benefits to
customers of conservation efforts.
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Where decoupling, lost revenue recovery, or
SFV rate design is utilized, it reduces a
utility’s risk of reduced profits due to sales
losses between rate cases.
Should that reduced risk be reflected in a
lower rate of return granted to the utility in
its rate cases? Or should utilities with
successful energy efficiency programs be
rewarded with a higher rate of return or a
share of customer savings?
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While the distribution rates of Pennsylvania
electric distribution companies are regulated by
the PUC, most of those utilities have major
unregulated generation affiliates, who still make
more money by selling more generation at higher
prices.
Even if a utility’s distribution revenues and
profits are made indifferent to sales losses due to
decoupling, does the utility corporation’s
overriding incentive still lie in supporting higher
generation sales and higher generation market
prices?
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One way to reduce the impact of the utility
disincentive issue is to assign the task of
providing energy efficiency to another entity.
Independent third party efficiency providers
have been established in a number of states.
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Efficiency Vermont
Energy Trust of Oregon
Wisconsin Energy Conservation Corporation
Efficiency Maine Trust
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Sonny Popowsky
[email protected]
215-279-2915
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