Energy Independence and Security Act of 2007 - Section 532, Standard (17)
Rate Design Modification To Promote Energy Efficiency Investments
Energy Independence and Security Act of 2007 - Section 532, PURPA 111(d):
(17) Rate Design Modifications To Promote Energy Efficiency Investments
(A) In general, the rates allowed to be charged by any electric utility shall:
(i) Align utility incentives with the delivery of cost-effective energy efficiency; and
(ii) Promote energy efficiency investments
(B) Policy options. In complying with subparagraph (A), each State regulatory authority and each
non-regulated utility shall consider:
(i)Removing the throughput incentive and other regulatory and management disincentives
to energy efficiency;
(ii)Providing utility incentives for the successful management of energy efficiency programs;
(iii)Including the impact on adoption of energy efficiency as one of the goals of retail rate
design, recognizing that energy efficiency must be balanced with other objectives;
(iv)Adopting rate designs that encourage energy efficiency for each customer class;
(v)Allowing timely recovery of energy efficiency-related costs; and
(vi) Offering home energy audits, offering demand response programs, publicizing the
financial and environmental benefits and educating homeowners about all
existing Federal and State incentives, including the availability of low-cost loans,
that make energy efficiency improvements more affordable.
Description of Standard:
There has been concern in recent years that standard ratemaking practices may not encourage, or could even discourage, utilities from adopting energy conservation measures. For cooperatively-owned utilities, the impact can be similar, except in this case rather than earnings, a decrease in sales revenue could lead to a decrease in the net operating margin required to operate and maintain the utility.
The six policy options listed in this standard are intended to guide states and non-regulated utilities when considering the standard.
Purposes and Goals of Standard:
Conservation of energy supplied by electric utilities
Optimal efficiency of electric utility facilities and resources
Equitable rates for electric consumers
Policy Option (i): Removing the throughput incentive and other regulatory and management disincentives to energy efficiency.
This policy option refers to the link between a utility's sales and the earnings of the company. Decoupling a utility's sales and the earnings does not apply to non-regulated utilities the same way as it does for regulated utilities. Non-regulated utilities do not have a rate proceeding requirement with a regulatory authority, upon which earnings have traditionally been linked to a utility's sales. Non-regulated utilities have the direct authority to adjust or revise rates as necessary to recover any lost net operating margins due to implementation of energy efficiency programs.
To the extent that a utility recovers its fixed costs through the variable energy charge, an energy efficiency program that reduces the amount of energy throughput could possibly diminish the ability to recover fixed costs. Like most utilities across the nation, SEIEC's rate classes currently have declining rate blocks. This means that the more energy a consumer uses in a certain rate class, the less the variable charge component becomes on a per unit basis. This rate design was established to allow recovery of a portion of the fixed costs in the variable energy charge but the energy rate declines with consumption in order to not overcharge larger users with fixed cost recovery and to increase sales of energy which could improve overall efficiencies and lower costs to the overall membership. If the declining block rate was eliminated, the customer charge would have to be adjusted to align appropriate fixed cost recovery and the variable energy charge would also have to be adjusted to better align appropriate variable cost recovery.
Historically, SEIEC has conducted cost of service studies and rate designs based upon industry estimates and assumptions with each rate class due to the lack of available information. Due to the recent implementation of an automated metering system that provides detailed demand and energy consumption data, the Cooperative now has the ability to conduct an in depth cost of service study analysis to determine the accurate fixed cost recovery amount per rate class, demand recovery and variable energy component recovery.
SEIEC is currently in the process of performing this cost of service study and should conclude at the end of 2009. At the conclusion of this study, management recommends rate revisions, rate adjustments and possibly new rates that eliminate or reduce the effect of the declining block rates or throughput incentive. The Cooperative must consider other issues when designing rates including the impact on existing residential and other rate classes caused by recovering the fixed cost component entirely through the customer charge in rates. Additionally, the Cooperative must consider how the retail rate design aligns with the wholesale rate structure to ensure appropriate cost recovery.
Policy Option (ii): Providing utility incentives for the successful management of energy efficiency programs;
This policy option refers to providing a financial incentive in terms of additional profits and/or removing any utility disincentives for investing in, implementing and managing energy efficiency programs such as a negative effect on margins. The intent of this policy option is to put energy efficiency on a similar platform as supply options for investor-owned utilities, that is, make it profitable, not just a break-even activity.
