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    Document Summary
    - Report Published -

    Senate Document No. 17
    PUBLICATION YEAR 2007

    Document Title
    Staff's Report to the State Corporation Commission in preparation for the SCC's Report Required by the Third Enactment Clause of Chapter 933 (SB 1416) of the 2007 Acts of Assembly

    Author
    State Corporation Commission

    Enabling Authority
    Chapter 933 Enactment Clause 3. (Regular Session, 2007)

    Executive Summary
    Executive Summary
    The General Assembly of Virginia enacted on April 4, 2007, Chapter 933 of the 2007 Acts of Assembly ("Chapter 933")(*1) that, among other provisions, established:(*2) That it is in the public interest, and is consistent with the energy policy goals in 67-102 of the Code of Virginia, to promote cost-effective conservation of energy through fair and effective demand side management, conservation, energy efficiency, and load management programs, including consumer education. These programs may include activities by electric utilities, public or private organizations, or both electric utilities and public or private organizations. The Commonwealth shall have a stated goal of reducing the consumption of electric energy by retail customers through the implementation of such programs by the year 2022 by an amount equal to ten percent of the amount of electric energy consumed by retail customers in 2006.

    The Third Enactment Clause of this statute (“the Clause”) directs the Virginia State Corporation Commission (“Commission” or “SCC”) to “conduct a proceeding” and “submit its findings and recommendations to the Governor and General Assembly” on or before December 15, 2007. The Clause also directs the Commission to “include recommendations for any additional legislation necessary to implement the plan to meet the energy consumption reduction goal.” The Staff tenders this report to assist the Commission as it responds to the legislative mandate set forth in the Third Enactment Clause of SB 1416.

    In furtherance of its responsibilities under the Clause, the SCC convened a proceeding that enabled and encouraged extensive stakeholder participation. The primary purpose of this report is to pass along information collected by the Staff during the proceeding. Where appropriate, Staff also provides limited analysis of the information collected during the proceeding. Importantly, direct stakeholder work product is included in Appendix I in the form of five sub-group reports. The reports presented in Appendix I have not been edited and appear as they were submitted to Staff by each of the five subgroups, except for minor formatting changes to include in this report.

    The proceeding directed by the Clause requires the Commission to:(*3)

    (i) determine whether the ten percent electric energy consumption reduction goal can be achieved cost-effectively through the operation of such programs, and if not, determine the appropriate goal for the year 2022 relative to base year of 2006,

    (ii) identify the mix of programs that should be implemented in the Commonwealth to cost-effectively achieve the defined electric energy consumption reduction goal by 2022, including but not limited to demand side management, conservation, energy efficiency, load management, real-time pricing, and consumer education,

    (iii) develop a plan for the development and implementation of recommended programs, with incentives and alternative means of compliance to achieve such goals,

    (iv) determine the entity or entities that could most efficiently deploy and administer various elements of the plan, and

    (v) estimate the cost of attaining the energy consumption reduction goal.

    Work-group Efforts

    As described below, the Commission initiated a proceeding pursuant to this legislative direction. That proceeding convened a large number of stakeholders who formed five self-directed sub-groups.(*4) Each sub-group produced a report as final work product in addition to providing a wealth of information to Staff during three all-day meetings of the entire stakeholder group as well as in literally hundreds of e-mail
    exchanges. Sub-group reports are presented in their entirety in Appendix 1 of this report. We also incorporate or otherwise refer to stakeholder provided positions, comments, data and information in the body of our report, as appropriate. The comments of work-group participants, speaking as individuals or representatives of stakeholder entities, are posted on the Commission’s website at http://www.scc.virginia.gov/division/eaf/conserve.htm. The Staff very much appreciates the hard work performed by proceeding participants over the past six months.

    Although further details and explanations may be found within the synopsis of each sub-group work product in Section II of this report, as well as within the respective subgroup reports included in their entirety in Appendix I, it is important to note a few of the observations common to several of the sub-groups reports. Four of the five sub-groups acknowledged that while the legislation focuses on a reduced energy consumption goal, reducing peak demand is also an important consideration. The sub-groups generally agreed that to support the attainment of an energy savings goal, measurement and verification methods would be needed to measure the energy impacts of all programs. Demand and capacity impacts can also be estimated with such methods.

    Most of the sub-groups reviewed energy savings goals set in other states and observed that while the various states’ goals suggest a range of targets to frame the discussion, more detailed analysis is needed to develop a goal specific to Virginia. There appeared to be some agreement that a Commonwealth specific economic potential study should be conducted to determine Virginia’s ultimate energy savings goal and its related impact. There was consensus within sub-group 5 that not only is a 10% reduction in electricity consumption by the year 2022 highly achievable, but also that a reduction in consumption through conservation, energy efficiency, demand-side management and demand response programs, collectively referred to in this report as EE/DSM programs or more generally as DSM programs, is absolutely imperative.

