Fate of Conservation Mandates


Many states allow private opt-outs, but Florida bucks the trend.

Fortnightly Magazine - March 2016

For the past several years state legislators have been taking a look at mandates imposed on energy utilities to offer programs that promote conservation, renewable power, and energy efficiency. A number of states have acted to reduce, eliminate or postpone such obligations, including high-profile programs in Ohio and Indiana. Most recently, however, a decision issued by the Florida Public Service Commission suggests movement in the opposite direction.

These developments invite questions about whether conservation and energy efficiency are public or private goods. Should regulators allow customers to opt-out from such programs, on the theory that they know best how to tailor their investments to get the best results? Or should all customers be made to participate in a coordinated fashion, since conservation and efficiency confer benefits on society at large?

Florida: Wal-Mart Rebuffed

Florida regulators, who were not bound by any new legislation aimed at curtailing mandates, voted this past January to reject a request by large commercial customers in the state to switch to an opt-out model for energy efficiency initiatives; i.e. to allow them to come up with their own self-directed programs and at the same time benefit from an exemption from paying for costs associated with established conservation programs offered by utilities. This decision, issued by the Florida Public Service Commission, concluded that the opt-out advocates had not provided convincing evidence to justify altering the state's long-held policy that since all ratepayers benefit from cost-effective demand-side management (DSM) measures, all ratepayers should share in the costs. Re Wal-Mart Stores East, LP et al., Docket No. 140226-EI, Order No. PSC-16-0011-FOF-EI, Jan. 5, 2016 (Fla.P.S.C.).

The Florida case involved a request by Wal-Mart Stores East and its affiliate, Sam's East, Inc., to opt out of participating in conservation and energy efficiency initiatives sponsored by investor-owned utilities. Customers allowed to opt out would no longer be held liable for the costs of the plans, which currently are recouped through Energy Conservation Cost Recovery (ECCR) clauses included in Florida utility tariffs. The existing ECCR mechanism is considered non-bypassable and is applied to every ratepayer. 

Wal-Mart maintained that large customers could implement energy efficiency more effectively on their own. It noted that many other states already had embraced opt-out policies for large customers, including Arkansas, Indiana, Louisiana, Missouri, North Carolina, Oklahoma, South Carolina, Texas, Virginia, and West Virginia. In addition, Wal-Mart said, some states permit so-called "self-direct" programs that allow participating customers to re-direct the dollars they would have otherwise contributed to utility-sponsored programs, so as to fund their own private energy efficiency investments. The self-direct states include several Midwestern states from Ohio to Minnesota and most of the states in the Mountain West and the Northwest.

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While the proponents of the opt-out plan said that eligible customers would still be able to participate in utility programs and thus would pay the requisite ECCR , the commission found that instituting the opt-out proposal could result not only in extra costs to other ratepayers, but also in diminished implementation of energy efficiency programs across the state. It noted also that the opt-out plan could lead to somewhat intractable administrative burdens as well, such as audits and other requirements for the opt-out customers, especially if savings from such customers were counted towards utility conservation goals. The commission found that while reducing ECCR charges for certain large customers would lower their bills, there was no guarantee that such customers would re-invest those savings in energy efficiency measures.

According to the commission, Florida's current demand-side management goals require that approved energy efficiency program savings pass the Ratepayer Impact Measure (RIM) test and have a payback period greater than two years, so as to minimize the number of free riders. The commission reasoned that utility-sponsored programs meeting the RIM test would put downward pressure on rates overall, benefiting the general body of ratepayers. In addition, the commission found that designing a policy to allow opt-outs and yet avoid cost-shifting to other ratepayers would prove extremely difficult.

Ohio: Political Repercussions

By contrast with Florida, the Ohio Public Utilities Commission (PUC) had decided back in 2014 to allow the state's FirstEnergy companies (Ohio Edison Co., Cleveland Electric Illuminating Co., and Toledo Edison Co.) to update energy efficiency and peak demand reduction tariffs to permit consumers to opt-out of certain company-sponsored energy efficiency programs. As a result, FirstEnergy's large industrial customers were able to opt out of the efficiency programs on Jan. 1, 2015. Re Ohio Edison Co. et al., Case Nos. 12-2190-EL-POR et al., Nov. 20, 2014 (Ohio P.U.C.).

