Jim Lazar, RAP Senior Advisor Presented to: Keystone Energy Efficiency Alliance
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Transcript of Jim Lazar, RAP Senior Advisor Presented to: Keystone Energy Efficiency Alliance
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The Regulatory Assistance Project
50 State Street, Suite 3Montpelier, VT 05602
Phone: 802-223-8199web: www.raponline.org
Breaking Down Barriers to Energy
Efficiency Utility Revenue Decouplingand other
Revenue Stabilization Tools
Jim Lazar, RAP Senior AdvisorPresented to: Keystone Energy Efficiency Alliance
September 20, 2011
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Energy Efficiency Is BY FAR the Cheapest Resource Available
• Energy efficiency costs much less than existing or new generation, and avoids transmission, distribution, line losses, and environmental impacts.
• Because it’s cheaper than supply-side options, it effectively achieves carbon reductions at a negative cost compared with a conventional resource strategy.
$0.00
$0.04
$0.08
$0.12
$0.16
$0.20
$0.24
Efficiency New Power
Efficiency
Customer Service
Distribution
Transmission
Generation Plant
Emissions
Fuel
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BUT: Energy Efficiency Will Not Happen Without Support
• Many barriers to efficiency:– Access to capital– Time horizon– Renters will not invest their own money, and landlords
don’t pay the bill– Lack of adequate information
• Utility Programs Are A Proven Tool To Achieve High Levels of Efficiency.– Utilities have long time horizons– Utilities have access to capital
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Tactics for OvercomingBarriers to Efficiency
• Energy Efficiency Performance Standard– Mandate to distribution utility
– Funded by system benefit charge
– Penalties for Underperformance
• Supplier Obligation (Europe)– All retail energy providers required to provide
• Third Party Administrator (Vermont)
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Energy Efficiency Can Impair Utility Net Income
• Higher costs and lower sales mean less revenue to cover costs fixed in short run.
• With efficient rate design – pricing incremental usage at long-run incremental cost, lost revenue greatly exceeds short-run avoidable expense.
• SO: a means to make the utility whole is needed.
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How Changes in Sales Affect EarningsOne Example Utility
12.31%11.88%$11,076,180$1,176,180$1,809,5081.00%
13.61%23.76%$12,252,360$2,352,360$3,619,0152.00%
14.92%35.64%$13,428,540$3,528,540$5,428,5233.00%
16.23%47.52%$14,604,720$4,704,720$7,238,0314.00%
17.53%59.40%$15,780,900$5,880,900$9,047,5385.00%
11.00%0.00%$9,900,000$0$00.00%
4.47%-59.40%$4,019,100-$5,880,900-$9,047,538-5.00%
5.77%-47.52%$5,195,280-$4,704,720-$7,238,031-4.00%
7.08%-35.64%$6,371,460-$3,528,540-$5,428,523-3.00%
8.39%-23.76%$7,547,640-$2,352,360-$3,619,015-2.00%
9.69%-11.88%$8,723,820-$1,176,180-$1,809,508-1.00%
Actual ROE% ChangeNet EarningsAfter-taxPre-tax% Change
in Sales
Impact on EarningsRevenue Change
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Methods For Recovery of Lost Utility Margin
• Lost Revenue Accounting Mechanism (LRAM)
• Straight Fixed / Variable Rate Design• Shared Savings Mechanisms• Bonus Rate of Return• Annual rate cases• Decoupling
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The Essential Characteristic of Decoupling
Traditional Regulation:Constant Price =
Fluctuating Revenues
Decoupling:Precise Revenue Recovery =
Fluctuating Prices
Revenues = Price * Sales Price = Target Revenues ÷ Sales
$0.1147
$0.1152
$0.1157
$0.1162
$0.1167
$114,800,000
$115,000,000
$115,200,000
$115,400,000
$115,600,000
$115,800,000
$116,000,000
1 2 3 4
Adjusted Revenues Adjusted Price Rate Case Price
$0.1147
$0.1152
$0.1157
$0.1162
$0.1167
$114,800,000
$115,000,000
$115,200,000
$115,400,000
$115,600,000
$115,800,000
$116,000,000
1 2 3 4
Actual Revenues Rate Case Rev. Req. Rate Case Price
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Revenue Decoupling:The Basic Concept
• Basic Revenue-Earnings Decoupling has two primary components:1. Determine a “target revenue” to be collected in a
given period• In the simplest form of revenue decoupling
(sometimes called “revenue cap” regulation), Target Revenues are always equal to Test Year Revenue Requirements
• Other approaches have formulas to adjust Target Revenue over time
2. Set a price which will collect that target revenue• This is the same as the last step in a traditional rate
case – i.e. Price = Target Revenues ÷ Sales
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The Decoupling Calculation
• Utility Target Revenue Requirement determined with traditional rate case
– By class & by month (or other period coinciding with how often decoupling adjustment is made)
• Each future period will have different actual unit sales than Test Year
• The difference (positive or negative) is flowed through to customers by adjusting Price for that period (see Post Rate Case Calculation)
Target Revenues $10,000,000
Test Year Unit Sales 100,000,000
Price $ 0.10000
Actual Unit Sales 99,500,000
Required Total Price $ 0.1005025
Decoupling Price “Adjustment”
$ 0.0005025
Periodic Decoupling Calculation
From the Rate Case
Post Rate Case Calculation
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Decoupling is Not Really “New”
• Fuel adjustment clauses decouple utility earnings from fuel and purchased power costs.
