Marty Kushler, Jim Presswood and Paul Peterson described different tools for regulating efficiency.

As reliance on efficiency programs to address concerns about fuel prices, system reliability, and environmental quality has increased, states and provinces are exploring new and different ways to regulate energy efficiency.

At the Market Transformation Symposium in March, CEE organized a session on innovative regulatory tools that show great promise for making energy efficiency a more robust resource.

The panel consisted of ACEEE’s Marty Kushler, Jim Presswood of the Natural Resources Defense Council and Paul Peterson of Synapse Energy Economics.

Kushler opened with an overview of energy-efficiency regulatory policy mechanisms that align the incentives of utilities with the state’s desire for efficiency to perform as an alternative to supply. Under traditional regulation, Kushler explained, utility profits follow sales trends.

“With the exception of the California energy crisis,” he said, “I have not found one investor-owned utility running energy-efficiency programs in the absence of regulatory requirements.”

Thus regulation designed to encourage efficiency programs by utilities needs to address three key economic concerns: 1) recovery of the direct costs of programs, 2) addressing the disincentive of the revenue lost as a result of programs and 3) providing an opportunity for earnings from energy-efficiency program activity.

Presswood then described one important mechanism that addresses lost revenues, rate decoupling. Under traditional regulation, utilities can under-collect revenues if sales fall below the forecasted amount (due to an unexpectedly successful efficiency program or to unexpected weather). Sales above forecast can result in over-collection of rates.

Decoupling severs the link between profits and sales by allowing for modest, regular true-ups in rates to ensure that any fixed costs recovered in kWh or therm charges are not held hostage to sales volume. If sales are higher than expected, over-collected revenues are returned to customers; if lower than expected, rates are adjusted so that utilities can cover the shortfall.

Decoupling allows energy efficiency to compete directly with supply, and encourages reduced consumption – and reduced environmental impact. Reduced demand often results in lower prices, which benefits customers.

Peterson described how energy efficiency and demand response have been incorporated into the policy of the newly formed New England Forward Capacity Market (FCM). Under the FCM, a variety of parties place an annual bid to provide electricity for a period of three years.

In this market, the provision of reduced demand is treated as equal to the provision of supply. Demand resources that can be bid include energy efficiency, load management, demand response and distributed generation.

Within each resource type, the resources are categorized by hours of performance and weather sensitivity. Penalties are substantial for failing to provide either the demand or supply resource once a bid has been accepted.

During the ensuing discussion, it was emphasized that none of these policy mechanisms is a “one size fits all” solution. Each state or province’s choice of policy tool needs to be appropriate for its circumstances and objectives.

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