When More Is Less
By: Alice Clamp
The growing national and state focus on energy efficiency initiatives is the result of several factors, according to a recent study by Standard & Poor's. Among them: rising infrastructure costs, higher energy prices and growing concern about climate change.
The push is not only coming from national and state energy policy. In the current economic climate, more and more electricity customers are looking for ways to use less energy. And they are turning to their utilities for help.
As a growing number of utilities respond by offering energy efficiency programs to their customers, the potential for decreased sales revenues and recovery of authorized costs becomes a credit issue, said the S&P report, When Energy Efficiency Means Lower Electric Bills, How Do Utilities Cope?
Utilities, already struggling with a drop in demand, "are especially vulnerable to changes in demand, as they base their rates on the expectation that energy sales will increase," the S&P report said. Moreover, these utilities are under growing pressure to hold down rates or provide increasing support to help cover municipal governments' budget gaps.
Even if a utility's energy efficiency programs are cost-effective and cheaper than acquiring new power supplies, the savings achieved end up hurting the utility's cost recovery, said Sheryl Carter, co-director of the Natural Resources Defense Council's (NRDC) energy program.
"As the nation moves into an era of carbon constraints as well as increased infrastructure costs, energy efficiency becomes more important," said Carter. And the challenge of balancing energy efficiency programs and utility revenues grows in magnitude. Carter described how energy efficiency programs might impact revenues for an investor-owned utility. Say, for example, that a utility's energy efficiency programs reduce its sales by 1 percent, she said. If the utility has an authorized fixed-cost revenue requirement of $300 million, and allocates $235 million to variable energy charges, $55 million to variable demand charges and $10 million to fixed charges (per month), the drop in sales will have an initial negative cost recovery impact of $2.9 million. Over five years, the utility's energy efficiency programs—assuming 1 percent savings annually—will reduce cost recovery by $43.5 million.
To help address the challenge, the NRDC is working with utilities to develop policies and rate structures that increase energy efficiency while ensuring financial integrity.
"We are in a period of transition," said Carter. "A lot of utilities haven't thought that much about this issue yet. Those with new or small programs may not be aware of the potential impact." When a utility's energy efficiency programs reach the point where they reduce total sales by 1 percent, said Carter, they start to make a big difference to cost recovery. But how does a utility know if lower sales can be attributed to the success of its energy efficiency programs? Can it distinguish the impact of these programs from the impact of other factors, such as the economy?
With a good measurement and valuation system, it is possible to pinpoint the effect of energy efficiency programs, said several utilities with well-established programs.
The Sacramento Municipal Utility District in California, for example, has 25 years of energy efficiency programs under its belt. "Like other utilities, we hire independent firms to verify the savings that we're achieving with each program," said Jim Tracy, the utility's chief financial officer. Identifying the revenue shortfall attributable to energy efficiency programs can be done, said Bob Balzar, Seattle City Light's director of conservation resources. "But it requires in-depth analysis."
Figuring the shortfall is difficult to tell with certainty, said Tom Buckley, manager, customer and energy services at the Burlington Electric Department in Vermont. "But we have tracked retail energy savings pretty carefully, so it would not be hard to do the math." Kennebunk Power & Light District in Maine did not really need to do the math to identify the reduced energy use by a few customers. "Our school system reduced its energy consumption by more than 800,000 kilowatt-hours over a year, and one large industrial customer did a complete lighting retrofit," said Sharon Staz, the utility's general manager.
Across the country, revenue growth is slowing, in part because of utility energy efficiency programs. Austin Energy's annual revenue loss is approximately $8 million, said Roger Duncan, the utility's general manager. Without its energy efficiency programs, Waverly, Iowa, Light and Power would be growing at a "substantially higher" rate than its average of just under 3 percent annually, according to Sheila Boeckman, the utility's manager of business operations and development. At the end of 2007, 85 percent of Waverly's customers were participating in at least one energy efficiency program. Still, as Burlington's Buckley pointed out, energy efficiency programs are deliberately designed to offset growth in loads. "So if our programs are successful, yes, our sales are lower." But the decline in sales is affecting utilities' ability to recover fixed costs. And those fixed costs are rising. "We anticipated an increase in diesel and gasoline prices in 2008," said Kennebunk's Staz. "But we budgeted $3 a gallon, not $4." In addition, costs have gone up for delivery surcharges from suppliers, copper and steel and the expensive fire-retardant clothing that some personnel are required to wear.
Seattle City Light's Balzar offered three suggestions on what to do about the impact of energy efficiency programs on utility sales. "First, acknowledge that this is part of the overall financial aspect of approving and launching a conservation plan. It needs to be accounted for." Utilities have a couple of options. They can employ a rate increase strategy. Or they can make other adjustments to their overall annual revenue requirements. Next, consider a slight increase in rates to offset the loss in revenue, Balzar said. "That increase is often much less than utilities would have paid to purchase power or build new generation to accomplish the same thing." Seattle City Light puts its conservation strategy and rate recovery strategy side by side, he said.
