Notes for Presentation of Energy Probe�s Initial Views OEB

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					Notes for Presentation of Energy Probe’s Initial Views: OEB Generic DSM/DR Review RP-2003-0144
Presenters: Norm Rubin and Tom Adams 2003 October 29

• Summary of Recommendations:
• • • • Direct Gas LDCs to report on weather-normalized domestic natural-gas consumption for the period of the GRI study and the ensuing period using measurement methods that permit direct interjurisdictional comparison; Initiate research into the causes of Ontario's apparent cohort-lagging performance in reducing per-capita natural-gas consumption, including perverse effects of DSM programs; Direct Electrical LDCs to report on their DR experience after August 14th, 2003; Highlight present market failures in the report to the Minister, recommending correction and/or directly effecting correction wherever possible.

Monitoring and Evaluation
The OEB Staff discussion paper’s discussion of monitoring and evaluation of DSM is given only one page. The report appears to be based on an assumption that these are relatively simple tasks. The experience with gas DSM in Ontario suggests otherwise. We have seen repeated instances of audit reports discovering overstated program savings. None of the audit reports so far has addressed the full scope of indirect effects of DSM programs, like “delay” and “rebound” effects. Foregone consumption is inherently difficult to estimate for short-run changes in usage and impossible to reasonably guess at when considering long term economic changes.

DSM Research Priorities
To respond to the measurement challenge, Energy Probe suggests that this process address two significant gaps in knowledge about DSM and DR effectiveness. In particular, these knowledge gaps should be addressed before further significant policy or financial commitments are made to DSM and DR.

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DSM May Hurt Conservation The OEB should initiate statistical research on the ultimate effectiveness of subsidized DSM programs in achieving accelerated usage reductions. A study conducted in 2000 by the Gas Research Institute found that between 1984 and 1999, households in a region that includes Michigan, Wisconsin, Ohio, Indiana, Illinois, and Ontario cut their natural-gas usage on a weather-normalized basis at a rate of 1.2% per year.1 Significantly higher prices since 1999 have probably prompted even more rapid usage declines in recent years. GRI is currently updating the study. We believe that Ontario is the only one of these jurisdictions with significant subsidies to gas DSM. Ontario’s progress in improving efficiency may be lagging. Between 1993 and 2002, households served by Enbridge cut their usage by only 0.84% per year. For both Union Gas’ residential M2 and Rate 01 customers, for the period 1995-2002, the rate of improvement was about 1% year (using Union’s rolling 20 year linear regression-based normalization). (ref. RP2003-0063 C3/T2/S7) The available information suggests that gas DSM programs may have helped prevent Ontario from keeping up with the conservation improvements seen in neighbouring jurisdictions. Ontario’s two major gas distributors should release their analysis of trends in residential weather-normalized average uses using the GRI’s 30 year normalization approach and heating degree day methodology that they appear to have provided as input to the GRI study. If energy efficiency gains are lagging in Ontario, the OEB should undertake the necessary economic research to determine why. Are DSM programs a deterrent to conservation? Is there a conservation “delay” effect from DSM programs? Are customers who might otherwise upgrade their appliances or insulation waiting for a subsidized programs to come their way before they act? When customers install energy efficient devices, what is the extent of “rebound”, also known as the “Khazzoom effect” where customers use the more efficient service more? For example, how much do households raise their thermostats once high efficiency furnaces are installed? How much longer are showers once flow-restricted showerheads are installed? Does the availability of high-efficiency furnaces encourage the trend to larger homes? Is the money saved on DSM programs itself an incentive to acquire gas fireplaces, patio heaters, or swimming pools? Advocates for more gas-like DSM programs have an onus to prove that Ontario’s disappointing results are despite our aggressive DSM programs, and not because of them. Recommendations: • • Direct Gas LDCs to report on weather-normalized domestic natural-gas consumption for the period of the GRI study and the ensuing period using measurement methods that permit direct interjurisdictional comparison. Initiate research into the causes of Ontario's apparent cohort-lagging performance in reducing per-capita natural-gas consumption, including perverse effects of DSM programs.

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Learning DR Lessons from Blackout The OEB should order all LDCs to provide the IMO with their gross system load shape and their net system load shapes (that is all usage not captured by interval meters) for the period during the post-blackout emergency operations period. The IMO can then compile the net system load shape for overall Ontario power system. With that data, the IMO can analyze the "natural" rate of domestic "DR" in response to a serious crisis and serious social pressure initiated by the Ontario government. Proper analysis of Ontario’s recent experience with “DR” will help all parties understand how to allocate future reliability-related costs, how to plan for future emergencies, and how to assess future conservation initiatives. At the last meeting of the IMO’s Market Advisory Council (October 8th) two MAC members suggested that the IMO and others collect information that would show customer group contribution to the conservation and curtailment following the Blackout. The results of such an analysis would depend on the nature of consumption (i.e. hospitals, water treatment plants, etc.). The IMO recognized that such a review would be valuable to understand the process for future reference. Derek Cowbourne of the IMO agreed to pursue conversations with the Electrical Distributors Association to determine what data collection and reporting can be done. LDC are not likely to support this research without regulatory direction. Recommendation: Direct Electrical LDCs to report on Ontario’s DR experience during the emergency.

