Fairness, not free money, for utilities

We shouldn’t have to overpay them just to help customers save energy

Smoking is less than half what it was in 1964. What if we had put efforts to reduce smoking in the hands of the tobacco companies? This is more or less the role we have given utilities when it comes to a key aspect of New Hampshire’s energy policy: energy efficiency.

Electricity is expensive. Carbon emissions are ultimately no more desirable than cigarette smoke is. Hence we pay, through our electric and gas rates, programs to deploy energy-efficiency measures – basically, building improvements that allow us to get more use out of each unit of energy we consume.

Telling utilities to create energy efficiency is not as crazy as it sounds. Utilities know their customers and they know the energy business. But there is still the “throughput incentive” – the fact that utilities make more money the more energy they sell.

Eliminating the throughput incentive looms large as hearings before the Public Utilities Commission approach this spring on creating an Energy Efficiency Resource Standard, which would commit the state to deploying all cost-effective energy efficiency. In exchange for taking that on, the utilities are demanding some kind of financial mechanism to make up for revenue lost to energy efficiency.

This is reasonable. But if we do it the wrong way, the utilities can end up with free money.

The utilities want an LRAM – a “lost revenue adjustment mechanism.” It is a blunt instrument that simply estimates the revenue a utility loses to energy efficiency and then adds it back into rates. The utilities get this extra money even if they don’t need it – if, for example, the revenue “hit” from energy efficiency is more than offset by unrelated sales increases.

A much better idea is “revenue decoupling.” Utilities typically dislike it – because it is symmetrical. The PUC sets each utility’s revenue requirement – the amount of money the company needs to meet obligations and pay a reasonable return to shareholders – and, depending on whether actual revenues are higher or lower than this benchmark, rates are adjusted either up or down.

Revenue decoupling has implications far beyond energy efficiency. It would be a fundamental change in the rules of the utility rate-setting “game” overall. 

“History shows that utilities nearly always ‘win’ the traditional game,” said Martin Kushler of the American Council for an Energy Efficient Economy, at a presentation to the PUC last year. “If sales are above forecast, they ‘stay out’ [i.e., don’t file a rate case] and pocket the excess revenues. If sales are below forecast and they are under-recovering, they file a new rate case and raise rates.”

According to Kushler, “a utility’s opinion of decoupling will depend upon whether they think they can ’win on the upside’ in the foreseeable future. If so, they’ll resist decoupling and much prefer LRAM. That is when decoupling is most important.”

Utilities are already receiving a “performance incentive,” basically a reward to their shareholders for helping customers save money through energy efficiency. The companies currently pocket up to 12 percent of their energy-efficiency budgets as a performance incentive.

Between that and a lost-revenue recovery mechanism, a big piece of the Energy Efficiency Resource Standard pie simply pays the utilities to play.

According to the utilities, energy efficiency costs New Hampshire ratepayers about 2.3 cents per kilowatt-hour –much cheaper than even the least expensive wholesale electricity. So an Energy Efficiency Resource Standard that commits us to achieving all cost-effective energy efficiency is wise public policy indeed. It will be so much wiser if we don’t pay the utilities too much, just to get them to do the right thing by helping customers save energy.  

Donald M. Kreis is the state’s Consumer Advocate, representing residential utility customers before the Public Utilities Commission and elsewhere.