Finally, it's worth remembering that if customers' bills go down, their feelings about the utility often go up, said Balzar. "There's a customer satisfaction link here that is not trivial and should not be missed."
Those public utilities that have offered energy efficiency programs for years know it's critical to account for them in revenue requirement forecasts. Sacramento Municipal Utility District, for instance, reviews its revenues periodically, said Tracy. "We reset our total revenue recovery based on the most recent forecast of sales. If sales are reduced through energy efficiency, our rates will be slightly higher."
SMUD tries to allocate the costs by asking: How much does it cost per customer to run a call center, how much does it cost for line drops and meters, how much does it cost to bill a customer each month?
Santee Cooper closely coordinates energy efficiency measures and rate adjustments, both pricing and structure, said Marc Tye, vice president of conservation and renewable energy. "We make sure the rate structures also give customers energy efficiency signals."
Burlington Electric Department initially develops a pre-conservation load forecast for budgeting purposes, said Buckley. "Then we apply a conservation reduction to that load forecast, based on anticipated conservation savings. That post-conservation load forecast is used to develop our power supply budget, and is also translated into anticipated customer class load shapes to develop revenue projections." The utility has typically seen a 2 to 3 percent anticipated load reduction from conservation efforts, said Buckley, which translates to both lower power supply costs and lower revenues. Burlington updates the forecast annually, and uses it to generated five-year budget projections.
Some utilities review their rates every year or so, while others haven't conducted a review for several years, said NRDC's Carter. "The more frequently a utility reviews its rates, the better able it is to adjust for unforeseen changes, but any savings beyond those forecasted that occur between reviews, no matter how frequent, can still hurt cost recovery." SMUD conducts a rate recovery review every two years, said Tracy. It's an ideal cycle because it aligns with the utility's debt payment obligations. Santee Cooper reviews its revenue requirement forecasts at least annually, said Tye. "But we're making a concentrated effort to monitor and validate our energy efficiency programs more than once a year." Waverly Light and Power makes major updates to its financial forecast annually, noted the utility's Boeckman. "We monitor it all the time, tweaking as the need arises." Kennebunk Power & Light District got caught because it didn't review forecasts often enough, observed the utility's Staz. "We have to do it more frequently. Annually is not good enough for us."
Utilities facing a revenue shortfall as a result of energy efficiency programs have several options. One is to find ways of cutting costs. If work was contracted out, contractors are let go. Planning and design departments are pruned. SMUD, for instance, is examining ways of reducing its operating and fixed costs. "We're reviewing every job in the organization and how strategic it is to meeting our service and other environmental goals," said Tracy. "Where we have discretionary money for conferences and travel, we're cutting back." Because of the economic downturn, SMUD isn't seeing new growth. As a result, it's putting on hold or pushing to the future such projects as new substations and new power lines. Kennebunk Power & Light District is taking a hard look at expenses, asking: Can we cut back, can we delay? "We haven't increased our staff size, and in some ways that's not a good thing," said Staz. "But when times are tight, we need to work harder and smarter. We remind our crews to think about each trip and do what they can to avoid repeat journeys."
Santee Cooper is focused on cost reduction, said Tye. "The more we can reduce our costs, the better we're able to help customers save money and meet their energy needs in a low-cost manner."
In addition to cutting costs, many utilities are increasing what they collect from customers. "We develop rate adjustment requests that incorporate all the moving parts of our financial picture in one exercise," said Burlington's Buckley. For some utilities, regulation makes it more difficult to offset the impact of energy efficiency programs. "We're in a semi-regulated position," explained Kennbunk's Staz. "We're not allowed to have a rate stabilization fund, nor can we build up a surplus of funds." In the view of the Maine Public Utility Commission, current ratepayers should pay current costs rather than paying for future costs, she said.
Because of its regulated status, Kenne-bunk wants to take a hard look at decoupling—a mechanism that severs the relationship between sales and revenues, allowing a utility to earn a predetermined level of revenue regardless of the actual kilowatt-hours sold. "I have a lot of questions about it," she admitted. Among them: how to avoid penalizing low-income customers? How to make it fair?
Santee Cooper wouldn't consider decoupling, said Tye. "I think it sends the wrong signal. If we fall short, we try to cut costs to make up for the difference or to raise revenue." Several public power utilities were asked if they planned to reduce their energy efficiency programs because of the impact on sales. None said they were considering a cutback. Rather, most expected to boost their energy efficiency efforts, in several cases significantly. Some of those utilities have goals to meet. Seattle City Light, for instance, has a five-year conservation action plan in which it will invest $214 million. "On the surface, one could ask, why ramp up?" said the utility's Balzar. The answer: "This is exactly when our customers—especially our commercial and industrial customers—need help. This is the kind of tool and program that can give them reduced operating expenses and help them in their businesses." Like Seattle City Light, Santee Cooper is spending a significant amount—$113 million between now and 2020—on energy efficiency programs. "Our board set a goal of achieving 40 percent of our generation from non-greenhouse gas emitting resources. When you break down that percentage, between 5 and 10 percent will come from energy efficiency."
