1447 Compliance of Commonwealth of Pennsylvania with section 410(a) of the American Recovery and Reinvestment Act of 2009?
PENNSYLVANIA PUBLIC UTILITY COMMISSION Compliance of Commonwealth of Pennsylvania with Section 410(a) of the American Recovery and Reinvestment Act of 2009 [41 Pa.B. 4596]
[Saturday, August 20, 2011]Public Meeting held
July 28, 2011Commissioners Present: Robert F. Powelson, Chairperson; John F. Coleman, Jr., Vice Chairperson; James H. Cawley; Wayne E. Gardner; Pamela A. Witmer
Compliance of Commonwealth of Pennsylvania with Section 410(a) of the American Recovery and Reinvestment Act of 2009; Doc. No. I-2009-2099881 Order By the Commission
By order adopted April 16, 2009, the Commission initiated this investigation to ensure compliance by the Commonwealth of Pennsylvania with Section 410(a) of the American Recovery and Reinvestment Act of 2009, Pub. L. No. 111-5 § 410(a), 123 Stat. 115 (2009) (ARRA). Section 410(a) of the ARRA conditions the allocation of certain Federal funds to the Commonwealth of Pennsylvania on a requirement that the Commission consider implementing ratemaking policies for electric and gas utilities that align their financial incentives with the promotion of energy efficiency and conservation.
The investigation has sought input from interested parties such as Pennsylvania electric and gas utilities, industrial customers, and Statutory advocates regarding potential Commission actions that might be needed to satisfy the requirements of Section 410(a) of the ARRA. Section 410(a)(1) of the ARRA states:
The Secretary shall make grants under this section in excess of the base allocation established for a State under regulations . . . only if the governor of the recipient State notifies the Secretary of Energy in writing that the governor has obtained necessary assurances that each of the following will occur:
The applicable State regulatory authority will seek to implement, in appropriate proceedings for each electric and gas utility, with respect to which the State regulatory authority has ratemaking authority, a general policy that ensures that utility financial incentives are aligned with helping their customers use energy more efficiently and that provide timely cost recovery and a timely earnings opportunity for utilities associated with cost-effective measurable and verifiable efficiency savings, in a way that sustains or enhances utility customers' incentives to use energy more efficiently.
In response to this requirement, Governor Rendell issued a letter to the Secretary of Energy on March 23, 2009, certifying that he had written to the Pennsylvania Public Utility Commission asking that it ensure adoption of the general policy described in Section 410(a) of the Recovery Act. On the same day, Governor Rendell issued a letter to Commission Chairman Cawley, asking that the Commission:
[C]onsider additional steps the Commonwealth can take to establish appropriate incentives in electric and natural gas utility rates for energy efficiency programs, consistent with State law, the attached statute and relevant PURPA requirements. These include policies to align interests of utilities to support conservation without raising the cost of conservation and increasing the cost to ratepayers of measurable, verifiable efficiency savings.
In response to the Governor's letter, the Commission issued an Order initiating this investigation by order adopted April 16, 2009. Parties submitted Comments on July 6, 2009, and Reply Comments on August 6, 2009. The Commission held a technical conference on November 19, 2009. Based on the discussions at the technical conference, on December 18, 2009, the Commission issued a Secretarial Letter seeking the formation of a working group to further discuss issues regarding the ARRA and to prepare a report regarding potential policies that could be implemented by the Commission to ensure compliance with the ARRA. The working group was formed on January 18, 2010, and held meetings on March 10, 2010, April 28, 2010, and June 9, 2010. The working group issued a Final Report on January 21, 2011. Comments were received regarding the Final Report on February 23, 2011 and March 10, 2011.
The participants in this Investigation have differed over the meaning of Section 410(a). The parties have generally divided themselves into two camps on a key question of whether the Commission needs to do ''more'' than it is already doing under existing Pennsylvania law and Commission policies in order to satisfy Section 410(a). One group believes that the Commission should implement a policy that will facilitate some additional measures to satisfy Section 410(a), and the other group believes that the Commission's existing policies and programs, when combined with this Investigation, already meet Section 410(a) requirements regarding programs and policies that align utility financial incentives with energy conservation goals.
Another key question is if the Commission determines that it should implement a policy regarding some additional measures that may also help satisfy Section 410(a), then how should the additional measures be facilitated and what additional measures would be useful. Importantly, the parties to the Investigation concluded that if the Commission wished to address additional measures, then the Commission should indicate, in general terms, what measures the Commission would consider as beneficial for Pennsylvania to meet its obligations under Section 410(a). In addition, the parties concluded that the specifics for any such particular measure should be fully considered in a future proceeding, specific to individual utilities, rather than addressed in the Commission's determination for this Investigation.
