Pennsylvania Office of Consumer Advocate Responses to DSR Working

Pennsylvania Office of Consumer Advocate Responses to DSR Working Group Draft Outline Investigation of Conservation, Energy Efficiency Activities, and Demand Side Response by Energy Utilities and Ratemaking Mechanisms to Promote Such Efforts; Docket M-00061984 I. II. History and Scope of Investigation Summary of Information Collected A. Existing Programs and Level of AMI Deployment – Tables available on PA PUC web site. B. White Papers on Metering, Energy Efficiency, Conservation, and Demand Side Response – Available on PA PUC web site. C. January 19, 2007 Presentations – Available on PA PUC web site. D. December 8, 2006 Revenue Decoupling Presentations E. Other Reports 1. Quantifying Demand Response Benefits – Brattle Group 2007 Report to PJM and MADRI. 2. ACEEE April 2004 Report 3. NYSERDA’s Annual Energy $mart Reports 4. FERC’s August 2006 Report on DSR; Docket AD06-02 5. PA DSR WG 2004 reports 6. Others III. Findings A. A wide array of studies and sources seem to confirm that energy efficiency, demand side response, and conservation programs and technologies can be cost-effective means of controlling the cost of electricity and natural gas. OCA Response: Extensive studies over many years have validated the benefits of these programs. However, programs have often not moved forward because those benefits are often not clearly established as an offset to program costs. Pennsylvania Office of Consumer Advocate Response to DSR Working Group Draft Outline Page 1 B. Individual customers can directly benefit through participation in DSR or conservation programs and utilization of energy efficiency technologies. OCA Response: The OCA urges the Commission to recognize the substantial differences between conservation and energy efficiency, on one hand, and price or demand response, on the other. The Commission will observe that many of the programs recommended by the Pennsylvania Coalition for Demand Resources (“PCDR”), and supported by the OCA, focus on energy efficiency. In fact, the most reliable results are from those programs that result in more efficient uses. These efficiency measures are implemented through programs that encourage the construction of more efficient houses or encourage consumers to replace appliances with substantially more efficient models. Consumers use less energy overall, which benefits them through lower bills, but they also benefit all customers by reducing consumption in all hours, including peak hours. There has been an ongoing debate about how to encourage consumers to respond to price signals. In fact, voluntary customer response is less urgent when efficiency measures are installed. Even so, the existing PJM demand side programs have encouraged a level of price response that PJM estimates to have reduced energy costs by about $650 million in 2006. The ability of price response to mitigate prices is clear, and the Commission should also consider how this capacity can be expanded. However, the OCA emphasizes that real time pricing must not be imposed at the retail level and that any use of real-time pricing must always be a matter of customer choice. Mandatory programs will result in hardship for many customers, particularly for residential customers whose dwellings, physical limitations or family circumstances make significant price response impossible. C. Reduction in peak demand and strategic conservation can favorably impact wholesale energy prices, to the benefit of all retail customers. This is consistent with the Commission’s objective of mitigating the effect of future price increases. OCA Response: The control of peak load is important because it can have immediate impacts on reliability as well as on consumer costs from both energy and capacity markets. D. General education about demand side response, energy efficiency and conservation will be important to heightening awareness about the existence of these programs and building acceptance for programs and technologies as they are offered. Consumer education should involve a variety of tactics, from advertising, media relations and grassroots Pennsylvania Office of Consumer Advocate Response to DSR Working Group Draft Outline Page 2 outreach. Efforts should be measurable with annual surveys of results. Stakeholders should have regular involvement and opportunities for input. Education strategies used should be based on effective programs employed in other states when applicable. OCA Response: Education plays a critical role in promoting efficiency and demand response. Consumers need to know how their behavior affects their bills. They also need to know what they can do to control their bills. In addition, as the Commission already knows, consumers need to be aware of the potential for higher bills following the expiration of the rate caps. All of these objectives are linked and this argues for a well coordinated education program such as that already under development related to POLR service. IV. Legal Authority A. The Commission may order gas and electric utilities to implement load management and conservation programs that it determines to be prudent and cost-effective. 66 Pa.C.S. § 1505(b). This provision is the statutory authority for the LIURP programs. B. Commission must separately ensure that “universal service and energy conservation” programs are available in each territory. 