Align Utility Incentives with Increasing EE

One of the recommendations of the SPEER Commission and our initial report on the topic was to begin the dialogue about performance based rates, decoupling, and other forms of alternative ratemaking that would align electric company revenues and profits with increasing efficiency. In 2016, SPEER published a final Energy Efficiency and Ratemaking report that discusses ways other states have attempted to resolve the conflict between utility and customer interests.

State regulated utility efficiency programs are still critical to attacking market barriers and market failures which prevent optimal investments in energy efficiency, even should markets for efficiency increase the rate of acquisition of cost effective efficiency.

Early in 2013, in a whitepaper entitled “Disruptive Challenges,” the Edison Electric Institute defined what it called a “vicious cycle” for utilities.  As end-users become more efficient and increase usage of distributed generation, their sales go down, causing their rates to increase to make up the revenue shortfall.  Higher rates cause additional customers to increase efficiency and self supply, causing rates to go higher, and the cycle continues to repeat.   Utilities increasingly recognize that purely volumetric revenues make less sense in a world with increasing efficiency and distributed generation; even here in the South-central US where load growth continues, utilities are expressing openness to consider alternative ratemaking.  SPEER  aims to align the incentives of utilities and their customers and minimize wasted effort and energy.

Texas is one of a minority of states to have no form of Lost Revenue Adjustment or Decoupling in place. Although the State adopted a bonus for utilities exceeding their efficiency goals, Texas transmission and distribution utilities run their efficiency programs, but have their profits tied to volume of sales, giving them little incentive to increase energy efficiency spending or program effectiveness.

The Texas Legislature has passed SB 774 which states: “The commission shall conduct a study and make a report analyzing alternative ratemaking mechanisms adopted by other states and shall make recommendations regarding appropriate reforms to the ratemaking process in this state.” Texas will benefit from the dialogue initiated by this bill. SPEER would like to put a focus on how utilities can become service businesses, compensated for reliability, customer service, and efficiency delivered, rather than merely for the volume of electrons passed through their infrastructure.  This is a major paradigm shift and will take significant time and effort to enact, but SPEER is an excellent position to contribute because of the groundwork we have laid in the recommendation of the SPEER Commission on Texas Energy Efficiency Policy.

SPEER authored a whitepaper on evolving regulatory structures last year. SPEER will soon produce a follow up policy report on the application of new utility regulatory policies to the unique ERCOT market environment, in order to better inform the dialogue related to decoupling or performance based rate-making as a means of aligning electric companies’ interests with customer interests.  We will continue to work with stakeholders and participate in proceedings on alternative ratemaking.