    Most sub-groups believed mass implementation of energy efficiency and conservation efforts would generate benefits to ratepayers and the state economy by helping to offset future increases in energy costs, provide electric system reliability benefits, offer customers the ability to better manage their energy costs, and maintain a competitive regional economy. Additionally, effective programs could help accelerate Virginia’s environmental and air quality goals while helping to reduce the costs associated with future climate change policies.

    The sub-groups found that administration and implementation of programs in Virginia could rely on either or both utility and non-utility entities. Initiatives might also include broader policy avenues such as building codes and standards as well as tax incentives. Particularly for statewide market transformation and consumer education programs, there was significant support for a non-utility, third party administration approach, contingent on the funding and enforceability of such an approach.

    Another generally agreed upon sub-group finding was that a review and redesign of Virginia electric utility rates is in order. Such a review and redesign would better match the price paid by a customer for electricity use with the cost of producing that power. This option is more fully described later in this report.

    Sub-group 2 compiled a list of energy efficiency programs to be considered for implementation in Virginia immediately (1-12 months), over the mid-term (1-5 years), and over the long-term (beyond 5 years). Though many of these programs are said to be costeffective in other states, they have not undergone any cost benefit analysis using conditions specific to Virginia. Sub-group 2 found that cost-effective conservation programs, coupled with properly designed electricity rates, can be an integral part of meeting Virginia’s ongoing electricity needs while mitigating upward pressure on electricity prices.

    According to the work of sub-group 3, the history of demand response in Virginia has been one of missed opportunities over the last thirty years. The group holds that new opportunities exist to capture the potential for reductions in peak demand resulting from recent policy enhancements within the PJM Interconnection, advances in telecommunications allowing real-time communication, and improvements in the affordability and functionality of demand response technology. This sub-group found that increased deployment of demand response in the Commonwealth could yield substantial customer financial benefits and electric reliability benefits. Historically, the focus on the utility industry in Virginia, as in most jurisdictions, has been on supply-side, rather than demand-side, solutions to address peak demand. As a result, generating plants and transmission lines have been and continue to be relied upon to meet peak loads during the limited hours of the year in which these loads occur. As described later in this report, Staff believes that it is advisable for Virginia’s electric utilities to develop a current integrated resource plan that considers supply and demand resources for the Commonwealth and to thus determine the value of avoided electrical supply costs.

    After reviewing the status of load management and demand-side management programs in the Commonwealth, sub-group 3 developed a list of proposals to reduce the impediments to such programs and these proposals are described later in this report.

    There appeared to be general agreement among the sub-groups that a utility should be able to fully recover its costs, including operating costs and a fair return of and on capital costs consistent with current law, through properly designed rate schedules. Regarding such cost recovery, most sub-groups believed that the costs associated with SCC approved or legislatively mandated energy efficiency and demand side-management programs should be considered on an equal footing with the costs of building, operating and maintaining new supply side options, and could include incentives.

    Sub-group 4 recommended that the SCC review its policies and procedures related to changes in utilities’ rate structures and rate design and consider establishing a limited, expedited, and revenue neutral regulatory procedure under which changes can be made to rate structures or rate designs outside a full general rate case. Sub-group 4 suggested the Commission consider revising the fuel cost recovery mechanism and the allocation of such costs among customer classes while continuing the policy of providing the utility with recovery of its actual fuel costs.

    Revenue decoupling was viewed by sub-group 4 as another form of rate design that could be considered. Revenue decoupling is defined as a ratemaking methodology that separates utility revenues from its volume of sales. Revenue decoupling may be enacted to address a variety of issues such as lost sales due to utility energy efficiency programs. Subgroup 4 discussed that recovery of lost revenue may be needed to pay for required infrastructure even in times of decreasing sales.

    Sub-group 4 believed that the current promotional allowance rules provide little guidance as to types of programs that may be acceptable within the rules, but that do not require prior regulatory approval. Given these circumstances, the sub-group suggested the Commission consider reviewing and updating the current promotional allowance rules to reflect changes occurring since 1992. Sub-group 4 recommended the SCC staff consider several issues with regard to incentives for utilities. These issues are described later in this report.

    Sub-group 4 believes that if Virginia adopts policies whereby utilities collect money to finance a Public Benefits Fund (“PBF”), then a mechanism similar to the Electric Utility Consumption Tax (Code of Virginia 58.1-2900) should be given strong consideration by the Commission. The structure of the consumption tax assigns the collected tax revenues proportionately to the State Consumption Tax (similar to a gross receipts or sales tax), Special Regulatory Tax (to fund certain operations of the State Corporation Commission), and Local Consumption Tax (similar to a Business, Professional, and Occupational License tax).

