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UTILITY PROGRAMS & REGULATORY REQUIREMENTS

Utility Incentives

Utilities in many states of the U.S. until recently were required by regulatory commissions to undertake integrated resource planning (IRP), including energy efficiency Ademand-side management@ (DSM) and renewable resources. They were required to provide incentives to their customers to purchase energy efficient lighting and appliances and to provide free or low cost energy audits to residential, commercial and industrial customers to help them identify efficiency opportunities. These utility incentives were very effective in a regulated environment, but with the prospect of deregulation, the utilities have been allowed to cut back on these incentive programs for fear that their costs would make the utilities uncompetitive with those without incentive requirements -- even though efficiency investments were made profitable for the utilities by the regulators and the fact that efficiency investments save energy at a cost far less than new power plant construction. Utility spending on energy-efficiency programs has declined from about $1.4 billion in 1992 to about $1.2 billion in 1996, with continuing declines to date and projected, despite the fact that only a handful of states have passed restructuring legislation.

Other countries have been more aggressive in their utility regulation to promote efficiency. In Brazil, for example, a new federal utility regulatory agency in July, 1998, required all distribution utilities to spend at least 1% of their revenues on energy efficiency improvements, with at least one quarter of this amount (about $50 million per year) to be spent on end-use efficiency projects. Utilities in Australia, Austria, Belgium, Canada, Germany and Ireland also have IRP and DSM requirements. Ontario Hydro of Canada placed its primary emphasis on end-use efficiency and distribution planning to displace building transmission and generating capacity. Its first three experiments programs cut its investment needs by up to 90%, saving it $600 million.

Application of utility incentives to rental apartment buildings can be a problem. The tenants have no incentive to install measures that will benefit the landlord and the landlord has little incentive to invest in measures that primarily will benefit the tenants. Some state utility regulators have addressed this problem by giving larger incentives to the landlords. To induce tenant cooperation, it is important that apartments be individually metered for electricity and gas consumption. Brazil has an extensive metering program run by PROCEL, a national electricity conservation program, and its national utility.

In the U.S. states that have deregulated their utility generation, environmental advocates have been quite successful in getting utility regulators or legislators to impose a Asystems benefit charge@ on the distribution utility, which remains a regulated monopoly, to fund efficiency, renewable and other public benefit investments; the revenues from these charges often are placed in independently administered public benefit funds. As of July 1999, fifteen U.S. states have adopted utility system benefit charges and benefit funds. A national public benefits trust fund of .2 cents/kWh (which would cost the typical residential customer only about $1 per month) has been introduced in the U.S. Congress and similar but smaller provision is included in the Clinton Administration's federal utility restructuring proposal.

For example, in August 1996 the Rhode Island legislature and regulatory commission authorized electric distribution companies to levy a charge of at least 2.3 mills per kWh for energy efficiency and renewables; about $17 million per year of the funds raised were to be spent by utilities on efficiency and renewable projects to be selected by collaboratives of all utility stakeholders. In the Pacific Northwest, the governors of the states of Idaho, Montana, Oregon and Washington recommended that each state spend about 3% of revenues on a variety of public benefit programs; a nonprofit corporation with a board of directors representing the stakeholders was created to determine allocations. The California legislature adopted a charge on the distribution utilities of about $1.8 billion in funding between 1998 and 2001 for energy efficiency, renewable resources and related R&D, with program administrators to be selected competitively by the regulatory commission.

Similarly, other countries have established a variety of public benefit arrangements to fill the gap for energy efficiency funding after deregulation. The United Kingdom established an Energy Savings Trust as a private limited company, funded by a small charge on distribution services, to promote energy efficiency for small customers. Norway adopted a small transmission tax earmarked for energy efficiency information, and it created and funded independent regional conservation centers to provide energy efficiency services. New Zealand set up an Energy Saver Fund as a part of its restructuring legislation to support residential programs funded by an $18 million appropriation for an initial 3-year period.

A new entrepreneurship of Energy Service Companies (ESCOs) has emerged to perform energy efficiency retrofits for homes and businesses as a profitable enterprise, but they have so far only penetrated niche markets for large customers in the U.S. Also, under deregulation, performance-based regulation (PBR) is replacing rate of return regulation for the monopoly distribution company. PBR can encourage distribution companies to provide electricity efficiently, rewarding performance measured against specific bench marks. Some commissions have placed a price cap on utility charges, giving the utilities an incentive to keep costs low; a revenue cap is far superior, however, since a price cap provides strong incentives for utilities to increase sales and thus discourages efficiency and renewable investments.

Utility Purchases

A number of U.S. utilities have acquired renewable resources for their own use. For example, The Pacific Gas and Electric Company (PG&E) uses 1,100 PV systems to produce a combined total of 44 kW of energy, the majority of which provides power for gas flow computers, automated gas meters, and water level sensors. Technology improvements have reduced PV generation costs from $1.50/kWh in 1980 to a range of $.30-$.40/kWh today.

Utilities benefit by using PV systems that are often the most cost-effective solution for specialized applications because of their reliability, modularity, low maintenance, and independence from transmission and distribution systems. The systems have successfully powered small off-grid loads and have been installed on transmission towers, in place of transformers, to handle small loads.

Green Marketing

A number of U.S. utilities offer an option to customers to purchase a package of green generation products at a slight premium in cost. The programs are too new to have a good assessment of their effectiveness in reducing carbon dioxide and other pollutants. Other countries such as The Netherlands have created a green pricing program permitting consumers to purchase renewables at a small premium.

A particularly ingenious and promising "Green Power for a Green LA" program was just announced in June of 1999 by the Los Angeles, California municipal utility. It commits to customers that choose a 6% rate increase (about $3 per month on average) to use the entire rate increase proceeds to invest in new renewable generation sources, combined with a commitment to install free energy efficiency measures for subscribers, assuring that participating customer bills will as a result experience a net decrease - a strong incentive for participation. The utility president, David Freeman, one of the world's clean energy pioneers, has thus found a way to finance new renewable resources in a way which demonstrably will be at no cost to the customers, creating a unique win-win financing arrangement.

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