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Jim Lazar, RAP Senior Advisor Presented to: Keystone Energy Efficiency Alliance

Breaking Down Barriers to Energy Efficiency Utility Revenue Decoupling and other Revenue Stabilization Tools. Jim Lazar, RAP Senior Advisor Presented to: Keystone Energy Efficiency Alliance. Energy Efficiency Is BY FAR the Cheapest Resource Available.

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Jim Lazar, RAP Senior Advisor Presented to: Keystone Energy Efficiency Alliance

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  1. Breaking Down Barriers to Energy EfficiencyUtility Revenue Decouplingand other Revenue Stabilization Tools Jim Lazar, RAP Senior Advisor Presented to: Keystone Energy Efficiency Alliance

  2. Energy Efficiency Is BY FAR the Cheapest Resource Available Energy efficiency costs much less than existing or new generation, and avoids transmission, distribution, line losses, and environmental impacts. Because it’s cheaper than supply-side options, it effectively achieves carbon reductions at a negative cost compared with a conventional resource strategy.

  3. BUT: Energy Efficiency Will Not Happen Without Support Many barriers to efficiency: Access to capital Time horizon Renters will not invest their own money, and landlords don’t pay the bill Lack of adequate information Utility Programs Are A Proven Tool To Achieve High Levels of Efficiency. Utilities have long time horizons Utilities have access to capital

  4. Tactics for OvercomingBarriers to Efficiency Energy Efficiency Performance Standard Mandate to distribution utility Funded by system benefit charge Penalties for Underperformance Supplier Obligation (Europe) All retail energy providers required to provide Third Party Administrator (Vermont)

  5. Energy Efficiency Can Impair Utility Net Income Higher costs and lower sales mean less revenue to cover costs fixed in short run. With efficient rate design – pricing incremental usage at long-run incremental cost, lost revenue greatly exceeds short-run avoidable expense. SO: a means to make the utility whole is needed.

  6. How Changes in Sales Affect EarningsOne Example Utility

  7. Methods For Recovery of Lost Utility Margin Lost Revenue Accounting Mechanism (LRAM) Straight Fixed / Variable Rate Design Shared Savings Mechanisms Bonus Rate of Return Annual rate cases Decoupling

  8. The Essential Characteristic of Decoupling Traditional Regulation:Constant Price = Fluctuating Revenues Decoupling:Precise Revenue Recovery = Fluctuating Prices

  9. Revenue Decoupling:The Basic Concept Basic Revenue-Earnings Decoupling has two primary components: Determine a “target revenue” to be collected in a given period In the simplest form of revenue decoupling (sometimes called “revenue cap” regulation), Target Revenues are always equal to Test Year Revenue Requirements Other approaches have formulas to adjust Target Revenue over time Set a price which will collect that target revenue This is the same as the last step in a traditional rate case – i.e. Price = Target Revenues ÷ Sales

  10. The Decoupling Calculation • Utility Target Revenue Requirement determined with traditional rate case • By class & by month (or other period coinciding with how often decoupling adjustment is made) • Each future period will havedifferent actual unit sales than Test Year • The difference (positive or negative) is flowed through to customers by adjusting Price for that period (see Post Rate Case Calculation)

  11. Decoupling is Not Really “New” Fuel adjustment clauses decouple utility earnings from fuel and purchased power costs. Conservation cost recovery clauses decouple utility earnings from expenditures for Energy Efficiency implementation. Other adjustment clauses include nuclear decommissioning, infrastructure replacement, renewable energy costs, renewable energy production tax credits, pollution control costs. Decoupling is dramatically simpler than implementing a fuel adjustment mechanism.

  12. Risks and Other Issues Affected By Decoupling Weather Economic Cycle Regulatory Lag Financial & business risk of utility Cost of capital implications Focus of utility management on controllable costs, not sales growth

  13. How Big are the Price Adjustments?

  14. Do Prices Always Go Up?

  15. Comparison of Traditional Regulation and Decoupling

  16. How States Have Approached Decoupling?

  17. One Innovative ProposalTucson Electric - Arizona Annual decoupling adjustment Inverted seasonal residential rate design Any surcredits applied to initial block Any surcharges applied to end blocks

  18. Jim Lazar: jlazar@raponline.org

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