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Aligning Utility Incentives with Energy Efficiency Investment. Val Jensen ICF International. Context - National Action Plan for Energy Efficiency.

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aligning utility incentives with energy efficiency investment

Aligning Utility Incentives with Energy Efficiency Investment

Val Jensen

ICF International

context national action plan for energy efficiency
Context - National Action Plan for Energy Efficiency
  • July 2006 report included a recommendation to “modify policies to align utility incentives with the delivery of cost-effective energy efficiency and modify ratemaking practices to promote energy efficiency investments.”
  • A key objective for Year 2 of the NAPEE effort is to, “undertake efforts to support key recommendations of the Action Plan.”
  • ICF retained by EPA on behalf of the NAPEE to develop a White Paper extending the work underlying this recommendation and provide additional information on cost recovery and incentive mechanisms
  • Original NAPEE and recommendations were focused on policy – current work is designed to support implementation activities – provide a resource.
the hierarchy of financial implication a k a the 3 legged stool
3 types of costs/financial implications that must be considered

Program cost recovery

Avoidance or recovery of lost margins

Utility performance incentives

Each of these affect utility earnings/net operating margins

It is the direction and magnitude of this effect that ultimately determines whether a utility’s financial interest is aligned with a policy interest in promoting utility investment in EE.

Our Objectives

Properly portray these implications from the perspectives of both utilities and policy makers.

Examine alternative approaches to addressing the implications.

Provide concrete examples/case studies.

Search for new approaches

The Hierarchy of Financial Implication (a.k.a the 3-legged stool)
mechanisms examined
Mechanisms Examined

Lost Revenue Recovery Mechanism (LRAM)


Rate Case


Lost Margin Recovery

Program Cost Recovery

Earnings/Net Operating Margin


Rate Case



Shared Savings

Performance Incentives

Performance Payment

ROR Adder

preliminary observations
Preliminary Observations
  • Significant levels of investment (e.g., CT, VT, CA) will require:
    • All three levels of financial implication be addressed
    • 3rd party administration may substitute to some degree
  • But, what matters ultimately is the impact on earnings
    • Can get there in a variety of ways.
  • Policies don’t operate in isolation – influenced by:
    • General ratemaking policy
    • Utility resource acquisition policy
    • Climate policy
    • Market structure policy
  • Important differences exist between
    • Investor-owned and publics/coops;
    • Electric and gas
more preliminary observations
More Preliminary Observations
  • Policies need to address not only tangible costs, but also utilities’ perceptions of regulatory risk – policy stability is important.
  • Consistent policy with net positive impacts on earnings can play a major role in changing utility resource acquisition culture.
    • Policies that leave a utility financially neutral (no reduction in earnings) will produce indifference to EE.
    • Aligning IOU interests with a policy goal of aggressive investment in EE may require an ability to earn performance incentives.
    • Climate legislation will likely change the utility benefit-cost calculus for EE
challenging issues
Challenging Issues
  • Recovery of margins
    • Are margins guaranteed?
    • Do customers benefit?
    • What is the proper utility business model?
  • Performance Incentives
    • Should utilities be doing this anyway?
    • Could someone else do the job less expensively?
process and timeline
Process and Timeline
  • Detailed outline - April
  • Draft to Advisory Group - June
  • Draft to Leadership Group for review and input - late July
  • Final Draft – September
  • Distributed – October
advisory group

Duke Energy

Tampa Electric Co.,


Questar Gas Co


Southern Company

Austin Energy

Southern California Edison


Utility Commissions

Idaho PUC,

Kansas Corporation Commission

District of Columbia PSC

New York PSC



Environmental Defense

CT Office of Consumer Counsel

Advisory Group