Scope of the Humble LDC
Many discussions of DSM focus on LDCs as delivery agents for DSM. Energy Probe recommends the following overall vision for the business activities of LDCs. Pure flow-through of commodity Responsible for efficient, reliable distribution operations Not responsible for customer usage decisions Facilitative of consumer energy choices (like commodity purchasing and wise use) through mechanisms like accurate, timely meter reading and billing Business practices and regulatory rules to maintain low financial risk profile Principal business focus relates to protecting investment

Based on these criteria, subsidized DSM activities should be limited and narrowly scoped if they are permitted within the LDC at all. Depending on how DSM policies are configured, particularly if a "symmetrical" and target-based SSM is established, that is a “shared savings mechanism” that could result in either a finanical reward at the end of a settlement period or a penalty, then DSM could be highly risky to an LDC’s net income.

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In the current rate freeze environment, requiring LDCs to subsidize and promote DSM activities would be directly threatening to the LDC’s financial stability.

Alternative Conservation Delivery Options
Energy Probe believes that LDCs are poorly suited to be DSM delivery agents. Other organizations are better prospects for enhancing conservation. Specifically in the area of electricity conservation, there is a potential role for the Ontario Electrical Safety Authority (ESA). The ESA has technical expertise with electricity consuming devices. The organization is directly involved in all changes made to the power system, including new loads. Conservation investments are most cost effective for consumers when new loads are being planned. Some conservation initiatives are very inexpensive (e.g. efficiency standards for equipment, equipment labeling, and comparative consumption rate information provision to consumers), allowing the ESA to take on some conservation roles without requiring major financial restructuring.

Protecting Successful Market Principles
Ontario’s basic gas and electric market design principles should not be changed without careful consideration of the positive and negative effects. The Board Staff DSM paper suggests that DR will require predictable prices (P. 39). The IMO is currently exploring the development of short term forward markets, that is markets that might be 4, 8 or 24 hours ahead. Such markets can assist consumers in participating in DR activities, but it should be recognized that even very short term forward markets will suffer from some inaccuracy in predicting real time prices. Consumers with the capability to react to prices closer to real time, for example customers that are participating in the market for Automatic Generation Control (AGC), should have the opportunity to capture the financial benefits of responding to more operationally relevant price signals than those available in the IMO short term forward markets. Attempting through policy fiat to freeze prices diminishes, rather than enhances, efficiency.

Identifying Market Failures
DSM and DR are often justified on the grounds that they are intended to respond to failures of markets to encourage efficiency. Rather than treat market failures in abstract, the specific causes of market failures should be identified. Correcting policy-induced market failures directly has obvious advantages when compared to attempting to create programs whose effect is to create results that seek to reproduce what would have happened without the market failure. However, there may be instances where some market failures are difficult to correct directly. DSM subsidies are only justified if they are able to correct market failures at lower cost than all achievable alternatives
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The market failures referred to in the OEB staff report include variablized LDC fixed charges creating LDC biases against conservation and the electricity rate freeze. Ongoing Policy-induced Market Failures Causing Inefficient Pricing of Natural Gas Service Federal Government • tax incentives for gas exploitation, e.g. flow-through shares and accelerated depreciation allowances for gas production investments (Note that the US federal government has similar programs. Canadian tax rules require ground source heat pumps to use a 25 year depreciation rate whereas some gas wells are allowed 3 years.) • expropriation rights for pipelines, administered through NEB • absence of pollution cost internalization for polluters (also applies to provincial government) OEB • • variablized fixed charges (creating disincentives for LDC’s to promote usage reduction) totally or substantially flat delivery charges for general service customers, rather than seasonalized delivery charges

Ongoing Policy-induced Market Failures Causing Inefficient Pricing of Electricity Service Provincial government • freeze on commodity for 53% of market, LDC charges for ~85% of market, IMO uplift for 100% of market • government financing of OPG and HOI capital programs absence of pollution cost internalization for polluters (also applies to federal government) • expropriation rights for transmission lines Recommendation: Highlight present market failures in the report to the Minister, recommending correction and/or directly effecting correction wherever possible.
The study was referred to in the Enbridge RP 2002-0133 case at A2/T2/Sch. 1 p. 9-13 of 24. Portions of the study were filed at I/T4/S16.
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