Energy Efficiency Policy Trends A Look Nationally

1. Energy Efficiency Policy TrendsA Look Nationally David Pickles Vice President ICF International dpickles@icfi.com On behalf of the U.S. Environmental Protection Agency NARUC Staff Subcommittee on Accounting and Finance March 31, 2008

2. Agenda • Impetus and Challenges for Energy Efficiency • Issues Garnering Increased Interest • “Quick start” EE programs • Aligning utility incentives with EE • Incorporating EE as a resource in utility planning processes • Cost-effectiveness tests • State examples • Resources and Summary

3. Growing Impetus for Energy Efficiency • Shrinking reserve margins and the need for additional generation and transmission capacity • Increasing environmental concerns, especially around coal • Desire for increased local economic activity • Desire for improved energy security and reduced exposure to volatility • Desire for increased customer satisfaction • Potential increased flexibility and modularity in the planning of the utility system • Increasing political attention • Synergy with Advanced Metering Infrastructure

4. Challenges in Energy Efficiency • Potential adverse short term increases in rates • Equity between customers and customer classes • Uncertainty surrounding the persistence and measurement of the impacts of the programs* • Difficulty in forecasting EE participation and costs* • Diminishing economies of scale as DSM programs grow • Impact on the system if utilities rely upon DSM programs that ultimately do not yield the intended impact • Lack of clear legislative and regulatory direction, ratemaking treatments, and goal setting • Role of EE and local distribution companies in states with retail competition • Role of non-utility parties

5. Large Potential for Cost-Effective Energy Efficiency • McKinsey Global Institute’s Curbing Global Energy Demand Growth: The Energy Productivity Opportunity (May 07) - By capturing the potential available from existing technologies with an internal rate of return of 10% or more, we could cut global energy demand by half or more over the next 15 years. • ACEEE’s Energy Efficiency’s Role in a Carbon Cap-and-Trade System (May 06) - Doubling efficiency would cut load growth by about two-thirds in 2024, from about 20% to about 6% above 2006 levels. • Report of the Clean and Diversified Energy Advisory Committee to the Western Governors Association (WGA) (June 06) - By adopting the WGA's best practices scenario in the 18 WGA states, load growth could be reduced by as much as 75% over the next 15 years.

6. Utility Sector Energy Efficiency Had Declined, But Is Now On An Upswing Source: ACEEE, ICF

7. Programs Help Overcome Key Barriers Limiting Efficiency • ENERGY STAR • Helps homeowners reduce energy use by 10, 20, or 30% while purchasing products, home improvements, or buying a new home • Helps businesses, public sector, schools reduce energy use by 10% or more • Overcomes lack of information, competing vendor claims, split incentives • Broad-based platform with government-backed credibility and network of retailers and manufacturers to leverage • Important utility barriers remain • Existing electricity and gas regulations / market rules provide additional financial incentives for supply-side resources • View that EE is not a reliable, measurable, cost effective resource • Concern that EE will raise rates • Lack of good documentation and guidance on demand-side programs Barriers important to address – do not go away with carbon regulation

8. “Quick start” EE programs • “Quick Start“ programs are a basic set of programs that: • Are quick to get off the ground • Offer measurable benefits in the near-term • Can be expanded to a broader and more comprehensive set of programs over a few years • AR PSC completed a successful collaborative in 2006 which resulted in EE rulemaking in June 07. • Quick Start EE programs filed by 4 electric & 3 gas utilities; • Approved statewide EE education program and weatherization program for Severely Energy-Inefficient Houses; • Allows for cost recovery via rate rider.

9. “Quick start” EE programs (2) • Residential Sector • Promoting the purchase of ENERGY STAR qualifying lighting and appliances through existing supply channels with financial incentives for some products, coupled with education and outreach • Promoting retirement and recycling of old and inefficient appliances such as refrigerators, freezers, and room air conditioners through turn-in incentive programs. • Promoting proper functioning of existing residential HVAC equipment, as well as proper sizing and installation of new equipment. • Developing pilot-scale initiatives to promote comprehensive home energy improvements for existing homes through Home Performance with ENERGY STAR. • Developing pilot-scale initiatives to promote the construction of ENERGY STAR qualified new homes (both site built and manufactured) through builder networks.

10. “Quick start” EE programs (3) • Commercial Sector • Offering prescriptive incentives for lighting and HVAC measures to a broad range of commercial facilities along with education and/or technical assistance to promote increased efficiency in lighting and HVAC system design. • Offering prescriptive incentives to promote the purchase of ENERGY STAR qualifying commercial food service equipment for use in restaurants, hotels/hospitality venues, schools, and other applicable commercial or institutional facilities. • Developing pilot-scale initiatives to facilitate whole-building energy performance using the ENERGY STAR building performance rating system, coupled with incentives for energy efficient lighting and HVAC systems, and general education about building tune-ups and/or retrocommissioning to improve building operation and maintenance. • Promoting power management of computer monitors through direct outreach to large end users and online tools for smaller end users, along with education about additional opportunities for saving energy through purchase and proper use of ENERGY STAR qualifying office products.

