1. Regulatory Aspects of Energy Efficiency: A Residential Perspective Presented by: Roger D. Colton Fisher, Sheehan & Colton Public Finance and General Economics Belmont, MA National Regulatory Conference Wiliamsburg, Virginia May 2008

2. Energy Efficiency: Four Tests of Cost-Effectiveness Participant test: Participant test: Cost and benefits to ratepayer (affordability) Cost and benefits to ratepayer (affordability) Total resource cost test: Total resource cost test: Total costs and benefits—participant and utility Total costs and benefits—participant and utility Utility cost test: Utility cost test: Resource option—narrowly defined avoided costs. Resource option—narrowly defined avoided costs. Ratepayer impact test: Ratepayer impact test: What happens to ratepayer bills What happens to ratepayer bills

3. Beyond the traditional tests... Four traditional tests focus on energy efficiency as a demand-side alternative to consider in capacity planning. Two additional concepts: Efficiency can be a least-cost strategy for utility tasks other than capacity planning as well. Efficiency can be a least-cost strategy for utility tasks other than capacity planning as well. In accepting proposition #1, the locus of authority for Commission to act on efficiency can be found in non-traditional statutes. In accepting proposition #1, the locus of authority for Commission to act on efficiency can be found in non-traditional statutes.

4. Proposition #1: Within a utility’s obligation to provide least-cost service, energy efficiency can serve not only as least-cost capacity planning, but as a least cost strategy for other utility tasks as well.

5. Appropriate Application of Utility Cost Test Least-cost obligation applies to all aspects of utility operations: Least-cost obligation applies to all aspects of utility operations: Self-insurance rather than insurance. Self-insurance rather than insurance. Peaking/base load/intermediate generation Peaking/base load/intermediate generation Demand-side vs. supply-side alternatives Demand-side vs. supply-side alternatives Traditional: avoided costs (capacity/energy) for utility cost test. Traditional: avoided costs (capacity/energy) for utility cost test. Least cost applies to non-supply issues as well: Least cost applies to non-supply issues as well: Credit and collection Credit and collection Control of uncollectibles/write-offs Control of uncollectibles/write-offs Non-energy utility avoided costs exist (Howat): Non-energy utility avoided costs exist (Howat): Reduced arrears: 0.6% – 8.8% adder Reduced arrears: 0.6% – 8.8% adder Reduced write-offs: 8.5% adder Reduced write-offs: 8.5% adder Fewer emergency calls: 11.6% adder Fewer emergency calls: 11.6% adder

6. Leaving Efficiency on the Table Electric utility proposes three-part energy efficiency program. Electric utility proposes three-part energy efficiency program. Vendor-based appliance rebates for Energy Star. Vendor-based appliance rebates for Energy Star. On-site energy audit and envelope sealing for HOs/1-family units On-site energy audit and envelope sealing for HOs/1-family units Refrigerator replacement as part of on-site audit Refrigerator replacement as part of on-site audit “Low-income” program: low-cost kit “Low-income” program: low-cost kit 2 low-flow shower heads 2 low-flow shower heads 3 CFLs 3 CFLs Systematically excludes low-income: Systematically excludes low-income: 70% of HHs < 150% of FPL are renters. 70% of HHs < 150% of FPL are renters. 85% of HHs < $10,000 are renters. 85% of HHs < $10,000 are renters. Disparate tenure length: Disparate tenure length: Mean “move-in” date for renters: 1998 Mean “move-in” date for renters: 1998 Mean move-in date for homeowners: 1985 Mean move-in date for homeowners: 1985 Impact: Impact: Low-income pay for program Low-income pay for program Low-income bear increased fixed costs Low-income bear increased fixed costs Low-income pay lost revenue Low-income pay lost revenue Consider, quite aside from low-income equity components (LI pay for but do not receive benefits from): Consider, quite aside from low-income equity components (LI pay for but do not receive benefits from): Leaves cost-effective efficiency potential on the table Leaves cost-effective efficiency potential on the table Leaves utility expenses higher than they “ought” to be. Leaves utility expenses higher than they “ought” to be.

7. Proposition #2 Once you accept the notion that efficiency can be a least-cost strategy for various utility tasks, it opens up the proposition that not only the authority, but the obligation, for state regulators to consider efficiency can be found in some non- traditional statutes. Consider environment as one example.

8. Applying Lessons re. Utility Commission Authority in Era of Environmental Concern State PUCs not only “may” but “must” look outside exclusive focus on economic regulation: State PUCs not only “may” but “must” look outside exclusive focus on economic regulation: As the environmental impact of generation increases, must look beyond economic regulation. As the environmental impact of generation increases, must look beyond economic regulation. Three sources: Three sources: “Whereas” clauses of commission creation. “Whereas” clauses of commission creation. Mini-state NEPA that applies to PUC as state agency. Mini-state NEPA that applies to PUC as state agency. Least-cost enforcement of federal law. Least-cost enforcement of federal law.

