20041223Revised Workshop 4 Summary.pdf

Assessing Financial Disincentives and Resolution Opportunities
(Corrected 041213)/fh' l) -j' Workshop
ASSESSING FINANCIAL DISINCENTIVES AND
RESOLUTION OPPORTUNITIES, WORKSHOP
Idaho Public Utilities Commission
DECEMBER 1 , 2004, 9:30 A.M. TO 3:00 P.M. Office of the Secretary
CONFERENCE ROOM 9 EAST, IDAHO POWER CORPORATE HEADQUARTERS, BOISE, ID R E eEl V E D
Facilitation Susan Hayman, North Country Resources , Inc.
Documentation Natalie Chavez, Chavez Writing & Editing, Inc.
DEC 2 2 2004
Boise, Idaho
WORKSHOP OBJECTIVES
1) Confirm criteria to evaluate the applicability and desirability of potential mechanisms to remove
disincentives/provide incentives for utility investment in DSM programs
2) Review two potential mechanisms:
a) Refined true-up mechanism
b) Performance-based ratemaking mechanism
3) Confirm the type of report that will be submitted to the IPUC on December 15 and assignments for
preparation and review
WORKSHOP DECISIONS AND OUTCOMES
Participants agreed to a set of evaluation criteria for potential disincentive/incentive mechanisms. The
purpose of the evaluation would be to compare and contrast different mechanisms to determine their
applicability and desirability.
Participants also decided to recommend a pilot of the performance-based mechanism proposed by IPUC
staff for one program until the next rate case. They also want to simulate the true-up mechanism during
the same period, based on real numbers, to consider it further and refine the mechanism. The next
meeting is scheduled for December 13, 9:00 am to 12:00 pm at IPC to discuss the details of these
recommendations. The final report and an application for the pilot program will be submitted to the IPUG
some time in January (dates to be determined December 13).
ACTION ITEMS
What?
1) Draft and distribute status report for review and comment
Who?When?
2) Prepare the outline and anything else necessary for
developing the proposal for a pilot performance-based
incentive mechanism; bring to the next meeting
3) Design the simulation for the true-up mechanism; bring to
the next meeting
Susan Hayman and
Scott Woodbury
IPC
(Darlene Nemnich)
December 3
December 13
IPC
(Mike Youngblood)
December 13
WORKSHOP INTRODUCTION
Susan Hayman, North Country Resources, welcomed participants (Appendix 1), reviewed workshop
objectives (above), and then reviewed the agenda (Appendix 2). She also reviewed posters with the
principles of meeting conduct, purpose and products of the workshop series, and important definitions.
Summary of the December 2004, Workshop
MECHANISM EVALUATION CRITERIA
Hayman distributed a handout with potential mechanism evaluation criteria (Appendix 3). She compiled
these criteria after telephone conversations with many of the participants prior to the November 8
workshop. Hayman said that the list served as a starting point for developing a final list of criteria against
which to evaluate potential disincentive and incentive mechanisms. Participants first clarified their
understanding of the criteria, and then revised criteria until they were acceptable to all. Appendix 4
includes flipchart notes taken during the discussion. However, most changes were captured on the wall
poster of the preliminary criteria during group discussion. The final revised list is included in Appendix 5.
POTENTIAL MECHANISMS
Refined True-Up Mechanism
Ralph Cavanagh, Natural Resources Defense Council, spoke about the requested revision to the
strawman proposal for an Idaho Power true-up mechanism (introduced at Workshop #2 on
September 27 2004). A handout summarized points of the original proposal as well as the proposed
revisions (Appendix 6). These proposed revisions included true-up based on actual customer counts for
residential and commercial customers (rather than on forecasted sales for all customer classes as
originally proposed).
