This article was originally published in the July/August 1999 issue of Home Energy Magazine. Some formatting inconsistencies may be evident in older archive content.


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Home Energy Magazine Online July/August 1999

Public-Benefits Programs Adapt Under Restructuring

by Juliane Poirier

Juliane Poirier writes for California Energy Markets and other publications.

Energy efficiency programs face an uncertain future in the changing electricity marketplace, as funding declines. But some states have placed a public-benefits charge on electricity purchases and put that money into energy efficiency measures. Will public-benefits charges be sufficient to ensure the survival of the country's energy efficiency programs?
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Table 1. Summary of Ratepayer-Funded Energy Efficiency Program Recommendations
Question for Program Design Recommendations
Rationale for ratepayer funding Capture cost-effective energy efficiency opportunities missed by the competitive market; facilitate transition to more competitive markets with more efficient price signals; ensure that benefits of restructuring are shared broadly.
Creation of a public-benefit charge Ensure competitively neutral mechanism for collecting funds.
Funding level Establish funding based on bottom-up analysis of cost-effective energy efficiency opportunities remaining after restructuring and an assessment of likely public-sector activities in the absence of ratepayer funding; at a minimum continue historic funding levels.
Duration Decouple sunset date from recovery of competition transition charges; establish a five-year review period over which to assess accomplishments.
Rate design Collect funds through a nonbypassable volumetric charge.
Objectives of energy efficiency policy Ensure that benefits to society exceed costs; target activities to areas not adequately addressed by private sector; design programs to effect lasting changes in the market.
Administration and governance of programs Systematically assess desirability of utilities, state agencies, and independent institutions to manage public-benefits funds based on (1) institutions' past performance, current ability, and level of interest; (2) geographic scope needed to implement policies; (3) duration of funding; (4) utility conflicts of interest and ability to manage these conflicts; (5) flexibility of state procurement and hiring procedures; and (6) degree of political support for creation of new, nonutility institutions.
Reprinted with permission from: Joseph Eto et al., Ratepayer-Funded Energy-Efficiency Programs in a Restructured Electricity Industry (Berkeley, Calif.: Lawrence Berkeley National Laboratory, May 1998).
Some states, mainly California and states in the Northeast, have set system benefits charges that will continue public-benefits programs as restructuring sets in.
As a result of restructuring, funding for demand-side management (DSM) programs across the country is being significantly reduced. David Nemtzow, president of the Washington, D.C.-based Alliance to Save Energy, estimates that in the past five years, total utility spending for conservation in the United States has dropped from a peak of roughly $3 billion per year to less than $1.5 billion.

This decline in spending should surprise no one. Utilities that are no longer regulated, or soon won't be, are cutting costs in as many of their departments as possible--including their energy efficiency departments--in order to be more competitive. However, DSM programs are not being universally abandoned. In at least nine states, restructuring legislation has included funding measures for energy efficiency programs.

DSM In Decline The circumstances created by restructuring have turned utilities into power-selling machines, more than they ever were before, says Marty Kushler, codirector of the utilities program for the American Council for an Energy Efficient Economy (ACEEE), based in Washington, D.C. In 1998, ACEEE reported on how public-benefits programs are faring across the country, and how each of the 50 states has acted on restructuring (see ACEE's Web site at In the restructured environment, the obvious way for utilities to maximize profits, Kushler points out, is not only to get costs down, but also to get revenues up by selling more power. Restructuring has even caused a lot of energy commissions to abandon the concept of energy efficiency planning, according to Kushler.

Even where restructuring is nothing more than talk, states are currently seeing DSM slowly wither. In the Pacific Northwest, for example, energy efficiency program spending has plummeted, although only Montana has actually passed restructuring legislation. In Washington, where restructuring legislation has not been passed, utility spending for energy efficiency dropped from more than $155 million in 1993 to less than one third of this amount in recent years.

Efficiency Programs' White Horse? While DSM funding is sliding down across the country, several states--California, Connecticut, Massachusetts, New Jersey, and Rhode Island--have preserved conservation funding to differing degrees while they undergo restructuring. They've done this by setting up what is known as a system benefits charge. Generally this charge is a fee pegged to each electricity sale, typically ranging from 0.1¢-0.3¢/kWh. This way, no competing electric service provider is put at a disadvantage. The pooled sum provides funding for a number of public goods programs, including energy efficiency.

While there are several good arguments for maintaining ratepayer funding for energy efficiency programs-- electricity consumers should help mitigate the environmental consequences of generating electricity, and ratepayer funding is a practical tool for accomplishing this objective--it is unclear exactly what sum will be sufficient to sustain effective programming and reduce the many market barriers to energy efficiency. Lacking that information, some efficiency experts think that funding should be set at least at the historic levels attained before any talk of restructuring (see Table 1).

Others argue that any amount of funding obtained via the public-benefits charge is better than nothing. Marc Hoffman, executive director of the Consortium for Energy Efficiency--a nonprofit, public-benefit corporation that promotes the use of energy-efficient products and services--is optimistic about the survival of DSM. The system benefits charge is tremendously helpful, says Hoffman. I think we'll be doing different things with less money.