66 Pa.C.S. §§ 2804(4), 2203(8). C. The information gathered represents a sufficient foundation for the Commission to direct EDCs and NGDCs to file a DSR, Energy Efficiency and Conservation plan with the Commission for its approval consistent with these statutory provisions. V. Objectives A. Nature of Objectives. The Commission initiated a price mitigation proceeding in 2006 at Docket M-00061957. Consistent with that, the focus should be on developing policies with quantifiable economic benefits for ratepayers. The Commission has previously identified nonquantifiable benefits in reports prepared by DSR WG in 2004. It may be assumed that some of those non-quantifiable benefits will also accrue with implementation of these programs. B. Many existing programs have as their objective a reduction in peak demand and/or overall energy conservation. This is quantified as a % reduction of overall or peak demand by a certain time period. Examples Pennsylvania Office of Consumer Advocate Response to DSR Working Group Draft Outline Page 3 1. Connecticut’s energy independence law established a goal of a 10% reduction in peak demand by 2010. Public Act 05-01, An Act Concerning Energy Independence. According to January 19 presentation by Enernoc, Connecticut has developed DSR capacity equal to about 6% of peak load at this time. 2. Austin Energy: According to February 9, 2007 presentation, they intend to satisfy 15% of expected 2020 demand with DSM resources. 3. California: 5% of system peak demand MWs enrolled in DSR economic programs by end of 2007 C. Objectives. 1. Develop policies that allow individual customers to take advantage of DSR, energy efficiency, and conservation measures. For reasons of equity, there should be programs available to residential, small business and large commercial and industrial customers. 2. Materially impact wholesale energy prices through DSR, conservation, and efficiency measures. 3. Educate consumers so that they can take advantage of these opportunities. 4. Objectives should be quantified in terms of DSR capacity reduction of peak load and overall conservation: a. Develop DSR capacity of ___ % of peak load by 2____. b. Strategic conservation of ___ % of kWh and mcf by 2____. These targets should be measured against PJM’s forecasted load for a given period as well as the Commission’s annual Electric Power Outlook Report and other sources. OCA Response: The OCA recommends that programs will need to ramp up over time in order to achieve the full potential for reducing energy consumption. Thus, the OCA proposes that the Commission permit demand resource capacity to develop for several years before goals are to be reached. Pennsylvania Office of Consumer Advocate Response to DSR Working Group Draft Outline Page 4 Further, the OCA recommends that the success of individual programs and the overall impacts of the Commission’s demand resource initiative be reviewed and evaluated periodically. As part of that evaluation, the OCA urges the Commission to set additional goals based on the evaluation results including an assessment of the potential for additional reductions in consumption and peak load. D. AMI deployment. To develop a robust DSR capacity, additional metering will be required in some service territories. However, we note that many large commercial and industrial customers already have time-of-use meters, even in territories where system wide deployments have not occurred. Approximately 78,000 residential customers in Penelec and Met-Ed’s territory are served under TOU rates even though there has not been a system wide AMI deployment. 1. This presents the question of whether AMI should be deployed system wide for all customers, or just certain customer classes. 2. Is it viable for PA EDCs that have not deployed AMI system-wide to enable medium and small customers who wish to be on TOU rates to be offered such a rate along with the meter to support that rate without deploying AMI technology system-wide? Would this accomplish the objective of enabling medium and small customers of most PA EDCs the opportunity to participate in DSR programs through TOU rates prior to the time when AMI technologies will be available system-wide? 3. If AMI deployment is appropriate, what is a reasonable time frame for this to occur within? OCA Response: The blanket deployment of AMI to all residential customers is not justified solely as a means to support demand response programs. In fact, the presentations to the Demand Side Working Group focused almost entirely on other benefits of AMI. The same was true of presentations at the recent NARUC Winter Meetings in the meetings of the Committee on Energy Resources and the Environment. These benefits include reducing many costs related to staffing, more easily resolved customer billing inquiries, better theft detection, and quick and accurate identification of service outages. At least in some cases, AMI deployment has been fully cost justified by these and related benefits. The OCA recommends two courses of action. First, where AMI deployment is justified on the basis of the sorts of benefits highlighted above, the Commission should consider how the capabilities of these Pennsylvania Office of Consumer Advocate Response to DSR Working Group Draft Outline Page 5 metering systems can then be used to support specific demand-related programs. The Commission can direct that programs evolve to meet the build-out of the new metering infrastructure. Second, where AMI is not otherwise cost justified, the Commission should focus on efficiency and direct utility load control programs. These programs do not rely on metering because their effectiveness can be partly or largely determined based on the established engineering performance of the measures or equipment that is installed. The OCA notes that this approach was endorsed in the Commission’s approach to establishing the AEPS Tier II credit value of efficient equipment. VI. Implementation Issues A. Coordinated vs. Individual Responses: Should EDCs develop and manage their own portfolios of programs? Alternatively, should programs be coordinated by third party administrator or state agency (e.g. NYSERDA approach)? This is a threshold issue that will impact how programs are designed and implemented. OCA Response: The OCA suggests that the first question is whether programs need to be coordinated statewide, and the answer is yes. Certain programs recommended by the PCDR are based on the EnergyStar program. These reflect national standards for which buildings and equipment