Cavanagh , in cooperation with Idaho Power staff, looked into how often a true-up tied to actual customer
counts would have increased or reduced rates for the residential and commercial classes since 1990. For
any year during which such a mechanism would have been in effect, rates would have gone down if the
class s retail sales had grown more rapidly than the class s customer count, and vice versa. For the
commercial sector, electricity use grew more rapidly than the customer count in 10 of the 14 years since
1990. For the residential sector, electricity use grew more rapidly than customer count in 2 of the 14
years, while rates of growth were essentially identical in 3 years (including 2003). These findings confirm
the potential for rate decreases as well as increases for both classes under a true-up mechanism
although based on historical data, the likelihood of a rate decrease is substantially greater for the
commercial sector than for the residential sector. Cavanagh emphasized that annual class-specific rate
increases necessary to ensure recovery of the authorized fixed-cost revenue requirement would never
have exceeded 2% under the true-up mechanism. In most years, for both classes, rates would have
shifted up or down by 1 % or less.
During his presentation, Cavanagh shared the following:
. A bar chart showed the net benefit of expanded energy-efficiency efforts for the Idaho system. The
high case indicated the greatest net benefit to the system at just over a $100 million (Appendix 7).
Given the net benefits, financial disincentives need to be removed so that Idaho Power is encouraged
to promote energy efficiency through conservation programs.
This true-up mechanism provides symmetry in that it addresses both lost revenues and found
revenues. Therefore, it discourages "perverse incentives" and DSM programs that "look good on
paper but aren t effective in practice.
The revised strawman proposal avoids cross subsidies and is fundamentally fair to the customers.
. A second bar chart showed the annual household energy use (in kWh) for entertainment electronics
that will likely be typical of households in about 10 years (Appendix7). It's expected that combined
energy use for plasma TVs, DVDNCRs , and set top box/satellite receivers will be about 1 200kWh
annually, up from about 500 kWh now with analog TVs. Workshop participants were cautioned
through this example that technological advances and changes in customer habits do not necessarily
lead to reduced per-customer electricity usage. This underscores the importance of well-designed
energy efficiency incentives, as well as and the merits of the revised NRDC true-up proposal (which
ties any increases in fixed cost recovery for the residential and commercial classes to increases in the
number of residential and commercial customers).
. A performance-based mechanism could be used in conjunction with the true-up mechanism.
Summary of the December 2004, Workshop
Follow-up discussion among participants focused on how big the impacts of implementing a true-up
mechanism would be to residential and commercial customers and how rate adjustments would be
calculated. Flipchart notes made during this portion of the workshop are included in Appendix 8.
Performance-Based Ratemaking Mechanism
Lynn Anderson, IPUC, distributed a two-page strawman proposal for a performance-based mechanism
(Appendix 9). Before talking about the proposal summarized on the second page, he asked that
participants review the hypotheses included on the first page. Until he compiled this list, he had been
unable to draft the proposed mechanism. The following issues were raised during discussion of
hypotheses:
Cavanagh questioned the exclusion of increased gas market share from fixed-cost losses in
hypothesis #7. Idaho Power may be motivated to retain electric market share for water heaters if the
company is unable to recover the fixed-cost revenue losses resulting from customers' conversion to
more efficient gas water heaters. This approach seems to penalize the company for these
conversions and encourage inefficiency. IPUC staff pointed out that Idaho Power could implement a
DSM program that reimburses customers for converting to energy-efficient gas water heaters.
Some workshop participants see some inconsistency in the IPUC's view on factors outside Idaho
Power s control. For example, the strawman proposal disallows Idaho Power from collecting fixed-
cost revenue losses unless incurred through DSM efforts. Yet reimbursement of fuel costs through
the company s Power Cost Adjustment (PCA) mechanism does allow for factors outside the
company s control.
The means for verifying savings resulting from DSM programs are likely to be "complex, tedious , and
expensive.
Following discussion of the hypotheses , Anderson explained the actual proposal, found on the second
page of the handout. The IPUC staff's strawman proposal would implement a mechanism to remove
financial disincentives by allowing specific fixed-cost revenue recovery for all verified DSM savings with a
bonus financial incentive for exceeding cost-effective DSM targets. He pointed out that the financial
incentives component of the proposal could also be implemented as a stand-alone approach or with a
true-up mechanism. This mechanism , as proposed, would be implemented as a trial restricted to the
Residential New Construction program. Residential energy rates have a relatively high fixed-cost recovery
component, which means that Idaho Power s financial disincentive for DSM in this class may be higher
than for other customer classes. It's also a relatively small program , so effects of any mistakes made in
the trial would be minimized. The following points were made during discussion of the performance-based
proposal:
According to Darlene Nemnich, IPC, Idaho Power rewards customers $750 when they exceed
building code on energy efficiency by 300/0 on new construction. Ideally, builders would want to make
homes as energy efficient as possible , but they are unlikely to want to change codes. Therefore, code
enforcement and training of code officials is important, and it is reasonable to credit utilities with work
they do with code enforcement beyond typical DSM programs.