    Sub-group 5 reached consensus that many consumer education programs currently offered in the Commonwealth provide important conservation and energy efficiency messages, but a new core program is urgently needed. The sub-group suggested that a new consumer education campaign should focus on simple, tiered behavioral changes in the home and at the office, based on no-cost, low-cost and high-cost efforts. The campaign should focus on helping homeowners identify what they can do, the efficiency savings available, and where they can begin. The goal of the energy consumer education program would be to increase energy efficiency awareness and generate behavioral change. The sub-group recommended that Virginia take the approach that highly energy-efficient states have taken – a high-level consumer education program with a clear and concise message that is complemented and/or supplemented by corollary messages offered by other independent lower-level programs.

    Sub-group 5 believed the Commonwealth of Virginia should be actively engaged in the development, management and delivery of the consumer education campaign for several reasons. Government involvement would ensure that all end users would have access to the same information and that such a program would be adequately funded. The sub-group believed that such an education campaign would be most efficiently managed either within the SCC or the Department of Mines, Minerals and Energy (“DMME”), or by an independent third-party entity with SCC or DMME oversight.

    Sub-group 5 developed and unanimously recommended potential legislative proposals that could be delivered to the Virginia General Assembly. These proposals are described later in this report.

    Staff Observations

    Energy efficiency issues discussed in this report have gone hand-in-hand with the regulation of the electric power industry for at least thirty years. The SCC conducted extensive proceedings on these issues in the early 1990’s.(*5) Although the prior move to restructure the industry to introduce market competition for electric power served to create a ten to fifteen year “timeout” on energy efficiency regulatory proceedings, consideration of such issues continues to be controversial in Virginia as well as in many other state regulatory jurisdictions. Continued growth in consumers’ electricity requirements, new concerns regarding electric power’s high capital and operating costs, heightened interest in climate change and the perceived inability of electric industry restructuring to deal adequately with these challenges have brought renewed interest to electricity conservation issues here in Virginia as well as around the country.

    The financial impacts of conservation and energy efficiency have been and continue to be especially controversial. As such, in many jurisdictions these matters have been subject to lengthy state regulatory commission adjudicatory processes including discovery, sworn testimony, evidentiary hearings, briefs and regulatory agency orders based on record evidence. Several such cases were conducted in Virginia during the early 1990’s. Staff notes here that the legislative direction to produce a report by December 15, 2007, precluded this Commission from conducting a full evidentiary proceeding regarding these complex and controversial matters. Nevertheless, the availability of the Virginia Energy Plan (“the VEP” or “the Plan”) in both draft and final versions, extensive study of related analyses for other jurisdictions, and the enthusiastic participation and efforts of many stakeholders allows Staff to provide a report on time and at considerably less expense than would have been the case if a formal proceeding had been undertaken.

    Staff notes that the sub-group reports did not focus explicitly on the analysis required to determine if potential energy efficiency will be “cost-effective,” “fair” and “efficient.” Staff believes that these are crucial and desirable program attributes and that more attention is required to develop analysis tools that correctly make these determinations.

    In direct response to the directives set forth in items (i) through (v) as set forth in the Third Enactment Clause, Staff responds as follows:

    i. Based on the findings set forth in the Virginia Energy Plan, experience of other states, reports of the work-group and the relatively low retail electric rates persisting in many parts of the Commonwealth for many years, the Staff believes that the 10 percent electricity consumption reduction goal set forth by the General Assembly is achievable by 2022.

    ii. A mix of programs that may be implemented in the Commonwealth to achieve the defined electric energy consumption reduction goal by 2022 is suggested in the VEP (*6) and merits further exploration, including tests for cost-effectiveness. Additional programs are also identified by the stakeholder work-group convened pursuant to the Commission’s proceeding related to this matter and merit further consideration.

    iii. Due to the longstanding complexity and controversial nature of the issues at hand, in this report the Staff presents issues and provides options for the development and implementation of potential energy efficiency programs including the advisability of incentives and alternative means of compliance to achieve such goals.

    iv. Again, due to the longstanding complexity and controversial nature of the issues at hand, the Staff presents issues and provides options regarding the entity or entities that could most efficiently deploy and administer various elements of the plan. Although a specific recommendation regarding whom or how to administer such a mix of programs is not evident, it appears that the SCC, the Department of Mines, Minerals, and Energy, or another third party could be established as the administrator.

    v. Finally, we note that estimates of the cost of attaining the energy consumption reduction goal depend on how the Commonwealth goes about implementing any chosen set of programs and measures. The Virginia Energy Plan estimates that achieving the goal could cost around $300 million per year between 2008 and 2022, yet the Plan also finds that conservation costs considerably less than the cost of new electric supply. (*7) If conservation is truly inexpensive, its deployment will not impose net costs on the Commonwealth. Rather, such cost effective programs will produce resource savings versus alternative means of serving the Commonwealth’s electricity needs. Moreover, if conservation costs less that new electrical supply, it can be deployed without increasing electric rates for non-participant ratepayers.

