Regulatory Aspects of Energy Regulatory Aspects of Energy Efficiency: Efficiency:

A Residential PerspectiveA Residential Perspective

Presented by:Presented by:Roger D. ColtonRoger D. Colton

Fisher, Sheehan & ColtonFisher, Sheehan & ColtonPublic Finance and General EconomicsPublic Finance and General Economics

Belmont, MABelmont, MA

National Regulatory ConferenceNational Regulatory ConferenceWiliamsburg, VirginiaWiliamsburg, Virginia

May 2008May 2008

Energy Efficiency: Energy Efficiency: Four Tests of Cost-EffectivenessFour Tests of Cost-Effectiveness

Participant test: Participant test: Cost and benefits to ratepayer (affordability)Cost and benefits to ratepayer (affordability)

Total resource cost test:Total resource cost test: Total costs and benefits—participant and utilityTotal costs and benefits—participant and utility

Utility cost test:Utility cost test: Resource option—narrowly defined avoided Resource option—narrowly defined avoided

costs.costs. Ratepayer impact test:Ratepayer impact test:

What happens to ratepayer billsWhat happens to ratepayer bills

Beyond the traditional tests. . Beyond the traditional tests. . ..

Four traditional tests focus on energy Four traditional tests focus on energy efficiency as a demand-side alternative to efficiency as a demand-side alternative to

consider in capacity planning. consider in capacity planning.

Two additional concepts:Two additional concepts: Efficiency can be a least-cost strategy for Efficiency can be a least-cost strategy for

utility tasks other than capacity planning as utility tasks other than capacity planning as well.well.

In accepting proposition #1, the locus of In accepting proposition #1, the locus of authority for Commission to act on efficiency authority for Commission to act on efficiency can be found in non-traditional statutes.can be found in non-traditional statutes.

Proposition #1:Proposition #1:

Within a utility’s obligation to Within a utility’s obligation to provide least-cost service, provide least-cost service,

energy efficiency can serve not energy efficiency can serve not only as least-cost capacity only as least-cost capacity

planning, but as a least cost planning, but as a least cost strategy for other utility tasks as strategy for other utility tasks as

well.well.

Appropriate Application of Utility Cost Appropriate Application of Utility Cost TestTest

Least-cost obligation applies to all aspects of Least-cost obligation applies to all aspects of utility operations: utility operations: Self-insurance rather than insurance.Self-insurance rather than insurance. Peaking/base load/intermediate generationPeaking/base load/intermediate generation Demand-side vs. supply-side alternativesDemand-side vs. supply-side alternatives

Traditional: avoided costs (capacity/energy) for Traditional: avoided costs (capacity/energy) for utility cost test.utility cost test.

Least cost applies to non-supply issues as well:Least cost applies to non-supply issues as well: Credit and collectionCredit and collection Control of uncollectibles/write-offsControl of uncollectibles/write-offs

Non-energy utility avoided costs exist (Howat):Non-energy utility avoided costs exist (Howat): Reduced arrears: 0.6% – 8.8% adderReduced arrears: 0.6% – 8.8% adder Reduced write-offs: 8.5% adderReduced write-offs: 8.5% adder Fewer emergency calls: 11.6% adderFewer emergency calls: 11.6% adder

Leaving Efficiency on the Leaving Efficiency on the TableTable

Electric utility proposes three-part energy efficiency program.Electric utility proposes three-part energy efficiency program. Vendor-based appliance rebates for Energy Star.Vendor-based appliance rebates for Energy Star. On-site energy audit and envelope sealing for HOs/1-family unitsOn-site energy audit and envelope sealing for HOs/1-family units

Refrigerator replacement as part of on-site auditRefrigerator replacement as part of on-site audit ““Low-income” program: low-cost kitLow-income” program: low-cost kit

2 low-flow shower heads2 low-flow shower heads 3 CFLs3 CFLs

Systematically excludes low-income:Systematically excludes low-income: 70% of HHs < 150% of FPL are renters.70% of HHs < 150% of FPL are renters. 85% of HHs < $10,000 are renters.85% of HHs < $10,000 are renters. Disparate tenure length:Disparate tenure length:

Mean “move-in” date for renters: 1998Mean “move-in” date for renters: 1998 Mean move-in date for homeowners: 1985Mean move-in date for homeowners: 1985

Impact:Impact: Low-income pay for programLow-income pay for program Low-income bear increased fixed costsLow-income bear increased fixed costs Low-income pay lost revenueLow-income pay lost revenue

Consider, quite aside from low-income equity components (LI pay for but Consider, quite aside from low-income equity components (LI pay for but do not receive benefits from):do not receive benefits from):

Leaves cost-effective efficiency potential on the tableLeaves cost-effective efficiency potential on the table Leaves utility expenses higher than they “ought” to be.Leaves utility expenses higher than they “ought” to be.

Proposition #2Proposition #2

Once you accept the notion that Once you accept the notion that efficiency can be a least-cost efficiency can be a least-cost

strategy for various utility tasks, it strategy for various utility tasks, it opens up the proposition that not opens up the proposition that not

only the authority, but the obligation, only the authority, but the obligation, for state regulators to consider for state regulators to consider

efficiency can be found in some non-efficiency can be found in some non-traditional statutes.traditional statutes.

Consider environment as one example.Consider environment as one example.

Applying Lessons re. Utility Commission Applying Lessons re. Utility Commission Authority in Era of Environmental Authority in Era of Environmental

ConcernConcern State PUCs not only “may” but “must” look State PUCs not only “may” but “must” look

outside exclusive focus on economic outside exclusive focus on economic regulation:regulation:

As the environmental impact of generation As the environmental impact of generation increases, must look beyond economic increases, must look beyond economic regulation.regulation.