While the explicit meaning of Section 410(a) might be a subject of debate, the intent of the section is clearly to align utility ratemaking methods with energy conservation. The language in Section 410(a) can be read to suggest that the Commission satisfies the legal standard if it merely undertakes an exercise that considers (but does not implement) a ''policy that ensures that utility financial incentives are aligned with helping their customers use energy more efficiently . . .'' The statute does not explicitly prescribe qualified policies or rate making changes that would serve to satisfy Section 410(a). Based on our review of our existing ratemaking policies and practices, the Commission believes that Pennsylvania is presently undertaking a number of activities which help Pennsylvania satisfy the Section 410(a) requirements to align utility financial incentives with energy conservation. Nevertheless, the Commission believes that consideration of additional policies in this regard is worthwhile to ensure that Pennsylvania's Section 410(a) requirements are met.
I. Existing Pennsylvania Policies and Laws that Address Section 410(a).
The Commission and Pennsylvania law already support and address some of the policy goals in Section 410(a). Specifically the following policies of the Commission already meet these goals:
1. The unbundling of electric generation and natural gas costs (supply costs) from distribution and transmission costs, and the competitive procurement of supply costs.
2. The elimination of declining block rates.
3. The energy consumption and peak demand reductions mandated by Act 129 of 2008.
4. Verification of energy efficiency savings and the cost effectiveness of such measures through use of the Technical Reference Manual (''TRM'') and the Total Resource Cost (''TRC'') Test.
5. The inclusion of energy efficiency and demand-side response activities in Pennsylvania's Alternative Energy Portfolio Standards (''AEPS'') Act.
6. Public Utility Code Sections that promote weatheri- zation and other energy conservation measures for low-income customers.
7. Public Utility Code Sections that grant the Commission authority to implement conservation measures and recover appropriate costs in rates.
Each will be discussed in turn.
1. Supply Portion of Rates Competitively Procured.
Pennsylvania has separated the supply costs from distribution and transmission costs. Supply costs are competitively procured. Through the implementation of rate unbundling, the movement to enable direct access by customers to competitive supply alternatives and the authorization for utilities to fully recover all reasonable costs related to the Provider of Last Resort (POLR) or Supplier of Last Resort (SOLR) roles, utilities revenues and profits are effectively not impacted by generation costs.
The Electric Generation Customer Choice and Competition Act (Competition Act) required electric distribution companies (EDCs) to unbundle transmission, distribution and generation rates for retail customers. See 66 Pa.C.S., § 2802(14); see also 66 Pa.C.S. §§ 2801—2812. Specifically, the Competition Act provided all customers in Pennsylvania with the opportunity to purchase supply from Electric Generation Suppliers (EGSs). 66 Pa.C.S. § 2806(a). The rates charged by EGSs reflect the costs incurred by the EGS in the wholesale market to arrange for the customer's supply service. The EDC is responsible solely for delivering electricity to those customers who shop, and for providing POLR (also known as default service) supply for those customers who do not buy their electricity from an EGS, or whose EGS fails to provide the promised supply. 66 Pa.C.S. § 2809(e); 52 Pa. Code § 54.184(a). When an EDC acquires electricity for customers not served by an EGS, the EDC is functioning as the ''default service provider.'' EDCs must obtain POLR supply by competitive procurement, approved by the Commission.
Similar to the Electric Generation Customer Choice and Competition Act enacted in 1996, the Natural Gas Choice and Competition Act (Natural Gas Competition Act) was enacted in 1999 and unbundled rates for Pennsylvania's Natural Gas Distribution Companies (NGDCs). See 66 Pa.C.S. §§ 2201—2212. More specifically, the Natural Gas Competition Act extended the availability of transportation service to all retail natural gas customers, regardless of size; however, in recognition of the satisfactory level of supply competition for Large Commercial and Industrial (C&I) customers, the Natural Gas Competition Act created a supplier of last resort (SOLR) obligation for NGDCs that was limited to supply service for residential, small commercial, small industrial and essential human needs customers. See 66 Pa.C.S. § 2207(a)(1). NGDCs must obtain gas through least-cost mechanisms. Least-cost mechanisms foster competitive procurement of supply in Pennsylvania, which assists energy users in seeing the actual costs of supply.
Since utilities' revenues and profits are effectively not impacted by generation costs, utility revenues are effectively not impacted by energy conservation programs with regard to supply costs. Competitive procurement of supply thereby eliminates many problems in aligning utility ratemaking policies with energy conservation goals, as supply costs constitute the majority of the overall customer costs to provide utility service.
2. Elimination of Declining Block Rates.
The elimination of declining block rates has been promoted by the Commission as a policy that enables customers to use energy more efficiently, consistent with Section 410(1)(a). Previously, under cost of service rate regulation, electricity rates were sometimes designed so that per unit charges decreased as a customer's usage increased. Upon implementation of the Electricity Generation Customer Choice and Competition Act in 1996, and the subsequent creation of a policy statement regarding default service in 2007, the Commission determined that declining block rate structures should no longer be implemented or encouraged. The Policy Statement on Default Service and Retail Electric Markets illustrates this point. Specifically, Section 69.1810 of the Policy Statement provides that ''[r]etail rates should be designed to reflect the actual, incurred cost of energy and therefore encourage energy conservation. The [price to compare] should not incorporate declining blocks, demand charges or similar elements.'' 52 Pa. Code § 69.1810.