Because of the trial nature of the mechanism , no penalties are included. Quality control is relatively
straightforward, and the targeted customer group is narrow, but the potential for perverse incentives
cannot be dismissed.
Flipchart notes pertaining to the performance-based mechanism are included in Appendix 10.
Addiilonal Suggesilon
David Hawk, J.R. Simplot Co., suggested that the group conduct an 18-month simulation of the two
proposed mechanisms based on real numbers. He believed that all parties and participants had invested
too much time discussing concerns with financial disincentives and potential corrective mechanisms for
nothing to happen. Because participants may not be comfortable implementing one or both of the
proposed mechanisms right now, an 18-mbnth simulation would allow proposals to be studied further and
problems worked out before the group forwarded a firm recommendation to the IPUC. The flipchart
regarding Hawk's suggestion as well as other modeling options is included in Appendix 11.
Summary of the December 2004, Workshop
NEXT STEPS
Mechanism Analysis/Evaluation
Ric Gale, IPC, requested that the interest groups (IPUC, Idaho Power, Northwest Energy Coalition, and
Industrial Customers) caucus before presenting their views on each of the three proposals: true-up
mechanism, performance-based pilot, and 18-month simulation of the two proposals. Hayman allotted 15
minutes for caucusing. Afterwards, she asked that group spokesmen share their groups' views on the
three proposals and next steps. Industrial Customers felt that David Hawk's previous suggestion for a
simulation adequately represented their view. Flipchart notes from the three interest reports are included
in Appendix 12.
Idaho Power Company
Gale reported the following Idaho Power perspectives regarding the proposals:
Idaho Power is concerned about disallowance of program costs. The company endeavors to manage
program costs as effectively as possible. But disallowance of program costs and prudence reviews by
the IPUC significantly deters DSM investment.
In the intermediate or long term, the company may want to implement a true-up mechanism. In the
next couple of years, Idaho Power wants to undertake the activities in the IRP but is probably unable
to ramp up DSM any more than that. They are, however, amenable to simulating the true-up
mechanism until the next rate case to at least identify unintended consequences. Gale isn t sure how
much influence results of the simulation will have, but it could eliminate a degree of the uncertainties.
The company is intrigued by IPUC staff's incentive mechanism and supports piloting it with one
program until the next rate case and then evaluating its applicability to others.
Northwest Energy Coalition
Ralph Cavanagh shared the following viewpoints for Northwest Energy Coalition representatives:
They are not convinced that a simulation will change people s minds. Therefore, the coalition isn
interested in pursuing a simulation unless the group is truly committed to moving forward, the
simulation/test is credible, and the exercise establishes an architecture that can be used in the next
rate case.
The simulation mayor may not be effective in evaluating how Idaho Power Company s appetite for
conservation programs would change if a true-up were implemented. Rather, the simulation will give
an indication of the rate impact of the true-up under hypothetical scenarios of conservation activity.
Their commitment to the true-up mechanism hasn t diminished. Although they can forward the
proposal directly to the IPUC, they prefer to continue working with this group. Gale commented that
the simulation allows the group to refine the mechanism before the next rate case so that they can
give the IPUC something feasible.
Idaho Public Utilities Commission
Randy Lobb reported the following points of view for IPUC representatives:
They understand Idaho Power s concern about cost recovery and prudence reviews. But the IPUC
will continue these reviews, and the company will likely continue to do a good job. They believe that
because of the Energy Efficiency Advisory Group (EEAG), the company is actually at less risk now
regarding disallowances than it has been in the past.
The IPUC is interested in piloting the performance-based mechanism on a single program. This pilot
allows everyone to see whether the complexity can be worked out and the mechanism is feasible.
