1. National Action Plan for Energy Efficiency www.epa.gov/ eeactionplan Aligning Utility Incentives with Energy Efficiency Investment Val Jensen ICF International

2. 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.

3. 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 1.Properly portray these implications from the perspectives of both utilities and policy makers. 2.Examine alternative approaches to addressing the implications. 3.Provide concrete examples/case studies. 4.Search for new approaches

4. Mechanisms Examined Earnings/Net Operating Margin Program Cost Recovery Expense Rate Case Rider Lost Margin Recovery Performance Incentives Capitalize Rate Case Deferral Lost Revenue Recovery Mechanism (LRAM) Decoupling Shared Savings Performance Payment ROR Adder

5. Current Landscape

6. Preliminary Observations Significant levels of investment (e.g., CT, VT, CA) will require: – All three levels of financial implication be addressed – 3 rd 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

7. 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

8. 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?

9. 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

10. Advisory Group Utilities – Duke Energy – Tampa Electric Co., – PNM – Questar Gas Co – PG&E – Southern Company – Austin Energy – Southern California Edison – Tri-State Utility Commissions – Idaho PUC, – Kansas Corporation Commission – District of Columbia PSC – New York PSC Others – NRDC – Environmental Defense – CT Office of Consumer Counsel