Back in 1978, Congress passed an energy bill, the National Energy Act, including an obscure provision that seemed like an incremental tweak to U.S. energy policy. But eventually, that incremental tweak—the Public Utility Regulatory Policies Act (PURPA)—smashed through the gates of the vertically integrated utility construct. PURPA introduced competition into wholesale power markets in a way that fundamentally changed the U.S. utility industry.
Now, with language in an obscure section of the Energy Independence and Security Act of 2007 (EISA), Congress seems to be turning the PURPA battering ram toward another set of gates—the gates that separate energy production from energy conservation in the American system of utility ratemaking. While the new mandates are subtler than the original ones, they might lead toward a similarly dramatic industry makeover.
Various amendments to PURPA since 1978 have sought to encourage demand-management programs and the technology investments necessary to make them effective. For example, in the Energy Policy Act of 2005 (EPAct), Section 1252 amended PURPA to require all utilities to provide time-of-use metering to all customers, or to explain why they decided against it. This spawned a slew of studies, hearings, workshops and rate decisions that spotlighted time-of-use rates and smart metering investments in many states.
What EPAct failed to do, however, was to address the big-picture ratemaking dilemma that discourages utilities in many states from really embracing time-of-use rates and the full range of technical and commercial transformations they imply. Namely, investments that reduce peak energy demand and total consumption also reduce the utility’s revenue figures and asset requirements. And to the degree utilities’ rates and profits are tied to energy sales and physical plant costs, utilities and Wall Street can only view demand-response and conservation as threats to their business interests.
Utilities in several states are now struggling to resolve this dilemma (see “California: Mandating Demand Response,” and “Duke’s Fifth Fuel,” Fortnightly, January 2008). Although the new energy legislation won’t shatter any major barriers overnight, it provides clear federal policy direction for state policy makeovers.
Namely, Title V, Section 532 of EISA amends PURPA to require all utilities to “integrate energy efficiency resources into utility, state and regional plans; and adopt policies establishing cost-effective energy efficiency as a priority resource.” Further, and more specifically, it says “the rates allowed to be charged by any electric utility shall align utility incentives with the delivery of cost-effective energy efficiency and promote efficiency investments.” The section then sets forth policy options that state regulators and non-regulated utilities “shall consider” in complying with the overall requirements. These include revenue decoupling, incentives for efficiency management and changes in rate design that make efficiency an explicit goal.
Additionally, Title XIII suggests that states require utilities to consider smart grid investments, weighing a range of factors from costs to societal benefits, before the state will approve non-smart grid investments. Further, the law suggests states authorize rate recovery and investment returns for capital expenditures on smart grid systems, as well as recovery of stranded costs for obsolete equipment being replaced. To sweeten the pot, Title XIII also directs the Secretary of Energy to establish a matching-grant program by December 2008 that will reimburse utilities for 20 percent of the cost of qualifying smart grid deployments.
Finally, Section 571 directs FERC to develop a national action plan for demand response. An allocated $10 million yearly budget ensures FERC will keep the action plan moving forward.
Today’s Congress is not the Congress of 1978. As a result, the language of today’s energy legislation stops short of PURPA’s outright policy directives for state utility regulators. As it did in EPAct, Congress structured EISA in a way that leaves states free to “consider” policy options that will work best for them.
But EISA Section 532 is slightly more prescriptive than EPAct Section 1252 was. While EPAct’s smart-metering requirement gave states and utilities an explicit out clause, EISA’s energy-efficiency section is unequivocal in requiring rate structures to align utility incentives with efficiency priorities. Of course, this language leaves wiggle room in how states will define and meet that standard, but Congress seems to be pushing the envelope slightly further with EISA than it did with EPAct. To wit: if a state’s rate structures don’t seem to be establishing efficiency as a priority, a plaintiff might sue the state for violating PURPA, as amended by EISA.
In any case, PURPA continues its role as a pry bar for dismantling the old utility structure. However, today many utilities and their shareholders welcome that tool—in part because they see the writing on the wall. Facing rising cost pressures and environmental challenges, utilities need lawmakers’ help to overcome the industry’s structural dilemmas. And unlike PURPA’s “avoided cost” ramrod, EISA’s approach to encouraging efficiency and smart-grid investments actually helps ease the transition, by attempting to realign utilities’ financial incentives.
The question now is whether utilities and state regulators will view EISA’s soft leverage as an excuse to let the industry status quo continue for a few more years, or whether they will view it as a Congressional mandate to join in the dismantling—and begin reconstructing the industry to prioritize efficiency rather than throughput.