Conservation and the law of the jungle

—Dr. Robert Peltier, PE Editor-in-Chief

Ever wonder why many utilities receive so little respect from the public? In America, open competition requires every business to earn customers’ trust before making a sale. Unfortunately, many utilities exploit their monopoly position to avoid the hazards of competition, including losses. It’s no wonder that public utilities, as a whole, routinely rank near the bottom of surveys that measure consumer trust in U.S. industries. Their low rank is typically a result of questionable business practices and lack of transparency. If this sounds a little harsh, read on.

The challenge of conservation

In my opinion, the most pressing challenge facing utilities these days isn’t the rising cost of nuclear reactor construction or falling pollution limits on fossil-fueled plants. Nor is it the aging workforce, high natural gas prices, or looming carbon controls. Although construction, compliance, and fuel costs are daunting, they are usually rolled into retail rates and life goes on.

The power utilities’ most pressing challenge is the public’s growing interest in energy conservation as a cultural and moral imperative.

It’s axiomatic that when customers of any company start using less of its products, the company must either cut prices to make the products more appealing, develop better products with more features, or both. Firms that are slow to respond to nimbler competitors die a quick death at those competitors’ hands. The law of the jungle means you are either well-fed or on the menu.

Many utility executives believe this law doesn’t apply to them. Some have responded to their customers’ efforts to use less energy by requesting rate hikes to replace revenues lost to conservation—in effect, treating customers as competitors. Such actions only reinforce the public’s perception of utilities as greedy and hypocritical. But if you sell only one, fungible product—electricity—you can’t recoup lost revenues by cutting its price and increasing sales volume, or by developing better electrons. The solution, in utility executives’ minds, is to charge customers for the privilege of using less electricity. That “logic” is beyond comprehension.

Money for nothing

Here’s a good example of twisted thinking, utility style. Duke Energy has asked regulators in North Carolina, South Carolina, and Indiana to compensate the company for the effects of its “Save-A-Watt” energy conservation program. Similar rate requests are expected in Ohio and Kentucky later this year. The program itself is laudable; it’s the funding approach that needs rethinking.

The Duke Energy Carolinas filing describes Save-A-Watt as a “new regulatory approach to energy efficiency programs…that fundamentally changes…the way energy efficiency is perceived.” The company suggests that energy efficiency is a “fifth fuel” that should be considered part of its portfolio of resources for sale at a price “for the benefit of…customers.” The application argues that Duke should be “compensated similarly for meeting customer demand, whether through saving a watt or producing a watt. The company [should] be compensated for the results it produces.”

There’s another axiom in the business world: The pigs get fat while the hogs get slaughtered. Duke would like rate-increase compensation of truly porcine proportion: 90% of the predicted profits from building generation capacity equivalent to the predicted reduction in demand that conservation would cause. Bear in mind that both predictions are Duke’s. Utilities have been poor predictors of demand, and there’s no reason to believe Duke is better at predicting demand reduction.

I say it’s time for Duke to widen its narrow perspective and use universally accepted business practices to fund its conservation program. The rate cases ask for payment for not pouring concrete. Although the requested surcharges are only tenths of a cent per kilowatt-hour, they’ll be on enough volume to generate for Duke Energy Carolinas an estimated $300 million over the first four years of the conservation program. No customer will avoid the bump; even ratepayers with a five-star, totally green home won’t be able to opt out of Save-A-Watt.

No risk, no reward

By law, Duke could roll out Save-A-Watt today as an unregulated business venture without waiting for regulatory approval. Few utilities would consider making such a bold move because they are risk-averse and lack the experience to avoid being eaten alive in the unregulated world, where ratepayers can’t backstop poor business decisions.

Duke is entitled to ask for a fair share of the savings that conservation projects it invests in would produce. In this respect, the company is making an investment similar to that made by a property owner who expects lower electric bills to amortize the cost of buying and installing rooftop solar panels. But in both cases, the investment decision should stand solo, and the rate of return should be based on realistic projections of future savings. That’s how the real world works. Regulators should hold Duke’s conservation projects to the same investment standard that applies to any business: Bad investments reduce shareholder value; good ones produce shareholder profits.

As electric rates have risen nationwide, more private companies have found that investing in energy conservation pays off. It’s time for self-styled “forward-thinking” utilities to walk the talk. They should show some leadership by modernizing their approach to the “business threat” of conservation, rather than insisting on use of the old funding paradigm that does little to protect ratepayers. When a hammer is the only tool you have, every problem looks like a nail.