3. Act 129 Energy Consumption and Peak Demand Reductions.
On October 15, 2008, Governor Rendell signed into law House Bill 2200, or Act 129 of 2008 (Act 129). 66 Pa.C.S. §§ 2806.1 et seq. Among other things, Act 129 expands the Commission's oversight responsibilities and sets forth new requirements on EDCs for energy conservation, default service procurements, the expansion of alternative energy sources, and the inclusion of a smart meter program. Act 129 also establishes prescriptive targets for energy conservation, with the ability to recover costs from ratepayers and a potential fine if the targets are not met. The Commission was charged with establishing energy efficiency and conservation (EE&C) programs for Pennsylvania.
Specifically, Act 129 requires each EDC with at least 100,000 customers to adopt a plan to reduce energy demand and consumption within its service territory, to meet reduction benchmarks over several years. Act 129 requires EDCs with more than 100,000 customers to adopt a plan, approved by the Commission, to reduce electric consumption by at least 1% by May 1, 2011, and by at least 3% by May 31, 2013, adjusted for weather and extraordinary loads. 66 Pa.C.S. § 2806.1(c). In addition, by May 31, 2013, peak demand is to be reduced by a minimum of 4.5% of the EDC's annual system peak demand in the 100 hours of highest demand,1 measured against the EDC's peak demand during the period of June 1, 2007 through May 31, 2008. 66 Pa.C.S. § 2806.1(d). Act 129 also mandates the use of smart meter technologies in order to help make energy rates and bills more understandable to consumers, thus increasing customers' ability to actively conserve energy. 66 Pa.C.S. § 2807(f)(1).
Act 129 set an aggressive schedule for Commission review and approval of each EDC's individual EE&C plans. Once the EE&C plans have been approved, Act 129 requires the Commission to monitor and verify the data collection, quality assurance and results of each EDC's EE&C plan as well as the Pennsylvania program as a whole. 66 Pa.C.S. § 2806.1(a). Act 129 represents a comprehensive effort by the Pennsylvania General Assembly to enact energy efficiency and ratemaking standards for EDCs.
The financial incentives for utilities in Act 129 consist of cost recovery mechanisms from ratepayers for the costs of implementing its programs and penalties to the extent certain benchmarks are not met. Act 129 states that utilities are entitled to recover ''all reasonable and prudent costs'' associated with energy efficiency and conservation programs up to a cap of 2% of revenues. 66 Pa.C.S. § 2806.1(k)(1). The statute allows utilities to reflect lost sales and revenue during their base rate proceedings, but specifically prohibits revenue decoupling to obtain additional compensation between rate cases. 66 Pa.C.S. § 2806.1(k)(3). The statute also includes financial penalties for utilities that do not achieve the efficiency goals. 66 Pa.C.S. § 2806.1(f).
Act 129 also gives utilities the autonomy and additional resources to create sustainable conservation programs. Although Act 129 gives the Commission ultimate approval over the elements of each Plan, utilities have considerable autonomy in the creation of their respective conserva- tion programs. This autonomy will result in programs that are adapted specifically to each utility, which will make it easier for utilities to achieve the Commonwealth's efficiency goals. Further, Act 129 provides assistance to utilities through ''conservation service providers'' to help implement the efficiency programs. 66 Pa.C.S. § 2806.1(b)(1)(E).
4. Technical Reference Manual & Total Resource Cost.
Pennsylvania is positioned to evaluate energy efficiency measures implemented by EDCs for their cost-effectiveness and to measure and verify efficiency savings, consistent with Section 410(a)(1). First, the Public Utility Commission has adopted and maintained a Technical Reference Manual (TRM) as a tool to assess standard energy savings measures implemented by EDCs. Second, as directed by statute, the Commission has defined a Total Resource Cost test (TRC) to be used to determine the cost effectiveness of energy efficiency and conservation (EE&C) plans filed by Pennsylvania's larger EDCs.
The Commission first adopted the TRM as part of its implementation of the Alternative Energy Portfolio Standards Act of 2004, 73 P. S. §§ 1648.1—1648.8 (AEPS Act). The AEPS Act requires EDCs and EGSs to include a specific percentage of electricity from alternative energy resources in the generation that they sell to Pennsylvania consumers.2 The level of alternative energy required gradually increases according to a fifteen year schedule, as set by the AEPS Act and the Commission. The AEPS Act defines ''alternative energy sources'' as including demand side management (DSM), energy efficiency (EE), and load management technologies. 73 P. S. § 1648.2.