qualify. Marketing of EnergyStar products is well developed and is reflected, for example, in the labeling of EnergyStar appliances and related national marketing. Also, large, national appliance retailers can develop appropriate responses if they can approach Pennsylvania as a whole. This means that utility EnergyStar programs will be far more effectively implemented if there is strong statewide coordination. This sort of coordination can be supplied by the Commission, by utilities closely cooperating under Commission direction, or by a separate statewide coordinator. The OCA is not sure which approach is most appropriate for supplying a strong level of coordination. At this time, the OCA requests that the Commission take every step to ensure coordination among utilities’ programs. This must also extend to coordination between electric and gas utilities. Most Pennsylvania natural gas customers are also customers of regulated electric utilities. It is vital that opportunities not be lost to produce the greatest feasible demand and consumption reductions by addressing both gas and electric appliances and equipment. B. Initiating the Implementation Process: Generic Commission Orders? Or are regulations needed? OCA Response: The vehicle for initiating and controlling programs will depend on how the Commission pursues issues like program Pennsylvania Office of Consumer Advocate Response to DSR Working Group Draft Outline Page 6 administration. If the Commission determines that a statewide administrator will design and operate programs, a generic Order or set of Orders may be more appropriate. It must also be recognized that the time lag for final implementation of regulations can extend over years while Commission Orders can independently direct that utilities immediately begin to initiate important actions. The OCA concludes that Commission Orders are probably a better vehicle for timely initiation of utility demand response programs, particularly if the Commission establishes a statewide administrator that will be responsible for detailed implementation. The use of Orders will only be effective if the Commission clearly sets out the extent of programs and clear goals that these programs are to achieve in these Orders. Should the Commission choose to set forth detailed program requirements, then regulations appear to be the appropriate vehicle. C. Timeline: What schedule should be set for the filing and approval of programs, and their effective date? OCA Response: Utility programs should be filed for Commission approval within six months of the final date of a Commission Order. As this investigation has demonstrated, the methods for creating demand resources are many, varied and well tested. There is no reason for substantial new material to be developed when it comes to, for example, EnergyStar programs. More tailored programs, ones that are appropriate to one or a few service territories can be developed and submitted for Commission approval while well established programs are being put into full operation. Thus, there is no reason for significant delay in the submission of initial compliance filings. D. Program plans/lifecycles. Three years, five years, etc. What are the respective advantages and disadvantages of shorter vs. longer plans. Is their an optimal program duration given Pennsylvania’s particular situation? OCA Response: Particularly for well-established programs, the cycle of individual programs should be long enough, where appropriate, to allow the market for services and products to become well established. Retailers and contractors will be reluctant to commit to a substantial market effort unless they are certain that the opportunities offered by the program will exist for several years. For more tailored programs, the initial life cycle should be somewhat shorter in recognition of the need for closer scrutiny and the expectation that program content may need to change substantially. E. Program design. Pennsylvania Office of Consumer Advocate Response to DSR Working Group Draft Outline Page 7 1. Should program designs be developed solely by EDCs? Alternatively, should they be selected by the Commission or a third party administrator? OCA Response: For many programs there is no need for “design.” The OCA strongly supports the menu of programs proposed by the PCDR. The OCA urges the Commission to establish these as basic standard approaches to be used, to the extent appropriate, by each utility. The recommended programs represent best practices for addressing the goals proposed above. As emphasized elsewhere, these programs will also be most effective on a statewide basis. Thus, for many of these programs, there is no need for design, per se. The OCA also recognizes that there must be sufficient flexibility for unique programs to be developed where their value can be demonstrated. There are large differences across Pennsylvania in levels and types of economic activity, in the rate of demand growth, in the price of electricity, in heating loads for specific utilities, in weather patterns, and in fundamental characteristics such as whether territories are substantially urban, mixed or rural. Also, some customers, such as large industrial customers, have truly unique needs that can only be satisfied through specially designed programs. 