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2008 CEO Forum: Conservation Compact

Utilities test new models to encourage investments in efficiency and conservation.

Fortnightly Magazine - June 2008

and financed.

The last time our industry faced an infrastructure expansion challenge similar in scope to the one facing us now, utilities enjoyed much higher credit ratings than they do today. Absent strong regulatory support, this doesn’t position the industry well to make the major investments required. The uncertainty surrounding an industry transformation from carbon-based to carbon-light only exacerbates the problem of financing major capital projects.

Policy makers and regulators need to recognize the infrastructure requirements and support electric utilities in their efforts to size and build needed facilities, or they may not get built.

Pepco’s Blueprint

Among U.S. electric utility companies with their revenues decoupled from sales volume, Pepco Holdings is one of the largest outside of California. And if the Washington, D.C., Public Service Commission accepts the company’s amended proposal, nearly two-thirds of the company’s distribution revenues will be decoupled from volume.

As it did for other decoupled utilities, this structural change effectively has transformed PHI’s business proposition, from one focused on demand growth and throughput capacity, to one focused on efficiency and conservation.

For investors in any other industry, this would represent a fundamental shift—and probably a big movement in stock price. But according to PHI CEO Dennis Wraase, the company’s stockholders barely have noticed.

Fortnightly: Lawmakers have decoupled profits from energy sales in many of PHI’s service territories—Maryland being the most recent example. How does this affect the company’s business strategy, outlook and investment plans?

Wraase: Efficiency and conservation are now the major thrust of PHI. We have on file in each of our states something we call the blueprint for the future. It involves a significant number of different components, but the major ones are energy efficiency, peak load reduction and the implementation of AMI and the smart grid. A major component of that is decoupling.

We anticipate we’ll have about 60 percent of our distribution revenue decoupled. It completely eliminates any disincentive to conservation and efficiency investments.

We’ve received permission in Maryland for our Delmarva and Pepco service territories, and have worked since last June under a decoupled structure. In Washington, D.C., there are a couple of legal hurdles to get over. I think they are solvable.

Maryland seems to be ahead of the other jurisdictions. We have a CFL rebate program. We’ve given out certificates for more than 600,000 CFLs. And we received approval recently to implement a demand-reduction program where we will install either programmable thermostats or an outside remote switch, where we’re allowed to cycle residential air conditioning.

To be perfectly honest, I’ve been somewhat disappointed with how little attention investors seem to be giving it. Speaking with analysts, they want to know if you’re able to earn on the dollars or recover the dollars. Those are all parts of our blueprint. For all practical purposes, our investors treat these investments like we’re building a new distribution line. As long as we’re being treated fairly, investors are somewhat indifferent.

It clearly provides us with a growth opportunity we wouldn’t have otherwise, and decoupling eliminates the disincentive to invest in conservation.

Fortnightly: How does