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The Color of Money

Wall Street sees “green” in demand response, energy efficiency, and distributed generation. Will the industry step up?

Fortnightly Magazine - October 2007

mission and message because it focuses the sale on service not volume. There are a number of ways to achieve decoupling or fixed costs and revenue recovery, including bi-annual rate reviews, narrow scope rate cases, lost revenue adjustments, infrastructure recovery riders, and decoupling mechanisms based on specific cost and revenue performance metrics. It is important to remember that quick recovery of expenses will be necessary. DR, EE, and DG activities that are of a scale equal to the addition of a generation plant or transmission investment will have significant expenses. These expenses can have a drag on earnings unless recovered quickly. The use of cost- recovery riders along with pre-approved budgets reduces this drag on earnings. In fact, for Wall Street, as our analyst interviews confirmed, it is all about earnings. If there are two choices, a traditional generation solution that earns a rate of return, or an alternative solution where there is full cost recovery but no rate of return, efficient markets will direct capital to the solutions that will provide the higher rate of return. Creating a regulatory asset for the DR, EE and DG investments will align the investment decision with policy and provides shareholder value for investing in alternative solutions. It alleviates the anomaly between traditional and alternative resources. It also will send a signal to Wall Street that there will be increased earnings on DR, EE, and DG investments, which then attracts capital. Also, a Recovery of Allowance for Funds Used for Conserving Energy (AFUCE) should be established.

As DR, EE, and DG solutions grow, the level of funds required to develop and support these programs will become significant. Similar to constructing a large generation unit, there will be costs associated with obtaining these funds that may not be recovered until a future rate case. These costs could be a drag on earnings. For traditional resources, regulators have provided a mechanism called Allowance for Funds Used During Construction to recover these costs. AFUCE would operate as a similar mechanism for those companies that did not have a tariff rider to recover these expenses. AFUCE would provide a mechanism to recover interest charges on funds for DR, EE, and alternative DG solutions among rate cases that would reduce the drag on corporate earnings. Further, alignment of depreciation rates with the life expectancy of the newer technology investments would be a significant advancement.

Most of the newer devices that will be used with DR, EE, and DG solutions include significant electronic and computer technology. As a result, these devices will have shorter life expectancies than traditional investments. In addition, technology will continue to advance, reducing the useful life of these solutions and increasing the depreciation rate. As DR, EE, and DG solutions become a larger part of the energy infrastructure, depreciation rates need to remain aligned with the advancement in technology to appropriately reflect the value of these investments over time and prevent barriers to future innovation. It also follows that accelerated depreciation and recovery for assets that are being replaced also should be made available to renewable and