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Earning on Conservation

An earnings-equivalence model helps utilities and regulators calculate appropriate returns for conservation investments.

Fortnightly Magazine - December 2007

of the rebalancing process, the equivalent amount of debt is removed in substitute for the contract. The rebalanced capital structure leads to an earnings equivalent value of 10.1 percent.

Most utilities rely on some, but not all, contracted energy to meet supply needs. The analysis must be modified to demonstrate the effect of partial reliance on supply contracts. Assuming the utility meets 50 percent of its energy requirements through its own resources and 50 percent through contracted energy, the 50:50 split is calculated by adding together one-half of the earnings resulting from the owned-supply option and one-half of the earnings result of the purchased-energy option. Therefore, to continue with the previous example, if the all-owned option results in a value of 26 percent and the all-contract option 15 percent, the 50:50 split is calculated as follows:

26%*0.5 + 12.6%*0.5 = 13% + 6.3% = 19%.

Other portions of owned resources and contracts can be substituted for the 0.5 multiplier above, to calculate the earnings equivalent percentage for different supply mixes.

In any case, adapting the earnings-equivalency model to fit the circumstances of a given utility can provide the incentives needed to place shareholders at an indifference point between a supply-side solution and an energy- efficiency solution. Ultimately, the benefits of these programs can be established on the same playing field, with fair and effective incentives for utility shareholders.

 

Endnotes:

1. State and Regional Policies That Promote Energy Efficiency Programs Carried Out by Electric and Gas Utilities, A Report to the United States Congress Pursuant to Section 139 of The Energy Policy Act of 2005.

2. EIA, 2006.

3. Dalton, Matthew, “The Bottom Line – Utilities typically have had little incentive to reduce demand for their product. States are trying to change the math.” The Wall Street Journal, Feb. 12, 2007, p. R-4.

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