9. Examples of “whereas” clauses: Maryland: PSC shall “consider the public safety, and economy of the state, the conservation of natural resources, and the preservation of environmental quality.” Maryland: PSC shall “consider the public safety, and economy of the state, the conservation of natural resources, and the preservation of environmental quality.” Vermont: goal of utility policy is “meeting the public’s need for energy services, after safety concerns are addressed, at the lowest present value lie cycle cost, including environmental and economic costs...” Vermont: goal of utility policy is “meeting the public’s need for energy services, after safety concerns are addressed, at the lowest present value lie cycle cost, including environmental and economic costs...” North Carolina: PSC policy is “to encourage and promote harmony between public utilities, their users and the environment.” North Carolina: PSC policy is “to encourage and promote harmony between public utilities, their users and the environment.”

10. Example of State NEPA Laws New York: PSC must find “that consistent with social, economic and other essential considerations, to the maximum extent practicable, adverse environmental effects revealed in the [EIS] process will be minimized or avoided.” New York: PSC must find “that consistent with social, economic and other essential considerations, to the maximum extent practicable, adverse environmental effects revealed in the [EIS] process will be minimized or avoided.” Differences between states: Differences between states: Some apply only to certifications/”projects” Some apply only to certifications/”projects” Others apply to all Commission actions (including rate-setting). Others apply to all Commission actions (including rate-setting). 20 states have mini-NEPAs 20 states have mini-NEPAs 12 commissions are explicitly subject to their state NEPAs. 12 commissions are explicitly subject to their state NEPAs.

11. Section 404, Clean Air Act (2) Allowances for Emissions Avoided Through Energy Conservation and Renewable Energy.-- (A) In General.--The regulations under paragraph (4) of this subsection shall provide that for each ton of sulfur dioxide emissions avoided by an electric utility, during the applicable period, through the use of qualified energy conservation measures or qualified renewable energy, the Administrator shall allocate a single allowance to such electric utility, on a first-come-first- served basis from the Conservation and Renewable Energy Reserve established under subsection (g), up to a total of 300,000 allowances for allocation from such Reserve.

12. Energy Conservation as Clean Air Strategy B) Requirements for Issuance.--The Administrator shall allocate allowances to an electric utility under this subsection only if all of the following requirements are met: B) Requirements for Issuance.--The Administrator shall allocate allowances to an electric utility under this subsection only if all of the following requirements are met: (i) Such electric utility is paying for the qualified energy conservation measures or qualified renewable energy directly or through purchase from another person. (i) Such electric utility is paying for the qualified energy conservation measures or qualified renewable energy directly or through purchase from another person. (ii) The emissions of sulfur dioxide avoided through the use of qualified energy conservation measures or qualified renewable energy are quantified in accordance with regulations promulgated by the Administrator under this subsection. (ii) The emissions of sulfur dioxide avoided through the use of qualified energy conservation measures or qualified renewable energy are quantified in accordance with regulations promulgated by the Administrator under this subsection. (iii)(I) Such electric utility has adopted and is implementing a least cost energy conservation and electric power plan which evaluates a range of resources, including new power supplies, energy conservation, and renewable energy resources, in order to meet expected future demand at the lowest system cost. (iii)(I) Such electric utility has adopted and is implementing a least cost energy conservation and electric power plan which evaluates a range of resources, including new power supplies, energy conservation, and renewable energy resources, in order to meet expected future demand at the lowest system cost. (II) The qualified energy conservation measures or qualified renewable energy, or both, are consistent with that plan. (II) The qualified energy conservation measures or qualified renewable energy, or both, are consistent with that plan. (III) Electric utilities subject to the jurisdiction of a State regulatory authority must have such plan approved by such authority. For electric utilities not subject to the jurisdiction of a State regulatory authority such plan shall be approved by the entity with ratemaking authority for such utility. (III) Electric utilities subject to the jurisdiction of a State regulatory authority must have such plan approved by such authority. For electric utilities not subject to the jurisdiction of a State regulatory authority such plan shall be approved by the entity with ratemaking authority for such utility.

13. Pennsylvania implementation “On or before January 1, 1996, each public utility shall submit to the commission and may request commission approval of a plan to bring its generating units which use coal to generate electricity into compliance with the Phase II requirements of Title IV of the Clean Air Act.” “On or before January 1, 1996, each public utility shall submit to the commission and may request commission approval of a plan to bring its generating units which use coal to generate electricity into compliance with the Phase II requirements of Title IV of the Clean Air Act.”

14. Critical lessons for energy efficiency: Common misperception is that utility commissions are only economic regulators: Common misperception is that utility commissions are only economic regulators: Excludes environmental impacts Excludes environmental impacts Excludes affordability impacts Excludes affordability impacts

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16. roger@fsconline.com