Because SMUD has increased its funding of energy efficiency programs and accelerated its goals, the utility fully expects the impact of those programs to accelerate, said Tracy. "Our goal is to reduce total energy use by 15 percent over a 10-year period that began in 2008." Austin Energy has dramatically increased its energy efficiency programs over the last few years, said the utility's Duncan. "We have a goal of reducing our energy load by 15 percent by 2020." Burlington is required by local policy directives, state law and public service commission orders to increase its energy efficiency efforts, which the utility has substantially increased in the last eight years. While the utility has no explicit plans to reduce its programs, it has noticed a slowdown in customer interest, said Buckley.
That's a trend that Waverly Light and Power's Boeckman has observed. "Now that our community as a whole has more efficient lighting, it will be harder to come up with programs that pay and that people want to participate in." Waverly doesn't plan to increase its investment in energy efficiency. Rather, it will retire one program as it adds another. Going forward, Boeckman expects energy savings will be smaller, especially in areas of the country with moderate growth.
Kennebunk Power & Light District, like all other utilities in Maine, no longer runs its own energy efficiency program. "All of us are required to assess our customers 1.45 mills—a mill is one-tenth of one cent—on every kilowatt-hour sold." For Kennebunk, that amounts to roughly $156,000, which the utility sends to the state. "The state operates conservation programs now, and it is doing very little for the residential customer," said Staz. "We keep a foot in the water by selling compact fluorescent light bulbs below cost and offering energy efficiency workshops." In addition, two of the utility's staff are certified auditors who do free home audits for low-income customers and charge $10 for all others. By keeping their governing body apprised of energy efficiency programs and their impact on sales, utilities are in a better position to gain the support they need—for expanding their programs and adjusting their rates.
"We know the impact is the cost of doing business," said Seattle City Light's Balzar. "We're always back in front of the regulatory board with the appropriate rate strategy. Some utilities aren't willing to have that conversation with their governing body. But that body needs to understand the impact on rates."
Seattle City Light presents a two-year budget to the City Council. But it modifies and tracks that budget on a monthly basis. "We can go back in midstream, which we haven't done recently, and ask for rate adjustments or additional revenues." The utility's monthly statement is a tool used by the City Council and the mayor's staff. In addition, the city's finance department looks at the budget frequently because economic conditions are changing so rapidly, said Balzar. "The City Council is committed to conservation and to the ability of the utility to recover its fixed costs."
Balzar said he thinks of conservation as a virtual power plant. "A reasonable utility wouldn't build a power plant without informing its governing body. So why embark on a virtual power plant without having mature conversations with your governing body?"
SMUD's publicly elected board holds a committee meeting monthly at which the board's targets and metrics are reviewed and the utility provides detail on current energy efficiency program trends and impacts. "We talk about revenue and resource needs for the next year, and provide a considerable amount of detail on the costs of running the business," said Tracy.
At every meeting of Waverly Light and Power's board of trustees, energy efficiency is on the agenda, said Boeckman." We discuss each program—how much money we've spent, how much energy and capacity have been saved."
Several times a year, Austin Energy briefs the City Council on performance measures. "The council is extremely positive," said Duncan. "It wants us to do more energy efficiency." Kennebunk's Staz e-mails the utility's governing body between monthly meetings. "I forward various articles so they realize that we're not facing this problem alone. And they've been receptive to the issue." Burlington Electric Department works to ensure that its Electric Commission and City Council understand how the utility's cost factors affect the cost of electricity, said Buckley. "Our policymakers are very aware that even though rates may go up slightly due to efficiency programs, those who participate see their bills go down."
There are other positives, too, said Buckley. They include environmental benefits, jobs created through the efficiency programs and keeping local dollars in the community that would otherwise be spent for power needed if there were no efficiency programs.
"We communicate these messages directly to our customers several times each year in a variety of formats," he said. In the long run, the avoided cost of investing in new generation means the bills of all customers—those who participate in energy efficiency programs as well as those who don't—should go down, said the NRDC's Carter. "With growing emphasis on energy efficiency and on electricity as a service rather than a commodity, the issue of lower electricity bills becomes more important."
Santee Cooper's Tye thinks customers will focus more on energy efficiency in the future than they have up to now. "Without the help of our customers, we can't do it. Ultimately, the customer has to reduce consumption." The utility has given CFL bulbs to half of its customers in a bid to spur them to think about ways to cut energy use. "People tend to think that bigger projects are easier, so they focus on them first. But small, simple measures can add up."
The utility has begun an aggressive outreach program, seeking to communicate with employees, rating agencies and state businesses as well as customers. Through a quarterly magazine, TV spots and bill stuffers, Santee Cooper provides tips on energy efficiency measures. These efforts are paying off, said Tye. A recent customer satisfaction survey revealed a significant increase—a jump of 11 percent—in awareness of Santee Cooper's conservation activities. Waverly Light and Power's Boeckman puts it like this: "Energy efficiency is our message, period."
Public power utilities can help their customers by offering energy-saving programs. And the utilities can help themselves by closely tracking program results and incorporating that information in regular updates of revenue requirement forecasts and rate strategies.
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