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Devra Wang’s Blog

It's Time for the California PUC to Make Energy Efficiency Utilities' Top Priority

Devra Wang

Posted October 25, 2012

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Energy efficiency is the cheapest and cleanest way to meet our energy needs. Yet, the California Public Utilities Commission, which regulates the state’s largest utilities, currently only provides utilities with profits for investing in dirtier and costlier alternatives like power plants.  That’s backward, and it’s time for a change.  

Over the coming months, the Commission will be considering proposals to offer utilities an opportunity to earn profits by helping customers save money and energy through energy efficiency programs.

Utilities nationwide that provide us with electric and natural gas service are responsible for more than half of America’s carbon pollution; in California, they account for more than a third of carbon pollution. California utilities’ investments – which are guided by CPUC regulation and are necessary to meet our energy needs and “keep the lights on” – play a critical role in determining not only how large a check we each must send our utility every month, but also whether California succeeds in spurring job growth and cutting pollution. 

Commission Sends Mixed Messages on Efficiency

Energy efficiency is supposed to be the top priority of the state’s energy policy because it cuts pollution and saves us all money on our bills (usually $2 in savings for every $1 invested). And we tend to spend those savings in ways that create more jobs across the economy (like in restaurants, retail, and entertainment). But the Commission sends the utilities mixed messages when it directs them to prioritize efficiency but only gives them an earnings opportunity on power plants, wires and pipelines. 

That’s like telling your house painter that your top priority is to have a red home but you’ll pay a sizeable bonus if they paint it blue. What color do you think your house will end up being? 

To further illustrate the problem: In the last two years, under the Commission’s regulations Californians paid utilities nearly $8.5 billion in pre-tax profits. How much of that money was for their successful energy efficiency effort during that time that is saving customers more than $1 billion in the form of lower bills? None.

CPUC Regulation Drives the Utilities’ Businesses

Utilities are different from “normal” businesses, because their earnings opportunities are determined by the Commission. Historically, traditional utility regulation unintentionally created a disincentive for energy efficiency – anytime a utility helped its customers save energy, it was hurt financially. Although this problem persists in much of the country, the CPUC addressed that challenge 30 years ago by breaking the link between the utilities’ ability to recover their fixed costs and how much energy they sell.  However, that only removed the automatic harm; it did not create an earnings opportunity like the utilities have for investing in costlier alternatives.

The Commission has made various attempts over the years to create an earnings opportunity for energy efficiency to change the utilities’ business model, but the CPUC’s policy has been highly inconsistent. Its current process to consider whether and how to establish an efficiency earnings mechanism is three years behind schedule. So, it’s past time for the CPUC to provide utilities with an opportunity to profit on energy efficiency to align their financial incentives with their priorities.

Opponents’ Arguments Are Penny-Wise, Pound-Foolish

Opponents of earnings opportunities for energy efficiency argue that utilities shouldn’t be paid for helping customers use less of their “product.” But the Commission has long recognized that utility customers aren’t concerned by how many kilowatt-hours or therms they use, but they do care about the energy services they get from consuming electricity and natural gas – such as light, heat, and gadgets that work. And they want them at the lowest cost and least impact on the environment. Energy efficiency is the best way for utilities to provide customers with realiable and affordable energy services.

Since energy efficiency saves customers money, opponents’ arguments against earnings opportunities for efficiency are short-sighted. By driving utilities to help customers maximize savings from energy efficiency, consumers can save more money on their utility bills.

It is time for the Commission to truly make energy efficiency the utilities’ top priority, which it can do by aligning the agency’s financial regulations with its policy priorities.

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