The California Public Utilities Commission, PUC, is currently considering granting the state’s big utilities $77.3 million in additional rewards under a program for cutting the amount of energy their customers use, despite indications that the actual energy saved was far less than originally hoped when the utility companies launched the energy saving programs. Essentially, the PUC is considering paying incentives for programs that did not have the desired result, and the money they are using is coming out of the consumer’s pockets. However, it is likely that the incentives will be paid and is another example of bureaucratic waste we as a country can no longer afford.
The rewards were conceived to give utilities a financial incentive to sell less electricity and natural gas. Command and control environmentalists hailed the program as a major innovation to fight global warming when it was launched and certainly the intention was good. The PUC set three year energy-efficiency goals for the utilities. If the companies met those goals, they would get rewards, paid by their customers in the form of increased rates. If they missed by a wide margin, they faced fines. How to actually measure the savings was initially not known so a proxy for that goal was established and that is at the heart of the current dispute at the PUC, but not the real problem. The a newly develop methodology used to estimate savings shows vastly different results from the original methodology. The PUC believes it has developed a better methodology to measure results than the original standard and wants to change the method of measurement.
Utilities are a highly regulated industry. The profits are based largely on the volume of energy sold less cost of providing service, including the value of all the pipes, wires, power plants and electrical substations each utility owns and is allowed to enter into their cost basis. All costs whether productive or not can essentially be recovered in rate increases. The current program was launched ahead of an acceptable methodology to evaluate the results. The current efficiency rewards were designed to make energy efficiency part of the utilities’ everyday business, but utilities are trained to analyze any program to maximize cash flow to the utilities. So, the utilities did what they were supposed to do, embrace the program to maximize their return.
While the PUC spent $97 million developing a way to evaluate and verify savings from the efficiency program, they started issuing rewards to the utilities based on actions taken like giving out compact fluorescent light bulbs and pay incentive for energy star appliances. Now the PUC wants to use its new evaluation standards to determine how much energy the utilities really saved (or as real as the current model can predict). The utilities developed programs to profit from the program using the original behavior standards and now the PUC wants to change the rules and the difference is $371 million less in reward payments to the utilities. Now the PUC will have to determine if they will pay the incentives and how much of this failure will be paid by the consumers and how much will be paid by the stockholders.
The utilities spent $2.1 billion on the efficiency efforts from 2006 through 2008 subsidizing compact fluorescent light bulbs and energy efficient appliances for their customers, running efficiency clinics for homeowners and working with businesses to trim their energy expenses. These were the behaviors that the regulators thought would produce results and so the program was initially set up to reward the utilities to run them. Now the PUC has determined that these programs have not been as effective as hoped and they need to determine if they will make additional payments under the old benchmarks or change measurement tools now. It appears that $2.1 billion of the utilities money (which no doubt was recovered from rate payers) was spent, $97 million of the rate payer's money was spent to develop a method to determine that the original goals presented to the utilities were wrong, and then $400 million in incentive will probably be paid when all is said and done so that a total of $2.5 billion will have been spent to achieve only a trivial reduction in energy use. Our regulators in action.
As in all things regulatory and government lawyers will be paid large sums of money to determine which individual investor or consumer pocket this money (and their handsome legal fees) will come out of. The real questions are how effective are these kind of programs in promoting desired behaviors, and should the government be engaged in these types of programs. This is just one government program and example of what our legislators, politicians and regulators have created.