The Commission worked in 2005 to establish standards for the verification and tracking of such DSM and EE measures. The Commission adopted the TRM as a ''a consistent framework for calculating deemed savings for a menu of energy efficiency measures using supported assumptions and customer data as input values in industry-accepted algorithms.''3 The TRM covers a menu of energy efficiency measures, such as a consumer's switch to energy efficient appliances or CFL light bulbs, available to reduce residential, commercial and industrial energy consumption. Through adoption and modification of the TRM, the Commission has shown a commitment to the development and application of tools to allow for measurement and verification of energy efficiency savings when Pennsylvania EDCs and customers implement DSM and EE measures. The Commission has updated the TRM to reflect additional energy efficiency technologies and new standard measures, to apply prospectively. By Order entered June 1, 2009, the Commission expanded and updated the TRM to address the dual purpose of implementation of EE&C measures required by Act 129 and continued use in identifying DSM/EE alternative credit amounts for AEPS Act and Act 129 compliance.4
By statute and Commission orders, Pennsylvania employs a Total Resource Cost test to evaluate the cost-effectiveness of individual EE&C plans implemented by Pennsylvania EDCs and how well those plans work towards Pennsylvania's goal of reduction in energy consumption. As part of the Pennsylvania EE&C programs, Act 129 of 2008 requires each of the larger EDCs ''to adopt and implement cost-effective energy efficiency and conservation plans to reduce energy demand and consumption'' within their service territory. 66 Pa.C.S. § 2806.1(a). Act 129 directs the Commission to analyze ''the cost and benefit of each plan submitted under subsection (b) in accordance with a total resource cost test approved by the commission.'' 66 Pa.C.S. § 2806.1(a)(3). Each EDC submitting a plan is required to ''demonstrate that the plan is cost effective using a total resource cost test approved by the commission and provides a diverse cross section of alternatives for customers of all rate classes.'' 66 Pa.C.S. § 2806.1(b)(1)(i)(H). Section 2806.1(m) defines ''Total resource cost test'' as ''[a] standard test that is met if, over the effective life of each plan not to exceed 15 years, the net present value of the avoided monetary cost of supplying electricity is greater than the net present value of the monetary cost of energy efficiency conservation measures.'' 66 Pa.C.S. § 2806.1(m).
Pennsylvania's adoption of a Total Resource Cost Test, by statute and Commission order, provides a uniform standard for evaluation of whether EE&C measures proposed and implemented by EDCs are cost effective over the life of the measures in the EE&C plan. Section 410(a)(1) looks for measures that will sustain or enhance utility customer's incentives to use energy more efficiently. Pennsylvania's consideration of both the net present value and benefit-to-cost ratio of EE&C measures are consistent with the goals of Section 410(a)(1) that require measuring and verifying efficiency savings.
5. The inclusion of energy efficiency and demand-side response activities in Pennsylvania's Alternative Energy Portfolio Standards Act.
The Alternative Energy Portfolio Standards (AEPS) Act, 73 P. S. §§ 1648.1—1648.8, includes demand-side management as a Tier II alternative energy resource. Specifically, the AEPS Act allows the following types of demand-side management activities (consisting of the manage-ment of customer consumption of electricity or the demand for electricity), among others, to qualify as Tier II resources:
(i) implementation of energy efficiency technologies, management practices or other strategies in residential, commercial, institutional or government customers that reduce electricity consumption by those customers; and
(ii) implementation of load management or demand response technologies, management practices or other strategies in residential, commercial, industrial, institutional and government customers that shift electric load from periods of higher demand to periods of lower demand.
73 P. S. § 1648.2(12).
Since rate cap expiration, all Pennsylvania suppliers (both default service providers and EGSs) must demonstrate that a percentage of their supply sold to retail customers is backed by Tier II resources. This creates a potential revenue stream to customers who pursue qualifying projects, consistent with Section 410(a)'s goals.
6. Public Utility Code Sections that promote weatherization and other energy conservation measures for low-income customers.
Pennsylvania's Public Utility Code and regulations directly promote weatherization and other energy conservation measures for the benefit of low income consumers. In the 1980s, the Commission established the requirement that each electric and natural gas utility implement usage reduction programs for their low income customers, programs that have become known as the Low Income Usage Reduction Program (LIURP). 52 Pa. Code Chapter 58. Section 58.1 of the Commission's regulations makes clear that such LIURP efforts are to assist low income consumers in conserving energy and to also reduce demand for electricity and gas overall as well as during periods of peak demand.
Later, as Pennsylvania undertook the restructuring of its electric industry to introduce retail choice for customers, and expanded retail choice for its natural gas customers in 1996 and 1999, respectively, the Pennsylvania General Assembly took care to ensure the continuation of these energy conservation programs and to ensure the full and current recovery of dollars spent on the programs. 66 Pa.C.S. §§ 2802(17); 2804(8) and (9); and 2203(6), (7), and (8). Thus, as part of Pennsylvania's move to competitive markets for electric generation, Sections 2802(17) and 2804(8) continued Pennsylvania's ''universal service and energy conservation policies, protections and services, and full recovery of such costs'' through a cost recovery mechanism designed to fully recover the electric utility's costs over the life of the programs. 66 Pa.C.S. §§ 2802(17), 2804(8).
As part of the natural gas retail choice law, the General Assembly ensured that universal service and energy conservation programs are appropriately funded, are available in the territory of each natural gas distribution company, and operated to help low income consumers reduce energy consumption to make natural gas service more affordable. 66 Pa.C.S. §§ 2203(6), (7), and (8). These programs are to be operated in a cost-effective manner and natural gas distribution utilities are allowed to fully recover these program costs through a cost-recovery mechanism. Id.