Three sources:Three sources: ““Whereas” clauses of commission creation.Whereas” clauses of commission creation. Mini-state NEPA that applies to PUC as state Mini-state NEPA that applies to PUC as state

agency.agency. Least-cost enforcement of federal law.Least-cost enforcement of federal law.

Examples of “whereas” Examples of “whereas” clauses:clauses:

MarylandMaryland:: PSC shall “consider the public PSC shall “consider the public safety, and economy of the state, the safety, and economy of the state, the conservation of natural resources, and the conservation of natural resources, and the preservation of environmental quality.”preservation of environmental quality.”

VermontVermont:: goal of utility policy is “meeting goal of utility policy is “meeting the public’s need for energy services, after the public’s need for energy services, after safety concerns are addressed, at the lowest safety concerns are addressed, at the lowest present value lie cycle cost, including present value lie cycle cost, including environmental and economic costs. . .”environmental and economic costs. . .”

North CarolinaNorth Carolina:: PSC policy is “to encourage PSC policy is “to encourage and promote harmony between public and promote harmony between public utilities, their users and the environment.”utilities, their users and the environment.”

Example of State NEPA LawsExample of State NEPA Laws

New YorkNew York:: PSC must find “that PSC must find “that consistent with social, economic and other consistent with social, economic and other essential considerations, to the maximum essential considerations, to the maximum extent practicable, adverse environmental extent practicable, adverse environmental effects revealed in the [EIS] process will be effects revealed in the [EIS] process will be minimized or avoided.”minimized or avoided.”

Differences between statesDifferences between states:: Some apply only to certifications/”projects”Some apply only to certifications/”projects” Others apply to all Commission actions Others apply to all Commission actions

(including rate-setting).(including rate-setting). 20 states have mini-NEPAs 20 states have mini-NEPAs

12 commissions are explicitly subject to their state 12 commissions are explicitly subject to their state NEPAs.NEPAs.

Section 404, Clean Air ActSection 404, Clean Air Act

(2) Allowances for Emissions Avoided Through (2) Allowances for Emissions Avoided Through Energy Conservation and Renewable Energy.-- Energy Conservation and Renewable Energy.-- (A) In General.--The regulations under paragraph (A) In General.--The regulations under paragraph (4) of this subsection shall provide that for each (4) of this subsection shall provide that for each ton of sulfur dioxide emissions avoided by an ton of sulfur dioxide emissions avoided by an electric utility, during the applicable period, electric utility, during the applicable period, through the use of qualified energy conservation through the use of qualified energy conservation measures or qualified renewable energy, the measures or qualified renewable energy, the Administrator shall allocate a single allowance to Administrator shall allocate a single allowance to such electric utility, on a first-come-first-served such electric utility, on a first-come-first-served basis from the Conservation and Renewable basis from the Conservation and Renewable Energy Reserve established under subsection (g), Energy Reserve established under subsection (g), up to a total of 300,000 allowances for allocation up to a total of 300,000 allowances for allocation from such Reserve. from such Reserve.

Energy Conservation as Clean Energy Conservation as Clean Air StrategyAir Strategy

B) Requirements for Issuance.--The Administrator shall allocate B) Requirements for Issuance.--The Administrator shall allocate allowances to an electric utility under this subsection only if all of the allowances to an electric utility under this subsection only if all of the following requirements are met: following requirements are met:

(i) (i) Such electric utility is paying for the qualified energy conservation Such electric utility is paying for the qualified energy conservation measures or qualified renewable energymeasures or qualified renewable energy directly or through purchase directly or through purchase from another person. from another person.

(ii) The emissions of sulfur dioxide avoided through the use of qualified (ii) The emissions of sulfur dioxide avoided through the use of qualified energy conservation measures or qualified renewable energy are energy conservation measures or qualified renewable energy are quantified in accordance with regulations promulgated by the quantified in accordance with regulations promulgated by the Administrator under this subsection. Administrator under this subsection.

(iii)(I) Such electric utility (iii)(I) Such electric utility has adopted and is implementing a least cost has adopted and is implementing a least cost energy conservation and electric power planenergy conservation and electric power plan which evaluates a range of which evaluates a range of resources, including new power supplies, energy conservation, and resources, including new power supplies, energy conservation, and renewable energy resources, in order to meet expected future demand at renewable energy resources, in order to meet expected future demand at the lowest system cost. the lowest system cost.

(II) The qualified energy conservation measures or qualified renewable (II) The qualified energy conservation measures or qualified renewable energy, or both, are energy, or both, are consistent with that planconsistent with that plan. .

(III) Electric utilities subject to the jurisdiction of a State regulatory (III) Electric utilities subject to the jurisdiction of a State regulatory authority authority must have such plan approved by such authoritymust have such plan approved by such authority. For electric . For electric utilities not subject to the jurisdiction of a State regulatory authority such utilities not subject to the jurisdiction of a State regulatory authority such plan shall be approved by the entity with ratemaking authority for such plan shall be approved by the entity with ratemaking authority for such utility. utility.

Pennsylvania implementationPennsylvania implementation

““On or before January 1, 1996, each On or before January 1, 1996, each public utility shall submit to the public utility shall submit to the commission and may request commission and may request commission approval of a plan to commission approval of a plan to bring its generating units which use bring its generating units which use coal to generate electricity into coal to generate electricity into compliance with the Phase II compliance with the Phase II requirements of Title IV of the Clean requirements of Title IV of the Clean Air Act.”Air Act.”

Critical lessons for energy Critical lessons for energy efficiency:efficiency:

Common misperception is that utility Common misperception is that utility commissions are commissions are onlyonly economic economic regulators:regulators:Excludes environmental impactsExcludes environmental impactsExcludes affordability impactsExcludes affordability impacts

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