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Consumer advocates and environmentalists are squaring off over whether to give bonuses to utilities for meeting energy efficiency goals, as outlined in a proposed California Public Utilities Commission decision. Enhanced energy efficiency is seen as a key to reducing power sector greenhouse gas emissions under the state’s climate protection law, AB 32, as well as reducing the need to build costly new power plants. But consumer advocates are taking a different view of the proposal than some environmental advocates. The Division of Ratepayer Advocates is concerned that the bonus proposal could raise the cost of energy efficiency programs as much as 25 percent, according to Aaron Johnson, the division’s deputy director of energy branches. He called the proposed bonuses “overly generous.” The position is supported by The Utility Reform Network. On the other side, the Natural Resource Defense Council backed the proposal. “It rewards utilities for saving customers’ money instead of spending it,” said Devra Wang, NRDC staff scientist. The incentives will spur utilities to make energy efficiency a higher priority she said. Elaborating on its position, the NRDC said in an August 28 filing that the proposed decision would eliminate regulators’ “mixed message” on energy efficiency. Right now, NRDC observed, regulators urge private utilities to invest in energy efficiency that displaces the need for power plants, but then simultaneously reward them for building power plants. Pacific Gas & Electric and Southern California Edison support the proposed decision to reward energy efficiency savings and penalize them for falling short of the CPUC’s designated savings goals. The proposal is aimed at putting utility earnings for energy efficiency gains on par with earnings from new power plants, which are included in the rate base. However, utilities are not wholly satisfied with the proposal. Instead, they are arguing that the bonuses should be higher than proposed. The warring factions outlined their positions last week in comments filed with the CPUC on the proposed decision by commissioner Dian Grueneich. Her draft decision would offer bonuses to utilities based on the extent to which they reach energy efficiency goals adopted by the commission. Utilities would be eligible for bonuses of either 9 or 12 percent of their energy efficiency spending for respectively achieving 85 percent or 100 percent or more of their efficiency goals. The money would add to shareholder profits. On the downside, utilities that did not achieve at least 65 percent of their targets would be penalized under the plan, which would reduce shareholder profits. Those achieving between 65 and 85 percent-- the so-called “dead band zone”--would be neither rewarded nor penalized (Circuit, Aug. 17, 2007). In comments filed August 29, PG&E argued that utilities achieving 100 percent or more of their target efficiency levels should be eligible for bonuses equal to 15 percent of the money they spend on efficiency. This, the utility said, would put the return on energy efficiency investments on a level playing field with the 16.7 percent supply side return on investment benchmark that Grueneich outlined in her proposed decision. In reply comments submitted September 4, the Division of Ratepayer Advocates countered that even at the 12 percent rate shareholders will come out better because they will reap their return more quickly than with a comparable supply side investment, which would be recovered more slowly. Also, they will not face comparable risk, since energy efficiency programs are administered with ratepayer money collected on a pay as you go basis. “Pursuing ratepayer-funded energy efficiency is far more attractive from the perspective of shareholders’ time value of money and inflation risk than is a shareholder power plant (indeed, infinitely so, because shareholders never tie up any of their own funds in ratepayer-funded energy efficiency),” wrote Diana Lee, division attorney. Instead, the division wants smaller bonuses that reflect only the actual financial risk shareholders bear, plus a smaller adder, in achieving between 65 and 100 percent of utility energy efficiency goals. That risk would be nil, the division said, because under Grueneich’s proposal ratepayers would bear most of the risk. The reason is because to the extent utilities fall short, ratepayers will have to pay for the electricity to close the gap between efficiency goals and power demand. The full commission is expected to consider the bonus proposal on September 21.

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