Marty Kushler, Dan York and Patti Witte

EXECUTIVE SUMMARY

Soaring fuel prices, growing concerns about utility system reliability needs, and increasing awareness of future environmental risks have all reinvigorated interest in the use of energy efficiency as a serious utility system resource.  With this renewed interest, there is increasing recognition that in order to expect utilities to embrace the aggressive deployment of energy efficiency programs, something must be done to address the financial concerns utilities have regarding energy efficiency.  As a result, a growing number of states are re-examining utility regulations and policies that affect utility planning, decision-making, and operations to ensure that such policies and regulations are supportive of energy efficiency objectives.

Electric utility industry experts have long recognized that under typical regulatory structures (e.g., traditional rate-of-return regulation, rate caps, etc.), utilities do not have an economic incentive to provide programs to help their customers be more energy-efficient.  In fact, they typically have a disincentive because reduced energy sales reduce utility revenues and earnings. The financial incentives are very much tilted in favor of increased electricity sales and expanding supply-side systems.

This report examines recent experience with two key regulatory approaches to overcome these structural disincentives: (1) “decoupling” of utility revenues and profits through periodic “true-up” of actual to projected sales; and (2) providing shareholder “performance incentives” for achieving energy efficiency program objectives. These basic concepts are not new. In the 1980s and 1990s during the era of “integrated resource planning,” a number of states enacted such policies. However, the advent of the utility restructuring movement greatly diminished interest in such policies and regulations; most of them were dropped in the mid- to late 1990s. The growing need for energy efficiency as a resource to help meet utility system needs has renewed interest in these regulatory approaches. Our review of these recent experiences includes case studies of states or individual utilities where either decoupling or shareholder performance incentives have been enacted.

We found that despite the surging interest in regulatory decoupling, there are thus far relatively few cases where such an approach has been enacted and effectively implemented for a sufficient period of time to begin to assess results.  The states of Oregon and California are the primary leading examples. We also found a small set of cases in which decoupling has been enacted on a “pilot” or other more limited basis, but there has not been sufficient experience to observe possible effects on energy efficiency activity.  These examples include Maryland, New Jersey, North Carolina, Utah, and just recently, Ohio.  Lastly, we identified several other states that are actively considering such an approach, including Idaho, New York, and Washington.
 
We also found that the use of some type of shareholder or related “performance incentives” is more widespread than decoupling at this point. Several states have had such mechanisms in place for a number of years, including Massachusetts, Rhode Island, Connecticut, Vermont, and Minnesota. Nevada has recently enacted a performance incentive for its electric utilities. We found a few additional examples where such mechanisms are either more limited in scope or have just recently been adopted.

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63 pp., October 2006, $30.00, U061