The IPUC is also amenable to the 18-month simulation of the true-up mechanism if the other groups
support it. The main purpose of the mechanism is to see how it changes company activities. A
simulation may have some value. If nothing else, it keeps a mechanism that the IPUC staff is unlikely
to suggest adopting at the moment on the table for future consideration. Working through it now may
Summary of the December 2004, Workshop
provide the company information it needs when it starts making decisions for the next two-year IRP
cycle.
Commission Reports and Timelines
Hayman directed participants to discuss the two reports-status and final-to the IPUC and timelines for
continued activities. The following decisions were made:
Scott Woodbury, IPUC, and Hayman will collaborate on the status report and send it out Friday,
December 3, for review.
This group will meet Monday, December 13, to discuss details of the pilot performance-based
mechanism and simulation of the true-up mechanism.
Idaho Power staff will prepare an outline for the pilot program and a design for the simulation for
discussion and finalization at the December 13 meeting. The company would like to see the pilot start
January 1 (or as soon as possible thereafter) when the DSM program begins. The pilot application
does not have to be submitted with the final report, although the report will be supportive of the filing.
The group agreed that the final report may precede the application filing unless they were submitted
concurrently. The group decided to talk specifically about the timing of the filing and the report at the
December 13 meeting.
Bill Eddie , Advocates for the West, will coordinate the final report, which will likely be a
recommendation to implement the pilot and simulation until the next rate case. The draft outline for
the report was developed at the November 8 meeting.
WRAP-UP AND WORKSHOP EVALUATION
Hayman reviewed action items to be completed before the next workshop (Appendix 13). This workshop
is scheduled for December 13, 2004 , from 9:00 am to 12:00 pm. Mike Youngblood agreed to check on
the availability of Conference Room 9 East for this workshop. During the workshop, participants will
discuss details of the pilot performance-based mechanism and simulation of the true-up mechanism.
Hayman also requested that participants evaluate the workshop. She recorded positive items and
possible changes on flipcharts (Appendix 14). Though feelings were mixed on preferable room size and
temperature, for the most part, participants are pleased with the honest and frank discussion, facilitation
and documentation , and refreshments.
Summary of the December 2004, Workshop
ApPENDIX 1-PARTICIPANTS
(Shading indicates work group participants unable to participate in person or by phone.
Name and Affiliation Name and Affiliation
Terri Carlock, IPUC
Ralph Cavanagh, Natural Resources Defense Council
Peter Richardson, Industrial Customers of Idaho
Bill Eddie, Advocates for the West
Ric Gale, Idaho Power
David Hawk, J.R. Simplot Co.
Nancy Hirsh, NW Energy Coalition
Bart Kline , Idaho Power
Don Reading, Ben Johnson Associates
Greg Said, IPC
Randy Lobb, IPUC
Tim Tatum, Idaho Power
Mike Youngblood, Idaho Power
Scott Woodbury, IPUC
Summary of the December 2004, Workshop
ApPENDIX 2-AGENDA
ASSESSING FINANCIAL DISINCENTIVES AND
RESOLUTION OPPORTUNITIES
WORKSHOP #4
December 1 , 2004
9:30am-3:00pm
Conference Room 9 East
Idaho Power Corporate Headquarters
Boise, Idaho
Objectives:
1) Confirm criteria to evaluate the applicability and desirability of potential mechanisms to remove
disincentives/provide incentives for utility investment in DSM programs
2) Review two potential rnechanisms:
a. Refined true-up mechanism
b. Performance-based ratemaking mechanism
3) Confirm the type of report that will be submitted to the IPUC on December 15, and assignments
for preparation and review
Final Agenda
(breaks will be taken when most convenient for/he group)
Time Topic Process
9:15am CoffeelTea available in meeting room
9:30am Welcome/Introductions/Meeting Overview - Susan Hayman Information
9:45am Mechanism Evaluation Criteria - Susan Hayman Exercise /
Discussion
10:30am Potential Mechanism Presentation /
Refined true-up mechanism - Ralph Cavanagh Discussion
11 :30pm Lunch (on your own)
12:30pm Potential Mechanism Presentation
Performance-based ratemaking mechanism - Lynn Discussion
Anderson
1 :30pm Next Steps - Group Discussion
Mechanism analysis/evaluation to be completed
(using criteria, other?)
