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CPUC Awards Final Incentive for Success of 2006-08 Energy Efficiency Programs; Improving The Mechanism For Following Years Should Now Be Urgent Priority

Devra Wang

Posted December 16, 2010

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Earlier today, the California Public Utilities Commission (CPUC) approved about $68 million in additional incentives to reward the state’s investor-owned utilities for their success in helping customers lower their bills through energy efficiency from 2006-2008.  As I blogged about in May, even the most conservative estimate of savings from these programs shows hundreds of millions of dollars in net savings for customers from avoiding costly investments in dirty sources of energy, and NRDC’s analysis shows that the actual savings were likely significantly larger.  Moreover, the annual reductions in global warming pollution are equivalent to avoiding the emissions from more than half a million cars. 

The CPUC’s decision brings the total rewards for all four utilities’ energy efficiency success over three years to about $212 million.  To put it in context, these profits comprise less than 2% of the utilities’ total profits during those three years. In addition, as I wrote about in June and September, if the utilities had not invested in efficiency programs and had procured more costly and polluting power instead, they would have earned roughly $700 million on those investments. 

The $212 million in total earnings on efficiency programs is about 11% of the amount the utilities invested in efficiency (which totaled nearly $2 billion over three years), whereas the CPUC routinely provides utilities profits of anywhere from roughly 30% to 60% of the amount they spend on power plants and other capital investments.  Of course, one of the major benefits of the “shared savings” incentive mechanism for energy efficiency is that it only rewards utilities for saving customers money, not for spending it (like for power plants), and it provides customers with the majority of the savings from the efficiency programs.  The $212 million award is a lot of money, but at less than 2% of the utilities’ total profits, it is a small fraction for the state’s top priority resource.

California is in the fortunate position of being accustomed to saving energy and money thanks to decades of experience with successful efficiency programs.  Although there are ongoing debates about the exact amount of savings from the 2006-08 programs, no one disputes that the programs saved customers a lot of money and cut pollution significantly.  The debate is essentially over whether the net savings were in the hundreds of millions of dollars or billions of dollars.  While this is an important question to resolve, it’s worth remembering that almost every other utility investment the CPUC examines simply results in a cost to customers.  The fact that these efficiency investments are saving customers hundreds of millions of dollars or more is surely a success that all can celebrate. 

Improving the Incentive Mechanism For Efficiency Programs Should Now Be The CPUC’s Urgent Priority

The efficiency incentive mechanism is critical to align the financial incentives the CPUC provides to utilities with the state’s policy that energy efficiency is the top priority energy resource.  Improving the incentive mechanism going forward should now be an urgent priority for the Commission. 

The CPUC delayed a vote today until January 13, 2011 on a proposed ruling on a new incentive mechanism for the 2010-12 efficiency programs.  As I wrote about earlier this week, the CPUC’s proposed ruling would simplify the efficiency incentive mechanism, but it would cut the utilities’ potential earnings by about 80% and eliminate all penalties.  This would send a message to the utilities that contradicts state policy: they would be able to earn more than twice as much money if they invest in power plants or other infrastructure instead of efficiency, they would not face any penalties if they do a poor job delivering savings through efficiency.  The end result would be customers facing higher utility bills to pay for more expensive and dirtier power.

Instead, NRDC urges the CPUC to ensure that the potential earnings for efficiency are at least comparable to those for dirtier and more expensive supply-side resources.  And utilities should face penalties if they don’t deliver, by having shareholders guarantee the cost-effectiveness of the efficiency programs.

The CPUC should adopt an improved incentive mechanism as soon as possible.  A stable incentive mechanism is critical to ensure the utilities make energy efficiency a core part of their business models over the long term to maximize savings for consumers.

Disputes Over Key Energy Saving Estimates Should Be Resolved

The CPUC’s decision today brought welcome resolution to the question of the 2006-08 incentive assessment, but it left other critical issues unresolved.  In particular, the CPUC has yet to resolve parties’ disputes over some important energy saving estimates. These estimates – for example, how much energy is saved by replacing an incandescent bulb with a compact fluorescent lamp – are important.  They will affect the amount of savings the utilities pursue in the future, how much they invest in helping customers become more efficient, and how many fewer power plants the state needs to build to meet future demand.  The CPUC should provide a forum for the experts to discuss the technical issues underlying the estimates and resolve the disputes over the most important estimates, so that efforts to increase efficiency in the future – which will save customers money and avoid purchasing more expensive polluting power – can be as effective as possible.



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