JUICE: Sweet Spot

By Published On: February 20, 2009

I have this delinquent step-brother in a trailer park in another state. He and his horse recently cut down on their energy consumption--like many consumers. His job is iffy at best. Much to the chagrin of the local utility where he lives, decreased energy consumption is a nationwide trend. My step-brother (and probably his horse) wraps himself in a blanket and turns off the television. Here in California, we too wrap up and try to conserve. Yet, it’s a different story. We get more efficient, and our state’s utilities don’t suffer loss of income while we get our warmth from blankets instead of heaters. That’s because of something the California Public Utilities Commission (presciently) did more than two decades ago. The state divorced utility profits from sales. Meanwhile, many utilities in the nation are struggling from a precipitous drop in income. The recession is damping down consumption. In many other states utilities base their profits on ever-increasing power use. So, they’re in a bit of trouble. Conservation for California utilities, however, is not bad news. The shift to separating utility profits from energy consumption started in the late 1970s when the structure of sales was turned upside down. Previously the rate structure was based on economies of scale--the more you make or use, the cheaper it is to produce. Then, the state decided instead of paying less the more one used electricity, the rate structure should charge higher prices with increased use. For instance, in the 1970s, manufacturers had a rate structure that offered cheaper prices the more power that was consumed. That changed to a tiered system that started charging more for incremental power consumption. Californians started conserving with the new rate structure. Big time. Utilities’ forecasted revenues decreased up to 11 percent, according to Bruce Smith, Pacific Gas & Electric manager of regulatory relations. Then, in 1982, the year of glam bands and, oh, a recession, regulators decided that California’s utilities shouldn’t tie their profits to sales. That is, regulators ordered that in order to protect conservation, utilities should slow down building new power plants and attendant infrastructure--and selling evermore electricity. They said that the state should pay attention to pollution and fossil fuel consumption. We’re California. With conservation, though, the state didn’t want its utilities’ profitability and viability to suffer. Thus, decoupling was born. The commission, in the year of glam bands, instituted an accounting mechanism that divorced consumption from revenues, called ERAM--the electric rate adjustment mechanism. Then the state adopted biennial (now triennial) rate cases to hammer out what they are supposed to do with their money, like maintenance, and how much money they need to do it. Because income no longer depended on sales, utilities had to forecast the revenues necessary to keep up the system. Once hammered out, the state put those revenues in the price of electricity so utilities didn’t come up short. It wasn’t exactly on cruise control--there were mean differences in those rate cases between consumer advocates, the state, and utilities--at the same time, utilities found stability and consumers could go greener. Along came deregulation in 1996. The ERAM was no longer considered necessary because utilities divested many of their power plants and the competition for selling electricity was the burden of unregulated generators. In response, a new accounting mechanism was devised, transition revenue accounting. That allowed utilities to put their revenues where they wanted for the most part. Critics said utilities were skipping maintenance and letting the whole system decline. Utilities said they weren’t getting enough money to keep up service reliability. Apparently they weren’t getting enough money--no matter what the accounting. In 2003, PG&E declared bankruptcy--although it still had a lot of cash around and funneled $5 billion to its parent corporation. Southern California Edison threatened to do the same. San Diego Gas & Electric’s rates skyrocketed, but the utility itself remained relatively solid. About that time, the commission returned to the concept of decoupling electricity sales from utility revenue. Utilities were back in the saddle, for the most part, although there were some competitors. The concept of deregulated competition making electricity sales cheap evaporated. The state, though, still wanted to encourage conservation. The commission set up new utility “balancing” accounts. The state has other accounting methods which provide utilities incentives for energy conservation and efficiency, but that’s another story and one that is currently in dispute at the commission. My point is that despite the Big Oops of deregulation, California’s done some creative thinking about how to implement conservation, thus reducing pollution. “Other states are intrigued and amazed,” said Smith--who meets utility representatives from across the nation. “They say, ‘it just won’t work here.’” The California plan just might have to work given the recession. For instance, American Electric Power and Exelon each are predicting $1 billion less investment in capital spending due to drops in revenue. There are fewer customers for utilities nationwide. Most states don’t require forecasts like California does with its triennial general rate cases. Other states’ utilities simply expect load growth to provide for revenues, according to Smith. Those states may face their own version of California’s 2000-01 energy crisis. A former editor told me that for California utilities, everything’s in the accounting. The editor also mentioned that there were a lot of gold-plated pencils on the accounts. Still, with decoupling consumption from utilities’ financial performance, the accounting seems to work most of the time. That, and a nice warm blanket.

Share this story

Not a member yet?

Subscribe Now