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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Some consumer advocates, however, worry that homeowners could get the short end of the stick if regulators aren't vigilant. Washington State last year rejected a proposal by one of its biggest utilities, Puget Sound Energy, after the state attorney general's public counsel office argued that efficiency-related lost revenue would have been only $500,000 a year, while rates would have increased more than $20 million annually. "It's a false promise," says Mary Kimball, policy analyst for the public counsel. "When you really look at the details, it ends up costing ratepayers a fair amount of money for very little benefit." Washington regulators accepted a more modest incentive pilot program, allowing Puget Sound to earn extra if it meets conservation targets.

But some argue bolder measures are needed, and no one has led the charge more fiercely than Jim Rogers, chief executive of Duke Energy. Regulators are now weighing whether Duke should earn a return on each "Save-a-Watt" it gains from its 2.3 million ratepayers in North and South Carolina the same way it earns a return on kilowatts it generates through new power plant construction. Duke would charge ratepayers 90 percent of the cost of an unbuilt power plant (85 percent in South Carolina, where Duke agreed to a lower return).

Eventually, Duke intends to invest billions in smart grid and meter technology that will allow the company to power down customer appliances or air conditioning briefly at peak hours. Other programs probably will promote efficient lighting, insulation, airtight windows—things that customers aren't buying enough of even though they'd save money in the long run. Ted Schultz, vice president for energy efficiency at Duke, says customers are making rational trade-offs: "Do I put four tires on my car, or do I insulate my house? Do I save for my kid to go to college, or do I put new windows in?"

Duke wants to design programs to front the costs of big-ticket home efficiency improvements and allow customers to pay them off on their utility bill. Some consumer advocates question whether efficiency should garner so high a return, but Schultz says, "We're unlocking this resource that is sitting here that quite frankly hasn't been tapped. This is tough sledding."