As a Cooperative operating on a not-for-profit basis, management does not recommend implementing an energy efficiency program that would provide profits to the Cooperative. As stated above, management recommends rate revisions, rate adjustments and new rates that eliminate or reduce the effect of the declining block rates or throughput incentive. Management does not recommend the Cooperative attempt to recover the entire fixed costs through the customer charge in one rate revision due to the rate impacts caused on some customer classes. Over a period of time, it may be feasible to accomplish this task through multiple rate revisions and align the throughput or variable charge component to only cover variable cost components. Under this type of rate structure, reductions in energy use would not undermine fixed cost recovery because the lost revenue would reflect reduced incremental costs of service.
Policy Option (iii): Including the impact on adoption of energy efficiency as one of the goals of retail rate design, recognizing that energy efficiency must be balanced with other objectives
This policy option is self explanatory in that energy efficiency can be one of the goals of retail rate design.
SEIEC's existing rates were designed to balance many considerations including fair and non-discriminatory rates, alignment of retail rates to wholesale rate structures, minimizing the impact of rates on member-consumers and providing proper and understandable rates that encourage the proper use of electricity. SEIEC's existing rates include components that send the proper pricing signal that include energy efficiency. Many rate classes include demand and energy components that encourage higher load factors and higher efficiencies to lower overall energy costs on a per unit basis. As stated above, management recommends additional rate revisions and rate adjustments to ensure that energy efficiency is included in the consideration of rate design balance.
Policy Option (iv): Adopting rate designs that encourage energy efficiency for each customer class;
As stated above, many of SEIEC's existing rates include components that send the proper pricing signal that include energy efficiency. Many rate classes include demand and energy components that encourage higher load factors and higher efficiencies to lower overall energy costs on a per unit basis.
Also as stated previously, at the conclusion of the cost of service study to be completed in late 2009, management recommends rate revisions, rate adjustments and possibly new rates that eliminate or reduce the effect of the declining block rates or throughput incentive and encourage energy efficiency.
Policy Option (v): Allowing timely recovery of energy efficiency-related costs;
This policy option is to allow timely recovery of energy efficiency program costs. If a utility is not allowed to recover program costs in a timely fashion, it could discourage utility participation.
Management will carefully consider the costs of implementing and operating energy efficiency programs and the associated benefits of such programs. Management recommends that all costs incurred in implementing such energy efficient programs be considered as a cost of service in each rate class affected and rates for each rate class will be designed to recover the costs of implementing energy efficient programs.
Policy Option (v): Offering home energy audits, offering demand response programs, publicizing the financial and environmental benefits and educating homeowners about all existing Federal and State incentives, including the availability of low-cost loans, that make energy efficiency improvements more affordable.
SEIEC provides members with numerous sources of energy efficient construction practices, energy efficient appliances, energy conservation tools and measures, etc. SEIEC has not been offering in-home energy audits and consumers have relied upon the HVAC industry specialist, regional construction contractors, regional insulation contractors, etc. to perform this function. At the current time, management does not recommend performing home energy audits due to the member's lack of interest in the Cooperative performing this function. In a member survey being conducted in the fall of 2009, SEIEC is asking members about their interest level in the Cooperative performing in-home energy audits as opposed to other available sources. If the survey reveals that there is some interest in the Cooperative providing home energy audit programs, management will consider offering in-home energy audits and potentially recommend implementing this new program.
SEIEC does not currently operate demand response programs other than offering commercial and industrial members with an off-peak rate that is designed to lower overall demand. SEIEC is currently billed for wholesale power capacity (demand) charges on a non-coincidental, individual delivery point, peak demand basis. Therefore, SEIEC's wholesale rate structure does not make it economical or practical to implement demand side response programs. Management does not recommend implementing demand response programs for these reasons.
SEIEC's wholesale power provider (SIPC) is in the process of investigating the implementation of demand side response programs and wholesale rate structure revisions to incorporate demand side response programs. When SIPC concludes this analysis and restructures the existing wholesale rate to make demand side operations practical and economical, management will reconsider its recommendation regarding implementation of demand side response programs.
SEIEC has been informing members about Federal and State incentives that make energy efficient improvements more affordable thru its Illinois Country Living Magazine that is distributed on a monthly basis to members, other publications, direct communications, etc. Management recommends continuing the publication of these programs.
SEIEC will make rate revisions, rate adjustments and possibly new rates that more accurately align rates with the delivery of cost-effective energy efficiency and further promote energy efficiency investments while simultaneously balancing other rate design criteria including the impact on existing rate classes and wholesale rate structure cost recovery. SEIEC will make these rate revisions, adjustments and possibly new rates over time through multiple rate revisions and adjustments. SEIEC will consider all costs incurred in implementing cost effective energy efficiency programs as a cost of service in each rate class associated with these programs and rates for each class will be designed to recover these costs. SEIEC will continue the publication of Federal and State incentives that make energy efficient improvements more affordable.
SouthEastern Illinois Electric Cooperative 2007. All rights reserved.