Nature of the December 15 IPUC report
Timelines
2:45pm Wrap~up and Evaluation - Susan Hayman Discussion
3:00pm Adjourn
Summary of the December 2004, Workshop
ApPENDIX 3-POTENTIAL MECHANISM EVALUATION CRITERIA
Potential Mechanism Evaluation Criteria
1) Balanced (fair) allacation of program costs across
shareholders and ratepayers
2) Cross-subsidization of program costs acrass ratepayer
groups are minimized
3) Removes financial disincentives to' the max
Pasitive financial benefit (at least less negative
effect ),measured over time
5) Ratepayers are better off than they would be without
the 111echanism
Promotes rate stability
Simp lem ec hani sm
Costs easily tractable
Mechanism adjustments are predictable and easily
understoad
10) Monitors short and long term effects to customers
and company
11) Incentives to manipulate the mechanism are not
present
12) Close link between mechanism and desiredDSM
outcomes
13) Provides adequate incentive for the acquisition of all
cost-effective DSM
Summary of the December 2004, Workshop
ApPENDIX 4-FuPCHARTS REGARDING EVALUATION CRITERIA
Criteria
#4 Needs clarification
. "
Benefit to all stakeholders from where they
would have been otherwise
Drop "less negative -should be net benefit
#10 Process needs to monitor mechanism
Ratepayers" are "customers" (change
throughout)
Stakeholder =
company and customers
includes everybody
#8 Tractable
Want mechanism that is affordable
Costs known and manageable , not subject to
unexpected fluctuations
not talking about program cost recovery
#5 Difficult to know benefits to all stakeholders
until after the fact
#5 is the bottom line
#11 Avoid "perverse" incentives
Summary of the December 2004, Workshop
ApPENDIX 5-REVISED VERSION OF POTENTIAL MECHANISM EVALUATION CRITERIA
Potential Mechanism Evaluation Criteria
Stakeholders are better off than they would be
without the mechanism
Minimize cross su.bsidies across cu.stom.er classes
Removes financial disincentives
Optim.izes the acquisition of all cost-effective DS.
Promotes rate stability
Simple mechanism
Adm.inistrative costs and impacts of the mechanism
are known, manageable, and :not subject to
unexpected fluctuation
8) Monitors short and long term effects to custom.ers
and company
9) A voids perverse incentives
10) Close link between mechanislTI and desiredDSM
Summary of the December 2004, Workshop
ApPENDIX 6-REVISIONS TO THE STRAWMAN PROPOSAL FOR AN IDAHO POWER
TRUE-UP MECHANISM
PRO:POSED:REVISIONS TO STRA WMANPROPOSALFOR AN IDAHO
POW.ER TRUE-UP MECHANISM
Submitted by Ralph Cavanagh
For discussion at 12/1/04 workshop
I. ORIGINAL PROPOSAL, DISCUSSED AT 9/22/02 WORKSHOP
1. Starting point: fixed-cost revenue requirement and retail rates approved by Idaho
PUC in latest Idaho Power rate case.
2. If, after initial year, changes in retail electricity use lead to under- or over-
recovery of fixed cost revenue requirement, a rate troe-up would occur in the
following year on the same schedule as the Company s current Power Cost
Adjustment.
"'I
;) .
Until reestablished in the next Idaho Power rate case, the currently approved fixed
cost revenue requirement would be automatically adjusted annually to reflect the
same rate of increase (or decrease) shown for retail electricity sales, net of any
DSM programs, in Idaho Power s latest IRP. True ups would occur annually
based on any divergence between the total fixed-cost revenue recovery that
forecast sales would have delivered and the fixed-cost revenues actually
recovered (so if, for example, sales were forecasted to increased by 2 percent and
actually i11creased by a larger percentage, Idaho Power would refund the
difference at the time of the next Power Cost Adjustment; if retail sales increased
by a smaller percentage than forecast, Idaho Power would get back the lost
revenues at the time of the next Power Cost Adjustment).
4. True-ups would occur by customer class based on divergence between actual and
forecast sales to each customer class.
5. Idaho Power would continue to absorb the risk or benefits ofpurely weather-
related effects on fixed-cost revenue recovery, as it does now. This would mean
weather normalizing actual sales before making the annual true-up calculation.