11. Aligning Utility Incentives with EE Expense Rate Case Rider Lost Revenue Recovery Mechanism (LRAM) Decoupling Program Cost Recovery Lost Margin Recovery Capitalize Rate Case Deferral Earnings/Net Operating Margin Performance Incentives Shared Savings Performance Payment ROR Adder

12. Support from National Organizations • 1989 NARUC resolution urging its member state commissions to: • consider the loss of earnings potential connected with the use of demand-side resources; and • adopt appropriate ratemaking mechanisms to encourage utilities to help their customers improve end-use efficiency cost-effectively; and • otherwise ensure that the successful implementation of a utility’s least-cost plan is its most profitable course of action • National Action Plan for Energy Efficiency offers the following recommendations as ways to overcome barriers that have limited greater investment in energy efficiency • ….Promote sufficient, timely, and stable program funding to deliver energy efficiency where cost-effective, and • …Modify policies to align utility incentives with the delivery of cost-effective energy efficiency and modify ratemaking practices to promote energy efficiency investments.

13. Significant State Regulatory Activity • Shareholder incentives are very common with 18 of the 36 states with significant DSM funding offering utility incentives of some kind • Six states provide a separate mechanism for the recovery of lost electricity margins • 14 states have either approved or have pending electric decoupling mechanisms to insulate utility earnings from DSM program performance • Ten states have either an approved or pending mechanism treating both lost margins and shareholder incentives

14. Status of Regulatory Treatments of EE

15. Trends in Utility Incentives • Increased interest in broad topic by many stakeholders (Commissions, utilities, legislators, non-profits, etc) • Renewed interest in exploring decoupling • Idaho Power pilot in ID • Legislation in CT, NY, MN • Filing by Pepco in MD and DC • Docket in IA • LRAM less prevalent but still being explored • Large variety of approaches for performance incentives • CA – Rewards and penalties based on a) how well the utility met CPUC established energy savings targets; b) the economic benefits generated from the utility’s EE portfolio • NV – Enhanced ROR • TX – Shared Savings

16. Incorporating EE as a Resource in Utility Planning Processes • Renewed interest in treating EE as a resource in planning • CA loading order • WA ballot initiative 937 – conservation is resource of first choice • NC IRP – comparison of demand and supply side options to determine the least-cost, long-term set of resources needed • ISO New England Forward Capacity Market – EE can bid in as a resource to provide capacity • TVA Board approved goal of 1200 MW demand reduction through EE and DR in 5 years.

17. Incorporating EE as a Resource in Utility Planning Processes (2) • WI legislation requires the PSC to conduct EE planning every four years; results incorporated into Strategic Energy Assessment by PSC. • AR PSC decision in June 2007 -- Resource Planning Guidelines, directs utilities to give “comparable consideration” to demand and supply resources and to assess “ all reasonably useful and economic supply and demand resources that may be available to a utility or its customers,” and to identify and investigate resources including “energy efficiency, conservation, demand-side management, interruptible load, and price responsive demand.”

18. Issues in Incorporating EE in the Utility Planning Processes • Fragmented regulatory authority (siting, emissions, transmission, reliability, etc.) • Timing of CPCN and related dockets and the timeliness of EE. Integrate EE early in the resource planning process to capture the full value • Inconsistent planning and evaluation criteria for supply and EE investments • Data necessary to integrate EE into resource planning are now readily available • Cost and savings data • Potential studies for what is achievable through EE measures • Energy, capacity and non-energy benefits can often justify significant EE programs • Clear path to funding is needed to establish a budget for EE resources • Update resource plan as information changes

19. Importance of Cost-Effectiveness Tests • Several tests for evaluating EE cost-effectiveness, each reflect a different stakeholder perspective on the impact of EE. • Common misperception that there is a single best perspective for evaluation of cost-effectiveness. Each test is useful and accurate, but the results of each test are intended to answer a different set of questions. • Amount of cost-effective EE is different depending on perspective. Also impact on shared savings and related M&V requirements • Criteria for defining cost-effectiveness - the California Standard Practice Manual is authoritative source, and is referred to by many states

20. Source: Guide to Resource Planning with Energy Efficiency - a Product of the National Action Plan for Energy Efficiency. 2007.

21. Snapshot of State Use of Tests No specific test/s required: • KY, PA, ME, IL, ND, OK, ID, WY, NC, SC • Doesn’t include info. from: MD, WV, MI, NE, OH, SD, AK, NV, TX, UT, WA, AL, LA, MS, TN All 5 tests required: • VA, IN, MN, CA, HI, GA

22. Resources National Action Plan for Energy EfficiencyGuides and Papers www.epa.gov/eeactionplan • National Action Plan for Energy Efficiency Report • Aligning Utility Incentives with Energy Efficiency Investment • Resource Planning with Energy Efficiency • Conducting Potential Studies for Cost-Effective Energy Efficiency • Model Energy Efficiency Program Evaluation • National Action Plan Vision for 2025 EPA Clean Energy-Environment Guide to Action www.epa.gov/cleanenergy/stateandlocal • Sections on Energy Efficiency Portfolio Standards, Public Benefits Funds for Energy Efficiency, Portfolio Management Strategies and Utility Incentives for Demand-Side Resources.

23. Summary • Growing momentum across the country • Interest in learning how to increase use of EE • Recognition that EE is a valuable part of energy mix and is one key as the nation addresses climate change solutions

24. For More Information David Pickles ICF International 7160 North Dallas Parkway, Suite 340 Plano, TX 75024 (972) 841-2567 dpickles@icfi.com www.icfi.com Katrina Pielli U.S. Environmental Protection Agency Clean Energy Program Manager (202) 343-9610 Pielli.Katrina@epa.gov www.epa.gov/cleanenergy