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Power Companies Get Incentive to Save Kilowatts

by Eric Kelderman, September 7, 2007

Environmentalists have long touted conservation as the cheapest way to cut energy pollution, but power companies usually have little or no incentive to sell less electricity.

This year, three states are launching programs to conserve energy and curb global warming while preserving utility profits. Idaho has enacted the nation's boldest plan to encourage efficiency by guaranteeing that utilities wonÕt sacrifice profits by selling less electricity. Maryland and New York regulators also approved measures to give power companies incentives for energy efficiency.

The latest policies are similar to California's 25-year old "decoupling" plan that breaks the link tying the amount of power a utility sells to its profits. Thanks to those policies, the average Golden State resident consumes a third less electricity than the average American, according to the California Public Utilities Commission. California's average electricity prices also are the eighth highest in the nation, according to data from the Energy Information Administration.

More power producers are jumping on the efficiency bandwagon in order to reduce the costs of cutting emissions blamed for global-climate change and of building new power plants.

"The cheapest kilowatt is the one we don't have to generate or buy," said Dennis Lopez, spokesman for Idaho Power, which advocated for the state's new plan.

Consumer advocates, on the other hand, largely oppose decoupling measures. Ratepayers should see smaller utility bills if they consume less energy, said Charles Acquard, executive director of the National Association of State Utility Consumer Advocates (NASUCA).

Traditionally, electricity rates are set by state regulators who consider power companies' fixed operating costs and the variable costs of producing or buying the energy they distribute to customers.

Under a decoupling plan, regulators set higher kilowatt rates that allow utilities to earn their expected profits while selling less electricity. Rates are adjusted annually and can be decreased if utilities' revenues are higher than expected.

Natural gas rates have been decoupled in California since 1978. The state's entire electricity market was decoupled in 1982, although the policy was suspended while the state experimented between 1997 and 2001 with deregulating the industry.

Other states now are pursuing energy efficiency as the latest tool to manage the fast-rising costs of electricity and to curb the burning of fossil fuels such as coal and natural gas, chief sources of gases linked to global warming.

In April, New York's Public Service Commission ordered utility companies to submit proposals for a decoupling policy after Gov. Eliot Spitzer (D) ordered a 15 percent cut in his state's electricity consumption by 2015.

Maryland's Public Service Commission approved a decoupling plan in July, just three weeks after Gov. Martin O'Malley (D) ordered state government to cut energy use by the same amount as in New York.

Idaho took the California plan a step further this year and created a simple but promising program that could be replicated across the country, said Ralph Cavanaugh, an electricity industry expert with the Natural Resources Defense Council (NRDC), an environmental advocacy group. Idaho regulators will adjust electricity prices up or down a maximum of 3 percent annually for residential and small business owners only.

In addition, the state will set efficiency goals, and the state's primary power company will get a financial bonus for meeting that benchmark. Under the new plan the company also will provide more marketing for customer incentives to save energy, such as a $750 credit to homebuilders that meet federal Energy Star standards.

"Decoupling is not by itself sufficient to encourage efficiency," said Cavanaugh of the NRDC, pointing to the importance of rewards for utilities that meet conservation goals.

One of the chief proponents of IdahoÕs three-year pilot plan was Idaho Power, one of the state's major electricity producers. For many years the company relied primarily on hydroelectric dams on the Snake River, giving Idahoans some of the cheapest and cleanest power in the country.

But a lengthy drought in the West, competing demands for the river's water and the state's growing population have forced Idaho Power to rely more on electricity from natural gas and coal-fired power plants, said Mike Youngblood, a senior pricing analyst with the utility company.

Efficiency is a long-term strategy for the company to meet customers' needs and limit the number of new power plants they will need to build in the future, Youngblood said.

In North Carolina, Duke Energy Corporation has proposed a plan to reward the company for meeting efficiency standards after state regulators balked at the company's plan to build a new coal-fired power plant. The company estimates that plans to increase energy efficiency will cost consumers 10 percent less than the cost of building and operating a new power plant.

Acquard, the consumer advocate, said that efficiency pays off for utility companies without subsidies from the state or customers.

The Northwest Energy Coalition, the environmental group that launched the Idaho movement to decouple electricity revenues in Idaho, argues that customers benefit more from having a healthy power company to provide reliable service, said the group's policy analyst Steven Weiss.

Eric Kelderman
Power Companies Get Incentive to Save Kilowatts, September 7, 2007

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