CPUC Details Utility Award Plan for Efficiency

By Published On: August 17, 2007

With an investment of $2.2 billion over three years, state regulators floated a plan to allow investor-owned utilities to reap substantial rewards for investing in energy efficiency projects. It is similar to the financial benefits the California Public Utilities Commission allows utilities to reap on their rates of return on fossil and nuclear power plant investments. Under the proposed decision, fines would be levied against utilities if they fail to provide the promised energy savings. For instance, if each utility only achieved 20 percent of their goal they would be docked $1.25 billion each. The CPUC plan covers both electricity and gas services. “What is fair to ratepayers? We believe that it is to make sure that this large return on utilities’ investments are actually realized with the funds authorized,” the proposed decision stated. “By aligning shareholder and ratepayer interests, [the] incentive mechanism serves to ensure this result.” Consumer groups like The Utility Reform Network, oppose the proposal. TURN wants utility eligibility to hinge on exceeding efficiency goals. The proposed decision, however, rejected TURN’s proposition that utilities’ spending and saving history does not jibe with the current incentives regulators have in place for other programs. If the proposed August 9 decision by Dian Grueneich is adopted by the full commission with the proposed $2.2 billion investment, utility shareholders would receive $175 million if the utility reaches 85 percent of its efficiency goals. At the same time, ratepayers would see $1.775 billion in net benefits if the savings goal is met. If utilities achieve 100 percent of their efficiency goal, their shareholders would receive $323 million. Concurrently, $2.7 billion in benefits would accrue to ratepayers, according to the regulators. This plan would take the two-decades-old CPUC move to decouple utility energy sales from utility profits one step further. Decoupling alone is not enough, according to the CPUC. It doesn’t penalize utilities for a lack of efficiency savings, nor does it push efficiency as an alternative solution to building new power plants. When the state first decoupled utilities’ income from the sales on power, it removed the incentive for utilities to build and sell more energy without restriction. Regulators at the time replaced that incentive, which still exists in most states, with one that links utilities’ profits to their capital investments and forecasted sales. That decoupling is through a balancing account true-up mechanism called the electric rate adjustment mechanism (ERAM). With ERAM, an adjustment is made to rates so utility profits are not impacted by differences between sales and the forecasted amounts. “This ‘decoupling’ of profits from sales eliminates the disincentive utilities had a long time ago to do conservation programs,” noted Division of Ratepayer Advocates analyst Bob Kinosian. ERAM was eliminated during deregulation in the 1990s when the market was supposed to take care of sales and profits. However, it was reinstituted in 2001. In addition to further decoupling, the commission proposes allowing utilities to decide their own types of efficiency investments on a portfolio basis. Portfolio performance, rather than performance of each individual program, “encourages innovation and allows for some risk taking on pilot programs and/measures in the portfolio,” according to the proposed decision. For instance, the CPUC estimates that if Southern California Edison invested in traditional generation facilities in place of efficiency it could receive $312 million in return. With the proposed efficiency rewards, it would receive $1.2 billion if it reached 100 percent of its goal. If adopted, the new regulatory paradigm would allow utilities more freedom to innovate with their capital investments, but at the same time put requirements on performance–a major change in regulation. Until the early 1980s, utilities invested enormous amounts of capital in big power plants. From the 1960s to 1980s the big ticket items were nuclear power plants. The state assured a rate of return on their investments regardless of whether the investment was gold plated or efficient. Thus, it behooved utility shareholders to invest more capital rather than less in order to get returns on investment because more costly investments drew more profits. For instance, instead of spending $100 million on a small new power plant and its transmission, utilities invested billions of dollars in new facilities, piggybacking the rate of return on the increased investment.

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