As approved by the Commission, electric distribution companies and natural gas distribution companies have implemented LIURP measures to assist consumers with household incomes below 200 percent of federal poverty guidelines, with the majority of assistance designated for households below the 150 percent of federal poverty level mark. Low income consumers with the highest energy consumption are given priority, as they offer the greatest potential for bill reduction and energy conservation. LIURP measures may address reduction of heating demand, water heating demand or other household energy consumption such as lighting. LIURP assistance is available to consumers, whether homeowners or renters. This way, LIURP assists in reduction of energy consumption and improvement of the quality of housing stock. LIURP measures offer both immediate and long-term benefits to the consumer, the utility, and the public.
Act 129 of 2008 reflects Pennsylvania's continued commitment to aid low income households in reducing their energy consumption and to reduce their energy bills. Section 2806.1(b)(1)(G) requires each EDC's EE&C plan to ''include specific energy efficiency measures for households at or below 150% of the Federal poverty guidelines.'' 66 Pa.C.S. § 2806.1(b)(1)(G). As Act 129 makes clear, these specific energy efficiency measures are to be coordinated with other existing programs designed to assist low income consumers in conserving energy. Id. Act 129 specifies that the expenditures to meet this Section 2806.1(b) requirement are in addition to the EDC's expenditures to support LIURP. Id.
Pennsylvania electric distribution and natural gas distribution utilities already have cost-effective LIURPs that provide low income consumers with support to allow for weatherization to reduce energy consumption. Additionally, Act 129 of 2008 requires EDCs to implement energy efficiency measures designed to further assist low income consumers in reducing energy consumption. As provided by the Pennsylvania Public Utility Code, full and timely cost recovery for these programs is provided through reconcilable surcharge mechanisms.
7. Public Utility Code Sections that grant the Commission authority to implement conservation measures and recover appropriate costs in rates.
• 66 Pa.C.S. § 1319 Recovery of conservation expenses;
• 66 Pa.C.S. § 523(b)(4) Conservation; and
• 66 Pa.C.S. § 1505(b).
The Commission's authority to require utilities to implement conservation measures and recover appropriate costs in rates is found in several provisions of the Public Utility Code. Both the Commission and the General Assembly have long recognized the importance of energy conservation and energy efficiency measures to Pennsylvania's future. In 1986, the General Assembly included several provisions in the Pennsylvania Public Utility Code to address the implementation of energy conservation measures by electric and natural gas utilities, to provide for timely cost recovery of any implemented measures, and to provide for performance factor considerations related to actions (or failure to act) to encourage the development of conservation and load management measures. Specifically, through the 1986 amendments known as Act 114 of 1986, the following sections were included in the Public Utility Code:
Section 1319—Financing of energy supply alternatives (specifically conservation and load management programs): This section provides for the recovery of prudent and reasonable costs of conservation and load management programs. The PUC may allow recovery of prudent and reasonable costs for developing, managing, financing and operating conservation programs through a surcharge.
Section 523(b)(4)—Performance factor considerations related to conservation and load management: This section provides for consideration for actions or failure to act to encourage the development of cost effective conservation and load management programs when determining just and reasonable rates.
Section 1505(b)—Authority to order conservation and load management: This section provides that the Commission may order a utility to establish a conservation and load management program as part of determining or prescribing safe, adequate and sufficient service. The plan must be ''prudent and cost-effective.''
Accordingly, Pennsylvania law has adopted and presently includes these several measures that reflect state policies to better align utility financial incentives with energy conservation.
II. Additional Commission Measures That Address Section 410(a) Goals.
Although the Commission believes that Pennsylvania has taken many steps to align utility financial incentives with energy conservation that satisfy Section 410(a)'s requirements, more can be done to further the goal of promoting energy conservation without damaging utilities' legitimate financial interests.
1. Utility Flexibility.
Gas and electric utilities assert that they should be provided with the flexibility to employ the energy conservation programs best suited for their service territories. Flexibility in program design is important to meeting the various needs of the diverse utility service territories in Pennsylvania. Distinction in methodology exists between EDCs and NGDCs. Distinctions also need to be made within industries, including: regional differences (e.g., between eastern and western NGDCs) and differences between types of customers (e.g., residential, small commercial, and large commercial/industrial). Recognition of the varying requirements of urban/suburban/rural customer needs should also be considered. Also important is the consideration of whether a specific utility's customer base is growing or shrinking, based on regional demographics.
Because of these broad differences, the Commission believes it must provide great flexibility to utilities to address energy conservation goals. By doing so, utilities will be more willing to initiate energy conservation programs. The Commission also believes that energy conservation initiatives should generally be proposed by utilities, rather than imposed by the Commission. In this way the programs will have the most flexibility to be most suitable to each specific utility.
