Disintegrated Resource Planning in California: Impact on Electric Rates

1. Integrated Resource Planning? California StateSenate Energy Committee March 13, 2007 prepared byWilliam B. Marcus Principal Economist JBS Energy, Inc. 311 D St., West Sacramento, CA 95605 Consultant for The Utility Reform Network

2. IRP Can BeControversial

3. Some Reasons why California Electric Rates Are So High • We have “disintegrated” resource planning that doesn’t weigh all options equally. • We unthinkingly buy too much insurance without thinking of the cost versus the value. • Utility returns are too high – not just making ratepayers pay too much, but skewing utility management’s investment and planning decisions. • Utilities are running poorly designed residential conservation programs, and no one is doing anything about it.

4. Disintegrated Resource Planning • Occurs when all options are not evaluated using similar metrics and methods • Example: Over 20 different ways to meet peak power needs (handout page) • We don’t use the same economic standards to judge all projects. • Tinkering with lower interest/discount rates to promote morer capital investment in transmission at ratepayer expense. (rejected by CPUC, after CEC proposed it) • The cost of avoiding new powerplants is higher per kW for demand response that only operates a few hours per year than for energy efficiency programs.

5. Disintegrated Resource Planning • When there are strong, organized constituencies for some options and not others, options with fewer backers lose. • Why supply options tend to win out over demand options generally. • Why California spends more money on advanced meters to provide “price signals” to force customers to conserve energy 12 days per year and less on air-conditioner efficiency investments to save energy on those same 12 days and 100 more days per year. • Why almost no one ever looks at “the competition” to utility electric service – Combined Heat and Power and gas A/C and pumping

6. Disintegrated Resource Planning • When the process is fragmented, head-to-head comparison of resources is prevented. • This is how California outsmarts itself. • Both the PUC and the CEC have individual proceedings to promote each type of resource that never compare all the options. • Proceedings on individual options are captured by their proponents. • Only utilities with ratepayer funding can afford to be everywhere at the same time. • Divisions within regulatory bodies (economists vs. pragmatists)

7. Disintegrated Resource Planning The End Result: • California regulators have rarely met a ratepayer who couldn’t afford to pay more for their next pet project. • Other good options are ignored or given lip service.

8. Can We Have Too Much Insurance? • Even asking the Question is Almost Heresy in Post-Crisis California • Scarlett O’Hara Syndrome • “I’ll never be hungry again.” • But Insurance Costs Money and Raises Rates

9. Can We Have too Much Insurance? • A few of our many insurance programs against a 2000/01 repeat • Resource Adequacy and Advanced Purchases • More Transmission to Hedge Against Price Spikes • Expensive Demand Response Programs • Even More Expensive Advanced Meters • Photovoltaics to Meet Summer Peak Loads

10. But Regulators and Utilities Want Even More Insurance. • PG&E’s Plan to Use 1 Year in 10 Demand Forecast and Increase Reserve Margin • Proponents of Even More Transmission • CPUC Decision to Pay Hundreds of Millions of Extra Dollars for Speedy Expansion of Peak Options after 2006 Heat Wave • Peaking Plants • Demand Response

11. Skewed Incentives • Utilities Are Making Too Much Money (10.7% to 11.6% Return on Equity) • Promotes Growth in Rate Base • Utilities Then Demand Even More Money. • Huge “Incentives” are “Needed” to “Do the Right Thing” in order to Offset Supply-Side Incentives Created by High Equity Returns

12. Utilities’ Corporate Incentives for Growth • Earnings and earnings per share dependent on growing rate base and profitable affiliate activities. • Generation (utility or affiliate) • Meeting Peak Load • RPS, etc. • T&D • Meeting Peak Load • Integrating new generation • Serving new customers • Replacement of aging equipment • Advanced metering (use capital to reduce labor costs) • If return on equity exceeds cost of capital, infrastructure growth becomes even more attractive.

13. High Return on Equity for Utility Supply Projects Feeds Incentives to Build • Disconnect between utility ROE (10.7%-11.6%) and other financial analysis • California utility pension actuaries (7-9% stock market returns) • California utility nuclear decommissioning funds (8.5% stock market returns) • Investment advisors (6-8% returns) • Risk Premium has declined (corporate CFOs expect stocks to earn only about 3.5% more than bonds) • PUC ignores all of this information • Single Digit Returns are Not Radical • Arkansas, New Hampshire, New York, and Alberta

14. How Corporate Incentives for Growth Affect Resource Plans • Building New Powerplants vs. Signing Contracts for Power. • Spending billions on rate-based Advanced Meters, using financial analysis that would get laughed out of a reputable lender’s office. • Energy Efficiency gets short shrift when rate base is at stake.

15. What Utilities Should Be Doing about Energy Efficiency • Should be focusing on • Peak Loads (A/C efficiency is a critical way to get through future heat storms) • Lost Opportunities (programs that save energy starting now that otherwise would not be saved for the life of the new building or appliance) • Comprehensive programs (do everything for a customer at once rather than skipping over cost-effective measures)

16. What Utilities Are Doing in Residential Energy Efficiency • Heavy emphasis on compact fluorescent light bulbs. • Less emphasis on air conditioners and other appliances.

17. What’s Wrong with Compact Fluorescents as a Utility Program Focus? • Bloated administrative costs turn a bulb costing a dollar into $20 of ratepayer spending. • Virtually no peak savings (so the utilities can still build those powerplants and earn high returns) • Free riders; many people would buy them anyway • Short lived, not persistent • Not a “lost opportunity” • Good news and bad news • We save lots of kWh. • But we save the same kWh over and over again.

18. But Aren’t California Efficiency Programs Working to Save Lots of Energy? • Yes and no. • Building and appliance standards are working, though they can work better. • Nevertheless, electric use per residential customer has been rising for all of the utilities for over 10 years, except for the period during and shortly after the energy crisis. • Per capita residential electric use is constant or falling only because the number of people per household is going up.

19. How the PUC Should Fix Thingsin the Short Term • Goals shouldn’t be “how many first-year kWh can you save this year”, but “how many life-cycle kWh can you save this year.” • Lost opportunities left on the table by utility programs should be counted as a deduction against cost-effectiveness of utility programs when paying incentives to utilities. • Stop wasting money on CFLs and other short-lived measures. • Get real measurement and evaluation in place. • Don’t pay out incentives based on what utilities think they saved in advance rather than what measurement after the fact shows that they actually saved.

20. Even More Fundamental Questions that the PUC Doesn’t Ask • Why do we need to pay utilities more for energy efficiency incentives rather than reducing the return on supply projects to more reasonable levels? • If utilities are doing energy efficiency “wrong” today and need huge incentives to get Energy Efficiency “right,” why are we still letting utilities manage EE? • A competitive market would give the job to a different manager who doesn’t have a conflict of interest trying to make money building powerplants and therefore doesn’t need huge incentives. • It isn’t a radical idea. • Oregon, Wisconsin and Vermont have independent managers of energy efficiency programs.