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Devra Wang’s Blog

California PUC Sends a Message Supporting Utilities' Energy Efficiency Focus

Devra Wang

Posted December 20, 2012 in Curbing Pollution, Green Enterprise, Solving Global Warming

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In good news for California’s efforts to cut utility bills and pollution, the Public Utilities Commission today voted to reward the state’s largest electric and natural gas utilities for their successful 2010-2012 energy efficiency programs.

State policy calls for efficiency to be the utilities’ top priority as the cheapest and cleanest way to meet customer energy needs. But the Commission, which determines how California’s private utilities can earn profits, has been sending mixed messages by only allowing an earnings opportunity for dirtier and more expensive alternatives like power plants, wires, and pipelines. 

Today’s decision corrects that imbalance by also allowing earnings for administering energy efficiency programs (like appliance upgrades and home weatherization). These programs are saving Californians about half a billion dollars in lower utility bills by avoiding the need for a large power plant every year and avoiding millions of tons of carbon pollution. The CPUC’s decision provides a “carrot” to encourage utilities to implement even more pollution reducing and money saving programs like these.

That’s a pretty good gift for Californians. And with the most pressing question in my household moving this week from “Can we have eight more days of Hannukah?” to “Is Santa Claus real?” here’s my take on how today’s decision stacks up on Santa’s “naughty and nice” lists.

The Nice List

1.    Efficiency continues to be a priority

By reaffirming its commitment to make energy efficiency a priority, in name and in practice, the Commission sent a key signal that it is serious about changing the utilities’ focus from more energy sales to what customers actually want: reliable and affordable energy services (like twinkling holiday lights and warm homes).

Opponents of efficiency earnings opportunities say the Commission shouldn’t reward utilities for selling less “product.” But as Art Rosenfeld, former member of the California Energy Commission, recently wrote in ElectricityPolicy.com, “That’s like saying we shouldn’t pay doctors to vaccinate our children because it deprives them of future visits from sick kids. What we want from our physicians is good health; and what we want from our utilities is affordable and reliable energy services – not kilowatt hours that we can avoid using and paying for.”

2.    The CPUC kept its word

Until today’s vote, the Commission had been waffling on its earlier commitment to provide an earnings opportunity for efficiency, even though the 2010-2012 programs are nearly over and initial signs show they were quite successful at helping customers save energy and money, as my colleague Sierra Martinez noted.

Reneging would have been shortsighted – shaving millions of dollars now only to cost billions later – by jeopardizing the state’s commitment to capture all cost-effective energy savings. Hats off to the Commission for keeping its word.

The Naughty List

1.    Lower earnings despite more successful programs

The Commission’s ruling inexplicably cuts the utilities’ rewards despite better energy savings results. It awards $42 million for the 2010 programs, 30 percent less than in 2009, even though more energy was saved, the Commission’s goals were exceeded by nearly 150 percent, and customers will save almost $1 billion.  (The awards for 2011 and 2012 will be made over the next two years once the Commission audits the utilities’ programs.)

These earnings represent only a tiny fraction of the total earnings the Commission has allowed the utilities (just 1 percent of $4.2 billion in pre-tax earnings for 2010). It also puts California at the very bottom of states nationwide with an award equal to just over 5 percent of program investments when the national range is 5 to 20 percent -- and averages 10 to 11 percent -- according to the American Council for an Energy Efficient Economy

So, although it’s very good news that the Commission reaffirmed its commitment to efficiency, this low level of earnings sends a weak signal; the Commission must do more to demonstrate it is serious about making efficiency the top priority going forward.

2.    Earnings aren’t tied to energy savings

Since the CPUC was about four years behind schedule in adopting a 2010-2012 incentive mechanism, it opted for a “shortcut.” Earnings are based primarily on how much the utilities’ spent on efficiency programs, not how much energy was saved. This approach should not be used going forward as it could encourage wasteful spending.  

Today’s ruling also bases part of the earnings on how diligent Commission staff think the utilities were in upfront administrative processes. Although the Commission should continue to oversee that utilities comply with its rules, subjective scoring of administrative processes should not be used as the basis for an incentive mechanism. Instead, earnings should be tied to the outcome the Commission seeks – in this case, energy and bill savings – rather than administrative processes. Just as marathon runners should be judged by how quickly they ran a race, not how neatly they tied their shoelaces at the starting line.  

Commissioner Ferron, who leads the Commission’s work on this issue, provided welcome comments today expressing his hope that energy savings will be a core component of a future incentive mechanism.

3.    Modeling of need for power plants undercounts energy savings

In a separate ruling today, the Commission significantly undercounted the expected future energy savings in its plans to model the need for new power plants over the coming decade, as my colleague Sierra Martinez discusses in his blog.  This could cost customers $1 to $2 billion if the Commission ultimately authorizes utilities to invest in unneeded power plants.  When the Commission gets the model results next year, it should ensure that it takes into account all expected energy savings before authorizing any new power plants.

Steps for the New Year

On January 1, the utilities and the Commission begin a new two-year energy efficiency program cycle. The Commission’s goal is to begin transitioning from programs that provide the cheapest energy savings to ones that also create the deeper, more comprehensive, and longer-term energy savings, critical for California to cut carbon pollution to meet AB 32’s emission limits and to provide even larger utility bill savings over time.

NRDC has proposed a new design for an incentive mechanism to spur utilities to maximize long-term energy savings, and require that utility shareholders provide a “cost-effectiveness guarantee” to ensure customers never lose money on their investment in efficiency programs. 

So, here’s a suggested New Year’s resolution for the Commission: adopt this mechanism as soon as possible to get the efficiency programs focused immediately on maximizing long-term energy and pollution savings for Californians. 

That would be a “nice” thing to do.

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Switchboard is the staff blog of the Natural Resources Defense Council, the nation’s most effective environmental group. For more about our work, including in-depth policy documents, action alerts and ways you can contribute, visit NRDC.org.

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