2. Use of pilot programs.
The Commission believes that use of pilot programs is an effective means of testing the usefulness of a specific energy conservation method. Pilot programs to test utility program designs have been used in the Commonwealth previously. Pilot programs have been effectively used to test the design of low-income residential customer assistance programs as well as small customer transportation programs. A pilot program will identify what does and does not work before a large scale version of the program is implemented.
3. Modified straight fixed-variable.
Modified straight fixed-variable (MFV) is descriptive of the energy industry rate structures currently in place in Pennsylvania, whereby a portion of fixed costs are recovered through fixed customer charges and the balance through volumetric rates. The balance between fixed and volumetric recovery has been loosely driven by the qualification of costs as ''customer direct'' and ''customer indirect'' costs, as well as a historical practice of the Commission to keep monthly residential customer charges low. Since rates are calculated based on average billing determinants, there will always be disparity among the members of a specific rate class whose usage patterns vary from the average. Recovering a greater portion of fixed costs through variable rates exacerbates that disparity and creates a subsidy of low-use customers by high-use customers; it may also provide a greater relative incentive to conserve.
MFV can result in some utility revenue stream volatility associated with weather fluctuation and high volumetric rates. Extreme weather can result in periodic windfalls to the utilities and a corresponding burden placed on consumers. Alternatively, negative financial indicators from under-recovery of costs in milder than ''normal'' weather periods could impede a utility's ability to earn a Commission-authorized rate of return. Since the goal of ARRA Section 410(a) is to promote conservation by electric and natural gas consumers, the Commission believes that reasonable, limited, fixed charges will generally benefit utility customers that conserve most effectively, since reductions in usage will result in greater reductions in the variable (usage based) portion of customer's monthly energy bills.
4. Time-of-use rates (higher rates for on-peak usage).
Time-of-use (TOU) rate structures incorporate varying prices applicable to usage based upon the time period in which the energy is consumed. By sending clear price signals to the consumer of the wholesale cost of purchasing electricity depending on the time of day, time-of-use (TOU) rates provide incentive to shift demand and usage from peak price periods to lower price periods or reduce consumption overall. The success of TOU rates can contribute to the social and environmental goals of conservation and responsible energy demand management.
Implementation of TOU rate structures, however, requires more sophisticated metering and communications infrastructure than simple kWh meters, the cost of which can offset the savings to be achieved through usage reduction or load shifting. Additional consumer education costs must also be incurred so that consumers can understand how to benefit from such rate designs. TOU rates send relevant price signals to the consumer regarding the cost of the commodity being purchased at high-cost time periods, and therefore will encourage energy conservation at these critical times.
On the other hand, TOU rates can cause greater variability in utility revenues, since a greater portion of utility revenues will be anticipated to be earned in the higher-priced time periods. If customers time shift their usage to a great extent, utility revenues will be lower than anticipated. Given the greater potential for energy conservation, the Commission believes it would be appropriate to consider time-of-use rate pricing, if proposed by a utility. The Commission believes that TOU rates should only be offered to customers on a voluntary (opt-in) basis.
The Commission notes that the mandates of Act 129, with respect to the deployment of smart metering and appropriate cost recovery and the availability of TOU rates position this rate design to be a potentially effective conservation and demand reduction tool. Under Act 129, electric default service providers ''shall offer'' time-of-use and real-time price plans to all customers with smart meter technology; and residential and commercial customers ''may elect'' to participate in such pricing plans. 66 Pa.C.S. § 2807(f)(5).
5. Seasonal rates (higher rates for seasonal peak usage).
Similar to TOU rates, seasonal rates reflect the varying nature of the cost of energy production, but over the year as opposed to within a day. Typically, the seasons are structured as summer/winter or non-heating/heating seasons although ''shoulder'' (spring and fall) periods can be included as well. Application of seasonal rates does not require the same level of technology as does a TOU rate structure. By increasing the price of energy during high usage time periods, customers have greater incentive to conserve during those times.
Doing so, however, can cause greater variability in utility revenues. If the weather is mild during usual high priced time periods (such as August or February), then utility revenues will be unusually low. Conversely, if the weather is harsh in such time periods, the utility will likely exceed their anticipated revenue requirement. Given the greater potential for energy conservation, the Commission believes it would be appropriate to consider seasonal rate pricing, if proposed by a utility.
6. Positive incentives to utilities to promote energy conservation.
Positive incentives provide benefits to utilities when they succeed in energy conservation efforts. At the present time Pennsylvania does not provide any such positive incentives to utilities. As utilities generally receive greater earnings when they sell more energy, energy conservation efforts can hurt their bottom line. Providing positive incentives can cushion the impact on earnings and ''put utilities in the energy conservation business.''
The Commission believes that a ''one size fits all'' approach to incentives is not the best approach. The better alternative is for financial incentives and conservation programs to be established via a collaborative effort between utilities and the Commission so that each utility establishes programs that will work to the benefit of that utility and its customers.
a. Performance target incentives.
