RATEPAYER-FUNDED ENERGY EFFICIENCY PROGRAMS IN A RESTRUCTURED ELECTRICITY INDUSTRY: Issues and Options for Regulators and Legislators

By: Joseph Eto, Charles Goldman, and Steven Nadel

May, 1998

Abstract

Electric industry restructuring requires state regulators and legislators to re-examine the purposes served by and the continuing need for ratepayer-funded efficiency programs, as well as the mechanisms to collect funds for these programs and the institutions appropriate to administer them. This paper offers background to these issues and a series of recommendations are summarized in Table A-1.

Table A-1. Summary of Ratepayer-Funded Energy-Efficiency Program Recommendations

Question for Program Design Recommendations

Rationale for Ratepayer Funding Capture cost-effective energy-efficiency opportunities that will be missed by the competitive market

Facilitate transition to more competitive markets

Ensure benefits of restructuring are shared broadly among all customers

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 private-sector activities in the absences of ratepayer funding; at a minimum, continue funding at historic levels

Duration

Decouple sunset date from recovery of competition transition charges; establish a five-year review period over which to assess accomplishments and determine continuing need for programs.

Rate design

Collect funds through a nonbypassable, volumetric charge.

Objectives of Energy-Efficiency Policy Ensure that benefits to society exceed cost

Target activities to areas not adequately addressed by private sector

Design programs to effect lasting beneficial 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 need 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.

**Table A-1. Summary of Ratepayer-Funded Energy-Efficiency Program Recommendations**
Question for Program Design	Recommendations
Rationale for Ratepayer Funding	Capture cost-effective energy-efficiency opportunities that will be missed by the competitive market
	Facilitate transition to more competitive markets
	Ensure benefits of restructuring are shared broadly among all customers
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 private-sector activities in the absences of ratepayer funding; at a minimum, continue funding at historic levels
Duration	Decouple sunset date from recovery of competition transition charges; establish a five-year review period over which to assess accomplishments and determine continuing need for programs.
Rate design	Collect funds through a nonbypassable, volumetric charge.
Objectives of Energy-Efficiency Policy	Ensure that benefits to society exceed cost
	Target activities to areas not adequately addressed by private sector
	Design programs to effect lasting beneficial 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 need 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.

65 pps., 1998, $15.00, U982