• Conservation cost recovery clauses decouple utility earnings from expenditures for Energy Efficiency implementation.
• Other adjustment clauses include nuclear decommissioning, infrastructure replacement, renewable energy costs, renewable energy production tax credits, pollution control costs.
• Decoupling is dramatically simpler than implementing a fuel adjustment mechanism.
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Lower utility costs become lower customer costs
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Risks and Other Issues Affected By Decoupling
• Weather• Economic Cycle• Regulatory Lag• Financial & business risk of utility
– Cost of capital implications
– Focus of utility management on controllable costs, not sales growth
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How Big are the Price Adjustments?
Northwest Natural Power
YearPGA
% ChangeDecoupling% Change
PCA% Change
(Res)Decoupling% Change
1995 (6.2)1996 (4.8)1997 10.51998 9.21999 7.22000 21.42001 20.82002 (12.7) 7.52003 4.9 0.6 (18.9)2004 20.1 0.36 02005 16.6 0.77 02006 3.8 (0.27) (14.0)2007 (8.7) (0.1) 11.02008 15.6 <(1.0) 8.45 (0.8)2009 10.2 0.8
Source: Lesh, Rate Impacts And Key Design Elements Of Gas And Electric Utility Decoupling: A Comprehensive Review, The Electricity Journal (June 2009)
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Do Prices Always Go Up?
21
2
13
23
7
5
12
0
3
1
67
4
2
0
0
5
10
15
20
25
> 3% ≤ 3% ≤ 2% ≤ 1% ≤ 1% ≤ 2% ≤ 3% > 3%
Decoupling rate adjustment
Nu
mb
er o
f an
nu
al r
ate
adju
stm
ents
Gas
Electric
Refund Surcharge
Source: Lesh, Rate Impacts And Key Design Elements Of Gas And Electric Utility Decoupling: A Comprehensive Review, The Electricity Journal (June 2009)
No!
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Comparison of Traditional Regulation and DecouplingIssue/Topic Traditional Regulation Decoupling
Revenue Requirement Cost of service Same, but may allow a “revenue path” between rate cases
Likelihood allowed revenue requirement will be over- or under-collected
High Low – revenue collected equals “target” revenue
Weather risk Customers and company bear weather risk with opposite “signs”; Results in wealth transfers based on weather
Customers and company shielded from weather risk; Earnings stability means lower equity ratio required
Economic cycle risk Company primarily bears economic cycle risk
Company shielded from risk; results in lower cost of capital
Need for rate cases Likely need more often when growth or other factors are changing
Reduced to 3-5 year periodicity at commission’s discretion
Rate Design See company’s current rate design
No change required, but income stability concerns addressed.
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How States Have Approached Decoupling?
Feature Gas Decoupling Electric Decoupling Revenue change between rate cases
Revenue-per-customer 23 4 Attrition adjustment 3 4 No change 3 1
No separate tariff 3 3 Timing of Rate True-ups
Annual 19 8 Semi-annual/quarterly 2 1 Monthly 4 3
Weather Not weather-adjusted 20 10 Weather-adjusted 8 2
Limit on adjustments and/or dead-band 9 6 Per class calculation and adjustments 25 7 Earnings Test 4 Pilot/known expiration date 11 4 Surcharges only 3 Total Utilities Analyzed 28 12 Source: Lesh, Rate Impacts And Key Design Elements Of Gas And Electric Utility Decoupling: A Comprehensive Review, The Electricity Journal (June 2009)
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One Innovative ProposalTucson Electric - Arizona
• Annual decoupling adjustment• Inverted seasonal residential rate design• Any surcredits applied to initial block• Any surcharges applied to end blocks
Summer WinterCustomer Charge 7.00$ 7.00$ First 500 kWh 0.080$ 0.073$ Minus any decoupling creditNext 2,500 kWh 0.102$ 0.093$ Plus any decoupling surchargeOver 3,000 kWh 0.120$ 0.113$ Plus any decoupling surcharge
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About RAP
The Regulatory Assistance Project (RAP) is a global, non-profit team of experts that focuses on the long-term economic and environmental sustainability of the power and natural gas sectors. RAP has deep expertise in regulatory and market policies that:
Promote economic efficiency Protect the environment Ensure system reliability Allocate system benefits fairly among all consumers
Learn more about RAP at www.raponline.org
Jim Lazar: [email protected]