Utility conservation programs generally provide energy conservation targets to enable the utility to carry out the program, and for the Commission to gauge the effectiveness of the program. If a utility does meet the energy conservation targets, the program should provide a benefit to the utility. This incentive will motivate the utility to carry out the program effectively. As an example of a performance incentive, a utility may not be able to earn a reward for meeting less than 70% of the goal but their reward is capped once they achieve 130% of the goal. Awards are usually calculated as either a percentage of the overall program budget or a fixed amount per approved program. In this way, the provider is given the incentive to not just meet minimum energy efficiency standards, but to make efficiency programs as successful as possible. These rewards could be paid for through a surcharge to ratepayers the following year, or reflected as a regulatory asset or in the rate of return given to a utility in a future base rate proceeding.
b. Shared energy savings between utility and customer.
One method to provide a positive incentive to utilities for implementing their energy conservation programs is to share the energy savings between the utility and the customer. If the customer saves on their utility bill due to the customer's participation in the utility's energy conservation program, the utility would receive a portion of that savings. Generally the way that such a program is implemented is that the customer would not receive the full reduction in their utility bill due to the energy savings. This way the utility is not losing as much revenue as it would otherwise lose from the energy conservation program.
In addition, the utility benefits from energy conservation, thereby providing motivation to pursue the conservation program. The utility could receive an increasing percentage of the savings as the utility or consumer conserves a greater amount of power or more consumers participate. This gives the utility an incentive to increase participation and energy savings rather than only meet minimum standards. As with performance target incentives, these benefits are often paid for through a surcharge the following year, or could be reflected as a regulatory asset or in the rate of return given to a utility in a future base rate proceeding.
c. Rate-of-return adder in a base rate proceeding.
A rate-of-return adder is a form of positive incentive to a utility that meets energy conservation program goals. If the utility meets the program goals, it can ask for an adder to its rate of return in its next base rate case. The adder would increase depending on the amount of energy conservation that was achieved. The rate-of-return adder provides a strong incentive for utilities to offer greater energy conservation programs.
d. Capitalizing EE and DSM investments.
Utilities could capitalize their energy efficiency and demand-side reduction programs and possibly earn a rate-of-return higher than traditional supply-side investments. The costs of the energy efficiency investments or demand reduction programs could become regulatory assets just as if the money was invested in new equipment or infrastructure. The utility can then recover these costs during its next rate case. The utility can then earn a profit on energy efficiency investments and demand reduction programs through its rate base and can meet customers' needs through either demand or supply side investments.
7. Allow for full recovery of costs for assets retired due to energy conservation.
As energy conservation programs succeed in reducing energy usage, it is likely that utilities will retire assets to reflect the usage reduction. In addition, utilities may seek to install more energy-efficient equipment and then seek to retire less energy-efficient equipment that might otherwise still be useful in providing utility services. In these situations, the utilities would not be as financially impacted if they were able to obtain some cost recovery for such assets. By allowing some cost recovery of such assets, the utilities will have a greater incentive to undertake such energy conservation efforts.
8. Act 129 and Recovery of Lost Revenues.
Section 410 (a) of the ARRA is designed to encourage through appropriate proceedings, general state ratemaking policies that align financial incentives with the efficient use of energy and which provide timely cost recovery and timely earnings opportunities for both natural gas and electric utilities. Prior to the enactment of the ARRA, the Commonwealth of Pennsylvania enacted Act 129 of 2008, requiring electric utilities to implement specific energy efficient and conservation plans, and establishing certain load reduction targets that electric distribution companies must meet, as well as requiring electric utilities to deploy smart meter technology to all customers within fifteen years.
Act 129 allows for recovery of costs through an automatic adjustment clause, but specifically excludes from such an automatic adjustment mechanism the recovery of decreased revenues of an electric distribution company due to reduced energy consumption or changes in energy demand resulting from the implementation of energy efficiency and conservation plans. 66 Pa.C.S. § 2806.1(k) states:
1) An electric distribution company shall recover on a full and current basis from customers, through a reconcilable adjustment clause under section 1307, all reasonable and prudent costs incurred in the provision or management of a plan provided under this section. This paragraph shall apply to all electric distribution companies, including electric distribution companies subject to generation or other rate caps.
2) Except as set forth in paragraph (3), decreased revenues of an electric distribution company due to reduced energy consumption or changes in energy demand shall not be a recoverable cost under a reconcilable automatic adjustment clause.
3) Decreased revenue and reduced energy consumption may be reflected in revenue and sales data used to calculate rates in a distribution-base rate proceeding filed by an electric distribution company under section 1308 (relating to voluntary changes in rates)
66 Pa.C.S. § 2806.1(k). (Emphasis added).
Further, in the smart meter technology section of Act 129, the recovery of any lost or decreased revenues of an electric distribution company due to reduced electric consumption or shifting energy demand is also strictly prohibited outside the context of a prospective base rate proceeding. 66 Pa.C.S. § 2807(f)(4)(ii). Section 2807(f)(4) specifically states:
4) In no event shall lost or decreased revenue by an electric distribution company due to reduced electricity consumption or shifting energy demand by considered any of the following:
i. A cost of smart meter technology recoverable under a reconcilable automatic adjustment clause under section 1307(b), except that decreased revenues and reduced energy consumption may be reflected in the revenue and sales data used to calculate rates in a distribution rate case proceeding filed under section 1308 (relative to voluntary changes in rates).
ii. A recoverable cost.
