The Efficiency Mandate: Stimulating Energy Efficiency

Deck: 

NARUC decries conditions on states for federal grants.

Fortnightly Magazine - April 2009

President Barack Obama on February 17 signed into law the American Recovery and Reinvestment Act of 2009, also known simply as the Stimulus Bill, which contained provisions allowing for investments approaching $100 billion in green energy alone. For example, some $11 billion overall will be spent on the smart grid and advanced electric meters, while $6.3 billion is slated for state and local governments to make investments in energy efficiency and $3.1 billion will go for energy efficiency and conservation block grants to states.

These grants are needed because many state governments are facing budget shortfalls and so they may lack sufficient financial resources to take advantage of the full potential of energy-efficiency programs available for implementation. The Stimulus Bill aims to help states promote clean-energy development and efficiency programs while creating jobs in the sector.

Specifically, Section 7006 of the bill establishes $3.1 billion in state grants under the Energy Policy and Conservation Act (EPCA) for energy efficiency and conservation. The Department of Energy, however, had its authority to give such grants conditioned upon obtaining written assurances that the governor of the state will implement certain regulatory and ratemaking policies (see sidebar “Stimulus: Strings Attached”). State regulators consider such conditions an unwarranted intrusion into the ratemaking process, and also an unnecessary impediment to implementation of green programs in general.

The National Association of Regulatory Utility Commissioners (NARUC) responded to early versions of the bill, decrying the retail rate conditions placed upon state access to energy-efficiency grants. The draft bill imposed requirements that states implement rate decoupling as a condition to receiving grants. That decoupling requirement was removed in the final version of the bill. But NARUC President Frederick F. Butler—who serves as a commissioner on the New Jersey Board of Public Utilities—issued a statement of caution about the bill’s language. “These ambiguous conditions will create confusion and legal uncertainty and will likely delay or preclude the release of these critical funds.”

Fortnightly asked Butler to elaborate on those remarks.

 

Fortnightly: What’s your overall perspective on the energy provisions in The American Recovery and Reinvestment Act of 2009—commonly called the Stimulus Bill?

Butler: Overall, while we are glad to see so much attention and money given to energy-efficiency and smart-grid issues, we have real concerns about the way the bill allocates funds to the state energy program account.

The final product imposes conditions that might be “less bad” than initial drafts, but they still interfere with the state regulatory process by requiring governors to gain assurances from their regulators about actions they have to take.

This point is important because our members are statutorily required to consider how retail electricity policies and practices will impact end-use consumers. Remember, states have been the ones pursuing innovative rate structures, renewable portfolio standards, integrated-resource planning, and reducing greenhouse gases for years—well before the federal government starting looking into these issues.

Our concern is that the stimulus package doesn’t recognize the progress states have made in increased efficiency and energy savings across the country. States are leading the way for renewable resources, and we’ve been helping shepherd new smart-grid technologies. And we’ve done all of this by focusing on how these steps will impact consumers.

State procedures can be lengthy and at times contentious, but they give all parties their seat at the table. Everyone is heard, all opinions are considered, and at the end of the day, a balanced decision is rendered.

So as I said, while the exact provisions in the stimulus bill may be “less bad” than earlier inceptions, it potentially could disrupt the independent regulatory decision making that has guided this country for more than 100 years.

In terms of the smart-grid section, we are pleased, again, to see any amount of money going toward smart-grid development. A question I keep being asked is, “is this enough money?” The answer is no, but it’s only intended to be seed money to stimulate smart-grid development.

While we have to be careful with how we proceed with the smart grid, the approximately $4.5 billion in the stimulus bill gives us a good starting point that we hope will bring some demonstration and pilot projects to fruition.

 

Fortnightly: The Stimulus Bill ties federal grants for energy-efficiency purposes to promises states must make about their ratemaking policies. What do you think about that aspect of the legislation?