2. Do we want to pre-approve a menu of DSR, energy efficiency and conservation programs that has been developed by the Commission or another party? EDCs or the third party administrator can then select from this list? 3. Regardless of the process used, potential programs should be ranked according to the best available data as to their effectiveness. Top ranked programs should be given preference when designing plans for each service territory. F. Program Evaluation. Who does it? What benchmarks and tests are used? Evaluation should be independent. Example of standard: California cost-benefit test. OCA Response: The OCA strongly supports evaluation as a means for establishing the overall impacts of specific programs as well as the effectiveness of administration and direct program delivery. Clearly, evaluation is critical to ensuring the long term effectiveness of utility demand side programs and the prudence of program management. Pennsylvania Office of Consumer Advocate Response to DSR Working Group Draft Outline Page 8 The OCA concludes that the level of evaluation depends on the nature of programs. For example, EnergyStar programs are under constant scrutiny by the Department of Energy as to the effectiveness of the design. For these, evaluation should focus on whether implementation is appropriate and whether vendors, contractors and inspectors are doing a good job. Even so, it will be necessary for the Commission and program administrators to be aware of changes in recommended program design and delivery. On the other hand, for programs for which design includes significant unique or utility-specific tailoring of the component, there should also be evaluation directed at whether the design is producing good results. For these programs, clear, specific measures of success must be designed in so that the evaluation can produce useful conclusions. VII. Funding and Cost-Recovery A. Section 1319 of the Public Utility Code, 66 Pa.C.S. § 1319, identifies a cost-recovery standard for programs implemented pursuant to Section 1505(b). Utility may recover all prudent and reasonable costs associated with managing, developing, operating and financing program. OCA Response: The OCA observes that, unless cost recovery is conditioned on prudency and reasonableness of management, there is no incentive for a utility to focus aggressively on good quality program implementation and operation. B. Revenue decoupling mechanisms do not appear to be expressly contrary to the provisions of the Public Utility Code. An appropriately designed revenue decoupling proposal may be in the public interest, if approved by the Commission as part of a package of DSR, energy efficiency, and conservation measures (see separate reports prepared by decoupling subgroup). OCA Response: The OCA’s position paper on decoupling is included as Attachment A. C. Energy Efficiency and DSR are Tier II alternative energy resources under the AEPS Act. AEPS costs can be recovered through a Section 1307 mechanism on a full and current basis. Should Section 1307 play a role in cost-recovery? OCA Response: Whether or not a 1307 mechanism is used, the Commission may not approve rate recovery unless costs are found to be prudent and reasonable. Pennsylvania Office of Consumer Advocate Response to DSR Working Group Draft Outline Page 9 D. EDC vs. Third party administration will drive funding issues. If a third party administrator is used, who hires them? EDCs or the Commission? Does the procurement code apply? Commission would have to approve overall level of budget for programs. OCA Response: The applicability of the procurement code will be determined by the Commission’s determination regarding program administration. Should the Commission determine that programs are best administered by a statewide administrator, and if this is done through a direct interface between the Commission and the statewide administrator, then the procurement code will likely apply. On the other hand, if the Commission decides to permit utility administration, those activities will take place under the Commission’s established authority. E. A Systems Benefit Charge may be an appropriate mechanism to fund these programs. An SBC is addressed in draft legislation that has been circulated. Advantages and disadvantages. OCA Response: The OCA observes that the SBC issue is expected to be thoroughly discussed in the General Assembly. The Commission should wait for that process to resolve so that there is a guide regarding the general appropriateness of an SBC related to utility demand response programs. F. Equity of funding and benefits must be considered. Funds raised from one service territory should be used for projects within that territory. OCA Response: The OCA urges the Commission to ensure that funding from a utility service territory be applied within that territory. However, it must be recognized that the benefits of demand side programs may apply broadly. For example, the soon to be implemented Reliability Pricing Model establishes, through analysis, areas that are constrained. These areas may include multiple electric utility service territories. As a specific example, BG&E in Baltimore and PEPCO, the utility serving Washington, DC and parts of Maryland, are included in a region labeled “Southwest MAAC.” A reduction of peak load anywhere in that region benefits all customers without regard for the utility service territory in which they reside. Benefits and costs of a program in one utility service territory that are enjoyed across several territories may need to be appropriately recognized in cost recovery and program deployment VIII. Other recommendations A. Amend Act 213: Amendments to Act 213 are being considered as part of the Governor’s Energy Independence Strategy. As part of this review, give strong consideration to the reclassification of Demand Side Pennsylvania Office of Consumer Advocate Response to DSR Working Group Draft Outline Page 10 Response, Energy Efficiency and Conservation as a Tier I alternative energy source. OCA Response: The OCA observes, based on the anticipated costs of various AEPS resources, that shifting demand resources from Tier II to Tier I will result in current Tier I resources being supplanted. This is inconsistent with the original legislative intent and would have the effect of preventing the development of many high-quality resources envisioned under Tier I. Instead, the OCA points the Commission to the proposal advance by the PCDR that demand resources be assigned to a new Tier III. There is likely to be a surplus of Tier II alternative energy credits for the foreseeable future. Credit prices are very low compared to Tier I. DSR and energy efficiency are unlikely to benefit much from current credit values. B. Default Service: Allow DSR/EE to bid as part of the default service provider’s portfolio. Demand side resources are mentioned in the default service policy statement. OCA Response: The OCA fully supports the inclusion of demand side bids as part of the default service portfolio. C. Require EDCs to render full cooperation to customers who wish to participate in RTO DSR programs, such as PJM’s economic program. D. Require EDCs to render full cooperation to curtailment service providers in accessing retail customer information. OCA Response: The OCA supports this proposal but only to the extent that it does not impinge on the protections embodied in the Commission’s regulations on information release. 