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2008 CEO Forum: Conservation Compact

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

Fortnightly Magazine - June 2008

state and national energy policy, we’re seeing a shift from the traditional least-cost utility model to one that balances energy needs with environmental concerns. As such, renewable technologies and energy efficiency have become a significant part of Progress Energy’s overall strategy.

We favor a shared-savings model with customers. Our idea of how this would work is we’d recover our program cost, net revenue lost and a 50/50 sharing of benefits with customers. That’s a good model because it’s transparent—here’s the cost and here’s the benefit. And this shared-savings model provides Progress Energy and its customers with appropriate incentives for maximizing the benefits of reduced peak electricity demand.

Fortnightly: Some states are decoupling retail energy rates from utility revenues—including a pilot for gas utilities in North Carolina. Assuming this trend continues, do you see this as a useful regulatory change?

Johnson: I’ve been following the developments in other states. In our states, we’re in the early days of thinking about efficiency and renewables incentives and changes in the regulatory compact. Our view is for some period of time we should do this methodically, and introduce changes as we understand things better.

I’m not sure decoupling is a trend but it’s increasing as a concept. In our states we need to follow a more traditional regulatory path until we understand how customers, regulators and utilities respond and perform under that system, and how they respond to the changes we’re already making.

Fortnightly: Given increasingly intense resource scarcity and environmental constraints, how does the business proposition change for vertically integrated utilities whose profits are based on capacity and throughput? If I’m a Progress Energy investor, what changes should I expect to see in the way the company earns a return over the next decade?

Johnson: This is an excellent question. The first part of the answer is that our obligation remains the same, to make sure we have adequate supply tomorrow, as well as 10 or 20 years from now.

We’ve always pursued the least-cost model and built least-cost infrastructure, and you earn a return on your infrastructure. As we go to a least-environmental impact model, that’s already changing the regulatory thinking, when incenting companies to invest in efficiency and renewables. That’s happening and there will be changes. We’re just at the front end of it now.

It will require innovative thinking and a partnership among utilities, lawmakers, regulators and customers. But at end of the day, we have the same objectives: quality standards, reliable service, and the most affordable price possible.

How we achieve that mission is the challenge as well as the opportunity.

Carbon-Light In Idaho

With reservoir levels falling and power demands growing, utilities in the West are facing difficult choices. Idaho Power is taking an integrated approach that relies heavily on shoring up its existing resources, procuring as much renewable and climate-friendly conventional power as possible, and slowing demand growth in an expanding economy.

IDACORP President and CEO J. LaMont Keen sees revenue decoupling as critical to that approach.

Fortnightly: How would you characterize Idaho Power’s outlook on power resource adequacy