The Old Model Isn’t Working: Creating the Energy Utility for the 21st Century

Traditional rate regulation of energy utilities creates conflicts between utility financial objectives and the objective of saving energy through utility customer energy efficiency programs. Under traditional regulation, utility spending to reduce customer energy use will yield financial losses compared to typical utility investments that increase energy supplies for customers.  If these inherent regulatory barriers aren’t addressed, electric and natural gas utilities will resist funding and implementing energy efficiency programs.

This paper examines regulatory changes which could help create a new business model for utilities. This new business model aligns utility financial objectives with meeting energy resource needs through a balanced, lowest cost portfolio of both supply and demand options. Such options include reducing energy use through improved customer energy efficiency.

Utilities face three primary financial concerns relative to customer energy efficiency programs: (1) recovery of program costs, (2) removal of the “through-put” incentive (profits linked to increased energy sales), and (3) providing earnings opportunities for shareholders comparable to alternative utility investments. The three primary concerns can be viewed as creating a three-legged “financial stool” on which the new business model must stand to achieve greatest impact and to overcome the inherent financial conflicts utilities face under traditional regulation.