Butler: We’re very disappointed by this provision. Regulatory operations are meant to be independent and free of outside interference. No matter how strictly the bill is interpreted, it seems clear that Congress intends for state governors to obtain “necessary assurances” that their regulators will seek to implement the energy-efficiency provisions.

We don’t know what this is intended to accomplish. For starters, commissions are set up to be quasi-judicial. Hearings and rate cases are essentially conducted in a courtroom setting, with witnesses, evidence, testimony, cross examination, etc. Because of this framework, state commissioners, in effect, act like judges and must weigh all the evidence when deciding on a certain case.

Therefore, it’s legally problematic to have a state commission give “assurances” that they will act a certain way in a given case. This is like qualifying the release of federal judicial grants to states based on governors having to receive assurances that their judges will find 80 percent of all those accused guilty.

 

Fortnightly: The original version of the Stimulus Bill in Section 7006 required utility rate decoupling. The final version doesn’t mention decoupling specifically, but requires state policy ensuring utility financial incentives are aligned with helping customers use energy more efficiently. What’s your perspective on that language?

Butler: The language seems vague in terms of what kind of efficiency programs would qualify for the funds.

I really don’t know if this will result in removing disincentives to efficiency. I don’t mean to duck the question, but I really just don’t know. For one, states are not immune from the economic plight we’re in, so we do want the money to get out to as many states as possible. But if regulators can’t provide the “assurances” the law requires, I don’t know how that will impact the bill’s overall goals.

I would say that although we expressed our concerns with the stimulus bill, it’s in our interest—indeed, the country’s interest—that it works. We want the money to get out to the states as quickly as possible, and to that end, we are interested in working with Congress and the administration to ensure the money is distributed.

 

Fortnightly: What are your specific concerns on how federal energy policies are affecting states' progress on conservation and energy efficiency?

Butler: We want Congress and the administration to encourage and reward, rather than mandate, innovative energy policies. The problem we had with the prescriptive decoupling language in earlier bills is that it ignored the good work that states are doing in terms of efficiency.

Decoupling is a tool in a state’s toolbox, and we don’t want anyone to think NARUC is against decoupling; that simply isn’t the case. However, we want Congress and the administration to know that decoupling is only one way to encourage efficiency. States like Vermont and Oregon are on the cutting edge of energy efficiency and only very recently considered decoupling measures. California, often seen as a decoupling success story, runs a ton of other efficiency programs as well. The problem is that while decoupling, if used correctly, can be a useful and effective tool, by no means is it the only way to do this.

States have long been pioneers on the energy efficiency and conservation front. Many of the policies Congress is considering have been used and perfected at the state level. If we start mandating particular policies, we run the risk of losing this entrepreneurial spirit and wasting valuable time and money. Decoupling isn’t appropriate in every situation, and forcing states to implement such a policy is a major distraction that will complicate their efforts to implement effective efficiency programs.

 

Fortnightly: Now that the Stimulus Bill is law, what more should the federal government do to encourage energy efficiency and conservation? What more should NARUC be doing to encourage the right actions at the state level?

Butler: We believe the government should look at what all the states are doing and instead of mandating specific programs, Congress should reward the intrepid efforts by the states that encourage conservation. Look at results, look at what works. Don’t focus on a buzzword that may or may not result in the conservation levels we need.

States recognize the need to become more efficient. In fact, at NARUC, we’ve been focusing on these issues for a long time. We’ve passed multiple resolutions encouraging efficiency and the adoption of innovative rate methodologies, and we’ve also taken the lead role in efforts like the National Action Plan for Energy Efficiency.

Our Energy Resources and the Environment Committee has been at the forefront of this topic, and if you’ve attended any NARUC meetings in the past five years, I’m sure you’ve noticed that ERE meetings are now some of the most well-attended committee discussions that we have.

Our work on these issues has been recognized by the outside world as well, as in September 2007 we won an award from the Alliance to Save Energy.

So we have been, and will continue to be, engaged on these issues. States are on the front lines, and so are we.