Program managers will be facing exactly that challenge in the states that have passed small system benefits charges. As recently as 1994, New York was spending $756 million annually for DSM programs. Now that New York law has mandated only 0.5% of revenues for conservation, the 1998-2000 spending budget for energy efficiency is only $174 million. In Pennsylvania, where there has never been much support for conservation, nothing has changed.

In contrast, New Jersey's restructuring legislation establishes energy efficiency funding at the preexisting levels--about $230 million per year--to be extended for an eight-year period, likely to begin in February of 2000, after the board of public utilities approves its first four-year plan. Connecticut and Massachusetts have legislated funding at rates that work out to $33 per resident for each state, compared to California's funding level of only $13 per resident.

The Rest of the Nation Waffles Elsewhere in the country, energy efficiency programs remain in relative limbo, awaiting the decisions of individual state legislatures. As Wisconsin plans for restructuring, for example, funding for energy efficiency in that state is proposed at a level of 4.1% of revenues: $100 million for residential and commercial DSM programs. If legislated as proposed, Wisconsin's energy efficiency funding quota would be the largest percentage of revenues paid by any state. State utilities are pressuring for much less spending. But Bentham Paulos, a Wisconsin energy consultant and renewable energy advocate, points out that Wisconsin's proposed charge is based on what the state was doing five years ago, before DSM spending decline set in, and will only restore the spending that utilities want to run away from.

The governor of Maryland reportedly won't consider a deregulation bill that does not include provisions for energy efficiency programs--which are likely to be supported by a system benefits charge.

California Programs' Tenuous Future California's DSM spending decline caused concern several years ago (see DSM in the Doghouse? HE Jan/Feb '95, p. 7), when deregulation was under serious discussion there. Although DSM funding was fortunately not eliminated with the passage of California's restructuring legislation, the system benefits charge adopted in that state guarantees DSM support only through the year 2001.

The 2.85% system benefits charge adopted by California's legislature collectively provides for both low-income and energy efficiency programs. To administer these programs, the state has formed two boards: the California Board for Energy Efficiency (CBEE) and the Low Income Governing Board (LIGB). Because of legal, contracting, and administrative problems in making the transition, the California Public Utilities Commission has proposed that administration of the state's DSM programs continue to be the responsibility of California's three investor-owned utilities--Pacific Gas and Electric Company, Southern California Edison, and San Diego Gas and Electric--through the year 2001. Spending for energy efficiency programs is projected at $308 million annually, with a total of $79.2 million earmarked for residential programs. According to Chuck Goldman, a member of the CBEE, a portion of these funds will go to creating a self-sustaining energy efficiency contractor market, via a program targeted specifically at the residential contractor market (see Program Assesses Contractor Work in California, HE, May/June, '99, p. 11).

Will Utilities Stay the Course? As in California, DSM faces changes in other states, both in program design--the evolution toward a market transformation model--and in the question of who will administer the programs. Some energy experts believe that, with the proper regulatory encouragement, utilities can still be good candidates for administering DSM programs because of their expertise and connection to customers. ACEEE's Kushler cites two examples, one on each coast: Pacific Gas and Electric (PG&E) and New England Electric Service (NEES). According to Kushler, these investor-owned utilities have historically been very strong on efficiency. These utilities have hung in there pretty well, says Kushler, compared to some of their industry cousins who have dumped this stuff like a hot rock.

Because PG&E is still administering DSM programs through 2001, their current programs do not accurately predict how much they will invest in energy efficiency once the current financial incentives disappear. However, it would be good public relations for both PG&E and NEES to continue to offer some kind of DSM program.

PG&E began developing energy efficiency programs in 1976. Chris Chouteau, manager of customer energy management at PG&E, claims that the utility is still very interested in continuing with conservation programs. Chouteau sees public-benefit programs not as a species of the free market but rather as an intervention that is good for the environment and for society.

NEES has the same perspective. According to NEES' communications specialist, Karen Berardino, NEES is a DSM leader and will continue to support the programs for as long as feasible. The question remains as to what defines feasibility in a competitive marketplace. Beyond the public relations benefits both companies have enjoyed for years, there is no clear business incentive for either utility to carry on DSM if energy efficiency programs are no longer mandated by legislation.

Some states--including Washington, Idaho, Montana, Oregon, and Wisconsin--are deliberately shifting the responsibility of DSM program administration away from utilities and toward new, nonprofit structures created solely for the purpose of making conservation and other public-benefit programs work. Wisconsin is shaping a two-year pilot program in which DSM is run by the state energy commission rather than by the utilities.

Restoring What DSM Has Lost Meanwhile, state-level funding may not be the only source of money for public-benefits programs. The Clinton administration has proposed a national public-benefits charge that will create funding distributed to and administered by individual states to support energy efficiency and conservation. If it is passed by Congress, this public-benefits trust will be structured as a matching fund, and estimates peg it as being established at somewhere between $3.2 and $6.4 billion annually.

Ralph Cavanaugh, West Coast energy advocate for the Natural Resources Defense Council, says that the trust is one of the few aspects of deregulation that enjoy bipartisan support. Cavanaugh is confident that any viable proposal for national deregulation must include such a trust if it is going to be passed. Friends of DSM should take heart from the proposed national public-benefits trust, according to Cavanaugh. They need to support it, he says, and they need to recognize it as an attempt to restore the lost spending momentum.


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