93053.doc Pennsylvania Office of Consumer Advocate Response to DSR Working Group Draft Outline Page 11 Attachment A OCA Suggested Principles and Recommendations Regarding Decoupling If decoupling is determined to be necessary and in the public interest, it should only be considered as part of a package of cost-effective, utility-funded, energy efficiency and conservation measures. Decoupling is not an end in itself, but is a means to prevent revenue and profit loss to utilities from utility-funded energy efficiency and conservation programs that reduce overall utility costs and customer rates. The goal is to encourage and deliver costeffective energy efficiency and conservation measures, not simply to insulate the utility revenue stream from all changes. If decoupling is determined to be necessary and in the public interest, it should follow, not precede the establishment of significant, cost-effective utility-funded energy efficiency and conservation programs. Decoupling programs must benefit customers as well as utilities. An appropriate model might be the New Jersey natural gas settlements that were presented to the DSR Working Group on December 8, 2006. In the New Jersey program, lost revenues are recovered through reconciliation after the first year of the conservation program implementation. In addition, any recovery by the utility of weather-normalized incremental revenue must be matched by actual gas cost savings to consumers resulting from the utility’s demand side resource programs. Petitions of South Jersey Gas Company and New Jersey Natural Gas Company, Docket Nos. GR05121019 and GR05121020 (NJBPU Order, October 12, 2006). In terms of what utilities should recover, it is not clear whether decoupling should be done 1) only to compensate for revenues lost as a result of specific utility-funded demand-side programs (i.e. a lost revenue approach), 2) on a revenue per customer basis, in which all revenues are reconciled on the basis of usage per customer, or 3) on a total company revenue basis, in which all revenues are reconciled on the basis of total company usage. There are pros and cons to each approach. For example, the lost revenue approach is targeted to the actual programs that are financed by the utility and therefore does not attempt to capture decreases or increases in sales that are unrelated to utility-funded DSR. On the other hand, this type of specific lost revenue approach does not remove the utility’s overall incentive to increase sales in other respects. Except for targeted pilot programs, the decision of whether or not to go forward with decoupling by Pennsylvania’s natural gas and electric distribution companies should be made by the Commission on a comprehensive policy basis. The decision of whether to implement decoupling cannot be left solely to the discretion of individual utilities on a Pennsylvania Office of Consumer Advocate Response to DSR Working Group Draft Outline Page 12 purely voluntary basis. If it is, then only utilities with declining sales (or declining revenue per customer) are likely to implement decoupling; and utilities with increasing sales (or increasing revenue per customer) will likely seek to continue with traditional regulation. It is up to the Commission to determine whether decoupling is appropriate as a matter of general policy, while recognizing that utilities may have differences among themselves that should be taken into account in the specific design of a decoupling program. Decoupling should be done in a manner that does not discourage the use of the most efficient and environmentally sound resources for a particular application, such as residential heating. Decoupling should be accompanied by appropriate retail rate designs that encourage costeffective conservation measures by individual customers. Results will be much better if customers – not just utilities – have the incentive to conserve. Rather than advocating higher customer charges and lower usage charges (which assure utility revenues but reduce the benefits of conservation to customers), it may be more appropriate to take exactly the opposite approach in order to maximize the benefits that customers receive from taking conservation measures. It should be noted that in its proposed electric POLR Regulations and Policy Statement, the Commission recommends the elimination of declining block rates in order to encourage conservation. Decoupling generally should be implemented in a base rate case in which all relevant revenues, expenses and return can be considered. While it may be possible to implement decoupling outside the context of a base rate case, it is not clear how to establish the appropriate pro forma revenue and variable operating and maintenance expense bases as a starting point for decoupling, especially for utilities that have not had distribution base rate cases in many years. Also, to the extent that revenue decoupling alters a utility’s overall risks of providing service, it may be appropriate to reflect that changed risk in the utility’s allowed rate of return. 92738 Pennsylvania Office of Consumer Advocate Response to DSR Working Group Draft Outline Page 13