The tale of today’s energy-efficiency programs is a good news, bad news story.

The bad news is that many energy-efficiency programs have suffered from the harsh state of national fiscal realities, which have resulted in government roll backs of energy-efficiency funding and some program disruption. The good news is that utility energy-efficiency programs are, for the most part, standing strong. The energy-efficiency picture across the nation is improving, but at a slow pace, and faces a future of hard work and difficult decisions.

Momentum in the Pacific NW

A shining example of the momentum of energy efficiency is in the Pacific Northwest, where 2010 was a record year for energy conservation with 254 MW saved. This surpasses the Northwest Power and Conservation Council’s (which tracks energy efficiency) goal by 25 percent. According to an October 12, 2011 article in the Spokesman Review, this is the single largest one-year gain in energy efficiency in the past 30 years and saved customers approximately $135 million through energy efficiencies. The upgrades targeted lighting, furnaces, major appliances, HVAC, insulation and water heaters.

The Pacific Northwest is only one example of increasing energy-efficiency efforts. Massachusetts, Ohio, Indiana, Georgia and even Alaska have all targeted big energy-efficiency projects.

Energy industry reports are another indicator of progress in energy efficiency. Year-over-year reports show more consumer funds going through utilities into energy efficiency, which will be an important factor in the momentum of energy-efficiency programs over the next few years, according to Richard Sedano, Director of U.S. Programs with the Regulatory Assistance Project (RAP), speaking at NAESCO’s 28^th Annual Meeting in San Diego recently. RAP is a non-profit organization providing technical and educational assistance to government officials on energy and environmental issues.

A New Business Model

In order to maintain the momentum that has been building, some things need to change.

With the current model, utilities are asked to implement many new and different programs, which is more than with past models. But the way utilities are compensated remains the same.

Sedano is calling for regulators to implement a structure where utilities won’t lose revenue due to energy efficiency and will be compensated based on various performance measures, including reliability performance, service quality performance, renewables, etc.

“Anything that matters to customers,” Sedano said.

Known in the industry as “decoupling,” this type of approach disassociates a utility’s profits from electricity sales. Instead, a rate of return is aligned with meeting revenue targets and is often based on performance goals and the ability of energy efficiency to operate within the utility environment and make customers to become a primary focus.

According to Sedano, most current rate structures focus on electricity sales and the investors’ bottom line, but utilities and regulators need to understand that efficiency and serving the energy needs of the customer will be an increasing part of their future.

Washington has implemented a partial decoupling structure. According to RAP’s “Revenue Regulation and Decoupling: A Guide to Theory,” Avista Utilities combined a conservation incentive/decoupling mechanism that allowed them to recover a percentage of lost distribution margins from sales declines in proportion to its percentage achievement of a Commission-approved conservation target. If Avista achieved the full conservation target, it was allowed to recover all of its lost margins, but if it fell short, it was allowed only partial recovery.

According to the RAP, one of the shortcomings of traditional utility pricing approaches is that a utility’s actual revenue collection can be significantly higher or lower than its actual cost of providing service. The different revenue functions that can be applied with decoupling offer a means of keeping the utility’s revenue collections much closer to its actual cost of service over time, which should result in smaller rate case revenue deficiencies or excesses, lessening their associated potential for “rate shock,” RAP said.

According to the report, a volumetric rate design combined with decoupling produces stable utility earnings as evidenced by Pacific Gas and Electric (PG&E). Over the past three years, since decoupling was restored after the termination of the California deregulation experiment, the earnings per share for PG&E have been $1.01 billion, $971 million, and $918 million. This stability was achieved despite a $1.4 billion increase in operating expenses, mostly the cost of electricity, during this period.

Regulators Remain Unconvinced

Despite the powerful incentives of decoupling, regulators and the industry still struggle with how to break the sales-revenue link and motivate utilities. Breaking the link should streamline the regulatory process for rate adjustments, but regulators are still having trouble adjusting to the way they view the problem, said Sedano.

According to RAP, regulators need to consider the answers to these questions:

• How are risks borne by utilities and consumers under decoupling, as opposed to traditional regulation?
• Are utilities being compensated for the right things?
• What value is derived from removing sales as a motivator for utility management?
• What value is derived from creating a revenue function that more accurately collects revenue to match actual costs over time?
• What are the expected benefits of decoupling?
• What, if anything, will society be giving up when it replaces traditional price-based regulation with revenue-based regulation?

In large part, regulators remain skeptical of the benefits of energy efficiency and decoupling. According to Sedano, there are people in important regulatory jobs who are unconvinced that savings from energy efficiency are real.

Vermont, Oregon and several other states have implemented third-party energy-efficiency utilities. Some advocates believe that by moving efficiency outside the utility, there is no longer a need for revenue decoupling, because the utility is no longer in a position to resist or obstruct energy-efficiency investment, according to RAP. However, the report notes that Vermont and Oregon have found revenue decoupling a useful addition to a framework that includes a third-party provider, because utilities affect energy efficiency in more ways than simply making grants and loans to consumers for energy-efficiency measures.