Regulators should ensure that changes to rate design seek to balance consumer and utility interests. Rates that are intended to insulate utilities from economic and technological change while...
The latest ‘incremental’ policy changes might realign utility financial incentives.
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