66 Pa.C.S. § 2807(f)(4). (Emphasis added).
EDCs assert that lost revenue for an EDC that is caused by the implementation of mandated energy efficiency programs can be defined as revenue that an EDC will not receive in a current year because distribution charges that are tied to energy usage are reduced due to the reduced consumption. In the current regulatory environment, if the lost revenue is not recovered through a base rate case proceeding, then the EDC would not recover those revenues, hence causing the EDC to be faced with a disincentive of losing those revenues forever by implementing energy efficiency programs.
In contrast, the consumer parties contend that the EDCs are fairly compensated by immediate automatic recovery of all the costs of the Act 129 programs and are permitted to reflect reductions in revenues due to Act 129 prospectively if and when they file a base rate case. Section 410(a) requires the ratemaking policies to ''provide timely cost recovery and a timely earnings opportunity for utilities associated with cost effective measurable and verifiable efficiency savings''; Section 410(a) does not necessarily require absolutely certain revenue neutrality. They assert that no additional incentives are needed because the Act 129 requirements are mandated as a matter of state law and the EDCs are subject to explicit monetary penalties if they do not meet those mandates. In any case, the consumer parties contend that the Pennsylvania General Assembly has spoken clearly and directly on this subject and it is not the role of the Commission to disregard that policy in an attempt to secure federal funds.
The Commission believes that the statutory language of Act 129 indicates that decreased revenues of an electric distribution company due to reduced energy consumption resulting from Act 129 conservation programs can be recovered, to the extent that such revenues can be recovered, by being reflected in revenue and sales data used to calculate rates in a distribution base rate proceeding. The Commission also believes that 66 Pa.C.S. § 523(b)(4) provides the Commission with authority to consider positive incentives for EDCs when determining just and reasonable rates in a base rate proceeding based upon an EDCs' success regarding its Act 129 energy conservation program, and that Act 129 can be read harmoniously with Section 523(b)(4). Given Act 129's limitations regarding an EDCs' recovery of decreased revenues resulting from an Act 129 energy conservation program, it is important to distinguish between a positive incentive given to an EDC based on its success in implementing an Act 129 program and any such decreased revenues resulting from an Act 129 energy conservation program. Therefore any positive incentive sought by an EDC in a base rate proceeding because of success with an Act 129 program should not be based upon any such decreased revenues, but instead should be based upon measurable success at meeting the objectives of the Act 129 plan.
III. Conclusion.
Upon consideration of the Section 410(a) of the ARRA and our review of existing Commission policies and practices in regard to energy conservation, it appears that the Commission has already given consideration to and, further, has adopted numerous policies and practices that, in the aggregate, reflect a general policy to align utility financial incentives with cost-effective and verifiable energy conservation by consumers. Indeed, to highlight just one key example, by virtue of Act 129, Pennsylvania has invested millions of ratepayer dollars to finance and incentivize both consumers and utilities to conserve energy and reduce peak demand in a cost-efficient manner. Nevertheless, the Commission acknowledges that more can be done and, accordingly, we are open to consideration of the other programs and policies described in the body of this order in the context of individual utility proceedings, in which the details of any such programs and policies can be evaluated.
Therefore,
It Is Ordered That:
1. The Commission accept the ARRA Working Group Final Report.
2. The Commission certifies that its present policies and practices reflect a general policy to align utility financial incentives with cost-effective and verifiable energy conservation by consumers in compliance with Section 410(a) of the ARRA.
3. The Secretary shall serve a copy of this Order upon the parties of record.
4. The Secretary shall certify this Order and deposit it with the Legislative Reference Bureau for publication in the Pennsylvania Bulletin.
5. That this matter shall be marked closed.
ROSEMARY CHIAVETTA,
Secretary[Pa.B. Doc. No. 11-1447. Filed for public inspection August 19, 2011, 9:00 a.m.] _______
1 Consistent with its January 16, 2009, Energy Efficiency and Conservation Plan Implementation Order at Docket No. M-2008-2069887 (hereinafter ''Implementation Order''), the Commission has adopted the use of 4.5436000f the EDC's average of the 100 highest peak hours during the summer months of June, July, August, and September in 2007. Implementation Order, p. 21.
2 Implementation of the Alternative Energy Portfolio Standards Act of 2004: Standards for the participation of Demand Side Management Resources, Docket No. M-00051865, Tentative Order at 2-3 (Pa. PUC Oct. 3, 2005) (Oct. 3, 2005 Implementation Order).
3 October 3, 2005 Implementation Order, at 5.
4 Implementation of the Alternative Energy Portfolio Standards Act of 2004: Standards for the Participation of Demand Side Management Resources—Technical Reference Manual Update, Docket No. M-00051865, Order, (Pa. PUC June 1, 2009).