    The body of this report discusses four key interrelated areas:

    • The prices that consumers pay for electric service (electric “rate design”) greatly impact consumer behavior, including consumers’ willingness to purchase energy efficiency on their own and the result of those purchases on utility shareholders and other ratepayers. This is especially true over the long run. Because of electricity restructuring and resulting capped rates, little attention has focused on rate design issues over the last decade. The question here is to what, if any, extent should regulated retail electric prices in Virginia be used as a means to promote costeffective conservation of energy through EE/DSM?

    • Will participants pay for their own energy efficiency measures out of anticipated electric bill savings or will energy efficiency measures be funded out of a pool of money collected from the general body of ratepayers?

    • Apart from pure peak reduction programs that must be administered by the system operator, will energy efficiency programs be administered by electric utilities, government agencies, commercial organizations, other types of third parties, or some combination of the entities listed here?

    • In the Final Order in Case No. PUE-1990-0070 (dated March 27, 1992) the SCC found that it lacked authority to incorporate quantified environmental externalities into the regulatory process. Staff notes that the world has changed since 1992 and concern about the relationship between electricity production and climate change appears to be one of the primary drivers leading to the Third Enactment Clause of SB 1416 and this very report. As such, a key question is to what, if any, extent can or should the Commission incorporate quantified environmental externalities, or any other externalities, into the regulatory process?

    Answers to these basic questions are necessary before detailed plans to achieve the electrical consumption reduction goal set forth in the Third Enactment Clause can be accomplished. How one defines potential programs as “cost-effective,” “fair” and “efficient” is important and necessary.

    The Staff believes that before we can be reasonably sure that “cost-effective,” “fair,” and “efficient” programs are to be implemented in Virginia, program designers require guidance or direction as to how to interpret these phrases. This report attempts to lay out the “pros” and “cons” of alternative answers related to the four key questions listed above. In addition, our stakeholder process and this resulting report were designed from the start as a conduit to pass on stakeholder positions on these key questions to Virginia’s policymakers.

    Most of Virginia has enjoyed low electric prices for many years. Low electric prices are good for economic growth, and economic growth leads to higher levels of electricity consumption. Virginia now seeks to reduce the rate of growth in electricity, yet still keep electricity prices low. Staff believes that the price mechanism can be the most efficient and thus “cost-effective” allocator of goods and services in our economy. Unless the demand for electric service is totally insensitive to its price, increasing electricity prices will reduce demand, other factors held constant. Given historically low prices and the above stated economic law of demand (i.e. price goes up, usage goes down – holding other factors constant), the 10% goal is achievable by raising electricity prices and then allowing customers to react to those prices.

    The Staff’s single recommendation is that Virginia’s electric utilities should provide the Commission and stakeholder community with complete information(*8) regarding each utility’s expansion plan and the avoided costs that accrue if load is less than it would have been due to the implementation of a demand-side efficiency program. Such information is necessary to evaluate “cost-effectiveness” regardless of what working definition of that term is eventually adopted in the Commonwealth.
    _____________________________________________________________________________
    (*1) Chapter 933 (SB 1416) amends and reenacts 56-233.1, 56-234.2, 56-235.2, 56-235.6, 56-249.6, 56-576 through 56-581, 56-582, 56-584, 56-585, 56-587, 56-589, 56-590, and 56-594 of the Code of Virginia; amends the Code of Virginia by adding sections numbered 56-585.1, 56-585.2, and 56-585.3; and repeals 56-581.1 and 56-583 of the Code of Virginia, relating to the regulation of electric utility service.
    (*2) Third Enactment Clause of SB 1416.
    (*3) Ibid.
    (*4) The five sub-groups were formed around the following issues: (1) general/summary issues, (2) consumption reduction, (3) demand/peak reduction, (4) financial considerations, and (5) information/consumer education.
    (*5) See, generally, VA SCC Case No. PUE900070, http://www.scc.virginia.gov/division/eaf/conserve.htm.
    (*6) A list of potential program categories is found in the Virginia Energy Plan, pp. 146–147. Additionally, subgroup 2 (Consumption Reduction) provides an extensive list of potential electricity conservation programs beginning on page 7 of their report and is found in Appendix 1 of this report.
    (*7) Virginia Department of Mines, Minerals and Energy, Virginia Energy Plan, 2007, pp. 61-62, 146.
    (*8) This information may be considered commercially sensitive but its dissemination also has public policy ramifications. The Commission should evaluate any claims regarding the degree of data dissemination in the appropriate proceeding, if any.