The genesis of this new policy is contained in S.B. No. 310, passed by the Ohio General Assembly in May 2014, and signed by Governor John Kasich the following June. The statute amends the state's policies concerning renewable energy, energy efficiency, and peak demand reduction. Among other changes, S.B. 310 provided that the statutory benchmarks already in place in 2014 for achieving energy savings and new renewable energy resources would not increase, and would remain unchanged for 2015 and 2016. Companies electing to file amended portfolio plans that might include provisions allowing customers to opt-out of participation in utility-sponsored energy efficiency programs, among other changes, must submit the updated tariffs to the PUC for review and approval. The FirstEnergy case was filed for commission review in September 2014. 

As it turns out, the debate over utility mandates in Ohio has taken on national significance as Governor Kasich (still running for President as of mid-February) seeks to establish his bona fides as an environmentalist of sorts with pragmatic conservative credentials. When signing the bill the governor made it clear he was acting to prevent a situation where consumers could be forced to pay for unnecessarily expensive power. Yet other interested parties pointed to aggressive lobbying by the state's largest regulated energy utilities as the basis for the bill's success, despite documented efficiency gains and widespread public support (including from large industrial users) to keep the programs running.

Another player in the Ohio debate was the Energy Mandates Study (EMS) Committee, created by state legislation and charged with the task of reviewing program performance and reporting back to the legislature on the results of the freeze after one year. (The committee consisted of a bipartisan panel of members of both the Ohio House and Senate and the chairperson of the Public Utilities Commission of Ohio.)

The EMS committee found that continuation of the program mandates would be costly for Ohioans, and that the penalties for not attaining the goals were overly punitive. Authors of the report, issued in September 2015, emphasized that "energy efficiency can provide great value if it is structured properly so that ratepayers pay less for electricity and the state uses less electricity overall." The report recommended that the General Assembly should consider enacting legislation that would expressly allow electric distribution utilities to offer voluntary energy efficiency programs that could operate to reduce overall electricity consumption in the state while cutting customer bills. 

A related question at issue in the FirstEnergy case concerned the treatment of energy cost savings that might result from self-direct projects - efforts at conservation and energy efficiency that industrial or commercial utility customers might choose to undertake on their own behalf, outside of utility-sponsored programs. Thus, the state's Office of Consumer Counsel had contended that savings emanating from such self-direct mercantile projects should not be counted against ratepayers, and the PUC agreed. As for the treatment of distribution service revenues lost due to reduced energy consumption caused by such self-direct projects, the PUC ruled that such questions regarding revenue decoupling fell outside of the issues at play in the case. According to the commission, such issues were more properly raised in other proceedings, including the broad-based Energy Security Plan cases, where base rate issues typically are decided.

Indiana: Opt Out, Escape Costs

Indiana marks another state in which lawmakers have enacted legislation to permit an opt-out from energy efficiency mandates, thus saddling utility regulators with the job of tailoring utility proposals for program waivers and updates. The new law, known as Indiana Senate Enrolled Act 340, was passed in March 2014. 

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Pursuant to this legislation the Indiana Utility Regulatory Commission issued an order approving tariffs and procedures governing industrial electric user opt-out of utility energy efficiency programs. Re Opt Out of an Industrial Customer from a Regulated Electric Utility Energy Efficiency Program, Cause No.44441, June 30, 2014 (Ind.U.R.C.), published at 315 PUR4th 148.

The law defines a qualifying customer as "a person that receives services at a single site constituting more than one megawatt of electricity of electric capacity from an electric supplier." Under the rules set out in the legislation, suppliers may not charge opt-out customers rates that include energy efficiency costs incurred under utility-sponsored programs after an opt-out application is approved. Program costs a customer will no longer be required to pay include such categories as direct program costs, lost revenues, and utility savings performance incentives. 

While approving opt-out tariffs developed by the state's major electric utility companies the Indiana commission settled several technical issues including timing requirements for implementation of the opt-out option and related rate reductions, procedures for allocation and reallocation of costs among remaining customers, and development of specific rates for opt-out customers going forward.

For example, the commission agreed to give the utilities the flexibility to decide whether to permit customers to pick and choose which accounts to opt-out. Some utilities had argued that there may be opportunities for energy efficiency savings left on the table if a customer was required to opt-out for all service accounts at each industrial site.