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Duke's Fifth Fuel

Conservation investments benefit participants and non-participants alike

Fortnightly Magazine - January 2008

the services provided. Customers were ratepayers and choices were virtually non-existent. Providing conservation and demand-side services was considered part of the utility’s franchise responsibility ( i.e., the regulated duty to serve). Under this regulatory paradigm, utilities had no opportunity to earn a margin on the services that other retailers would capture.

This created a strong disincentive against investment by regulated utilities, because when energy efficiency reduces sales between rate cases, shareholders lose income and have no opportunity to recover it. The greater the success of a utility’s energy-efficiency program, the greater the potential shareholder losses.

Regulation sometimes attempted to address this matter using revenue-decoupling mechanisms, whereby lost revenues would be recovered in an adder to regulated bills. At best, such a plan would help shareholders achieve a degree of indifference or neutrality. This often simply was not enough of an incentive to sustain support for energy efficiency.

The Duke plan fixes these traditional regulatory problems because it recognizes reasonable incentives are the essence of market-based societies. Earning a return on capital investments is essential, but earning a margin income on developing, packaging, and marketing energy-efficiency programs for retail customers is at least as important.

Additionally, Duke would treat energy efficiency as a fifth fuel or utility input, rather than a new product. State regulators would consider this fifth fuel among the options available to meet resource requirements, using least-cost planning principles.

The basic idea of Duke’s Save-a-Watt proposal includes three primary steps:

1) Determine the need , considering both supply and demand-side alternatives;

2) Use least-cost planning , and place cost-effective energy-efficiency choices in the utility’s rate base—at a revenue requirement of 90 percent of the present value of the avoided costs associated with supply-side alternatives. Such costs also would incorporate the annual depreciation and revenue requirements for energy-efficiency investments over their expected life.

3) Recover annual revenue requirements from all customers through a rate rider. This charge would be trued-up to ensure customers do not pay unless energy efficiency programs succeed.

This approach addresses the regulated revenue-requirements aspects of energy-efficiency simply and transparently. Regulators would consider and address the costs of service and future revenue-requirements effects for a new utility input, not a new product. They would understand the cost-benefit tradeoffs of various proposals to make the future resource mix green, greener or greenest. This would allow regulators to focus on what they can do best: Determining the reasonable future mix of conservation, traditional supplies and renewables.

Only one major regulatory question remains: How will regulators protect non-participants?

Just and Reasonable?

Most utility-sponsored energy-efficiency programs offer certain well-understood benefits. For example, if utility prices increase to pay for energy efficiency and provide utility income, reduced use generally offsets those price increases. This means lower monthly utility bills for participants.

Also, energy-efficiency products cost less than traditional supply-side alternatives, at least when they are designed in a sound way as part of an integrated planning process. Revenue requirements for utility-sponsored efficiency programs are lower than requirements for supply-side alternatives. Thus, societal benefits exceed costs.

The one ambiguous category is the effect on