Conservation Can Mean Profits for Utilities

States are changing the rules of the game so that it pays power companies not to expand.

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High-efficiency furnace sales around Portland, Ore., are hotter than anywhere in the nation. And the state credits the region's gas utility, NW Natural, with persuading customers to pay the $2,700 premium (softened by about $600 in rebates and tax incentives) for high-end units instead of letting inefficiency send 20 percent of their heating dollars up the flue.

A utility urging customers to use less energy? Seems impossible, since more BTUs and more kilowatts always meant higher profits in the energy business. But states are changing the way that utilities get paid—decoupling profits from energy consumption—to promote efficiency and curb the need for new power plants. Both Hillary Clinton's and Barack Obama's campaigns tout the concept. Last year, Connecticut, Idaho, New York, and Vermont chose decoupling, and a dozen other states now are considering jumping on the bandwagon. "It's an idea whose time has come," says Roger Cooper of the American Gas Association, which represents gas utilities. Some states even want to supercharge decoupling, offering rewards to, in the words of Ralph Cavanagh, senior attorney for the Natural Resources Defense Council, "make utilities motivated partners in energy efficiency."

Power to the people. Historically, they've been quite the opposite. "Our entire utility system was constructed around the objective to expand the system to bring power to more people," says Marty Kushler, director of utility programs for the American Council for an Energy-Efficient Economy. "The whole structure was set up to encourage more use of electricity and, therefore, more power plants. It was a self-perpetuating growth machine."

When electric utilities build new power plants, they can add the capital investment to the rates they charge customers. Natural gas utilities similarly are rewarded for selling more. Shareholders applaud increased energy use because it increases returns. But NW Natural Chief Executive Mark Dodson said his utility sought a different way after the western energy crisis of 2000-01, when calls for conservation increased. "I'm thinking, 'Does this make any sense going forward in the 21st century, to have shareholders on opposite sides from the customers?' " says Dodson.

State regulators typically determine a fair return for utilities based on their plants, pipelines, and other capital investments. But with decoupling, states reassess each year how much money companies actually have recovered from ratepayers. If energy use drops so that the utility is not recovering its fixed costs, rates are adjusted upward. Likewise, if energy use has increased enough that the utility is bringing in more money than necessary to recover fixed costs, the rates are adjusted downward. In states that have tried it, yearly rate fluctuations due to decoupling are minimal, about 1 or 2 percent, or $1 per month on the average utility bill, the experts say. But true success in decoupling means that over time the price paid per therm or kilowatt goes up, but customers' bills go down because they use less.

Golden. Consider California, the state that pioneered decoupling in the 1970s. The state has had a good-news energy story that was overshadowed, for a time, by the 2000-01 crisis because of its failed deregulation experiment that unleashed market manipulators. One trend held steady before and after Enron: For 30 years, per capita electricity use in the Golden State has stayed essentially flat at about 7,000 kilowatt-hours per year, while U.S. consumption per person climbed 50 percent and now stands at 12,300 kilowatt-hours annually. California's average electricity rates are eighth highest in the nation, at about 13 cents per kilowatt-hour, compared with the national average of about 9 cents. But Californians' electric bills are among the lowest. In fact, if Californians used as much electricity as Texans, they'd be paying almost $25 billion more a year for power. A mild climate and a service-based economy certainly are factors. But California says it has saved enough energy to supplant the need for 24 large power plants.