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Energy Efficiency Unmasked

Regulatory formulas for rewarding efficiency investments.

Fortnightly Magazine - February 2014
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utility service and correspondingly excessive flow of resources into its supply.” Some states have established fair value as the base for establishing a rate base, but this does not prevent a commission from setting a rate of return as if the rate base was established using embedded costs.

3. Definitions of EE and DSM vary across jurisdictions and other governmental agencies. For simplicity, this paper assumes that EE also includes energy efficiency and demand response or demand-side management programs.

4. Where Q(AC-C) represents the volume demanded with price set equal to current average costs and Q(AC-E) represents the volume demanded with price set equal to embedded average costs.

5. Cicchetti, Charles J., Going Green and Getting Regulation Right , Public Utilities Reports, Inc., 2009, pp. 122 to 125.

6. Myron B. Katz, “Demand-side Management Reflections of an Irreverent Regulator,” Resources and Energy 14 (1992), p. 192.

7. While a simplifying assumption, revenue requirements are generally adjusted to cover tax effects in a rate proceeding. Changes in taxes don’t affect the underlying strategy relative to changes in net income.

8. See Sara Hayes, et al., Carrots for Utilities: Providing Financial Returns for Utility Investments in Energy Efficiency, American Council for an Energy Efficient Economy, 2011, Table 1, p. 12; Steven Stoft and Richard J. Gilbert, “A Review and Analysis of Electric Utility Conservation Incentives,” The Yale Journal on Regulation, 11(1, 1994), p.4; and Peter Cappers, et al., Financial Analysis of Incentive Mechanisms to Promote Energy Efficiency: Case Study of a Prototypical Southwest Utility, Ernest Orlando Lawrence Berkeley National Laboratory, March 2009.

9. Percent of avoided costs was first proposed by Duke Energy in its save-a-watt energy efficiency application before the North Carolina Utilities Commission in 2007 and approved in a modified form by that commission on Feb. 9, 2010, in Docket No. E-7, Sub 831. Additionally, save-a-watt was approved by the Public Utilities Commission of Ohio in Case No. 08-920-EL-SSO and the Public Service Commission of South Carolina in Docket No. 2009-226-E.

10. Due to the higher risk inherent in PAC, an argument can be made that the utility should earn a higher return under this model than what is typically allowed.

11. One approach that has received considerable attention in the literature is revenue decoupling. While revenue decoupling could provide a solution for the lost margin issue, processes to implement decoupling are complex and never perfect and even less so for non-residential customer classes. A simpler approach would be to implement a formula rate setting process that allows annual true-ups.

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