MAXIMUM ANNUAL AVERAGE RATE IMPACT OF THE TRUE UP
MECHANISM:, UP OR DOWN, UNDER EXTREME CONDITIONS = 1.5 PERCENT.
II.PROPOSED REVISIONS AND ANSWERS TO SUBSEQUENT
QUESTIONS
A. CHANGES IN CALCULATION OF ANNUAL FIXED
COST RECOVERY : Without a true-up, fixed cost recoveries
grow in direct proportion to growth in total retail sales, averaging
Summary of the December 2004, Workshop
about 2 percent per year over the past decade. The initial
proposal called for growth in fixed cost recovery to be tied to
annual growth in the forecast of retail sales adopted in the
Company s most recent IRP. Concerns were raised that, in the
residential and commercial sectors particularly, growth in
customer counts could substantially exceed growth in forecast
sales, resulting in underrecovery of costs prudently incurred to
serve new customers. PROPOSED SOLUTION: Tie growth in
fixed cost recovery to actual measured changes in annual
customer count for the residential and commercial sectors. This
should allow a closer convergence between the fixed cost
revenue requirement and actual costs of service.
B. RETROSPECTIVE ASSESSMENT: In cooperation with the
Company, I looked into how often a true-up tied to customer
counts would have increased and reduced rates, respectively, for
the residential and commercial classes since 1990 (concerns had
been raised that rates would always go up under such a
mechanism). For any year during which such a mechanism had
been in effect, rates would have gone down if the class s retail
sales had grown more rapidly than the class s customer count
and vice versa. So we looked at how often the residential and
commercial customer counts increased more rapidly than class-
wide electricity use in each year, starting in 1990. For the
commercial sector, electricity use grew more rapidly than the
customer count in ten of the fourteen years from 1990-2003. For
the residential sector, electricity use grew more rapidly than
customer count in two of the fourteen years, and the rates of
growth were essentially identical in three other years (including
2003). This confirms the potential for rate decreases as well as
increases for both classes under a true-up mechanism, although
based on historical data the likelihood of a rate decrease is
substantially greater for the commercial sector than the
residential sector. Finally, it should be emphasized that annual
class-specific rate increases needed to ensure recovery of the
authorized fixed-cost revenue requirement would never have
exceeded two percellt under the true-up mechanism. In most
years, for both classes rates would have shifted up or down by
one percent or less.
Summary of the December 2004, Workshop
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Summary of the December 2004, Workshop
ApPENDIX8-FuPCHARTS REGARDING CAVANAGH S REVISED STRAWMAN
Assumptions for True-
Last year s consumption plus 2% to calculate
the rate increase spread over kWh the next
year.
Clear every year don t want to carry
significant over/underages/year
If kWh sales exceed customer count in a
class, there would be a rate decrease.
Question: How to resolve true-up within
schedules for irrigators and industrial? (how
to true-up with subclasses to the classes)
Rate impacts could be more volatile under
multiple true-up values
Summary of the December 2004, Workshop
ApPENDIX 9-PROPOSED STRAWMAN FOR A PERFORMANCE-BASED MECHANISM
Strawrnan Proposal for DSM Performance Incentive
For Discussion at IPC Decoupling Workshop, 12/01/04
Hypotheses:
1) The primary DSM financial disincentives in question are those that affect shareholders
rather than managers. These disincentives are primarily "fixed-cost" revenues that are not
collected when electricity is not sold; i.e. those portions of energy and demand prices that are
based upon utility costs that do not vary with energy usage in the short run.
2) Idaho Power will fail to maximize demand-side management (DSM) potential benefits
for its customers unless the primary financial disincentive is removed through a regulatory
mechanism.
3) Idaho Power s customers will be net beneficiaries if the company provides more cost-
effective DSM as a result of customers paying to remove the primary financial disincentive.
4) Rate cases will occur too infrequently to sufficiently mitigate the primary financial
disincentive.
5) The company is legitimately entitled to recover fixed-cost revenue losses caused by its
DSM efforts regardless of the absence of rate case examination of overall costs and revenues.
6) Idaho Power is incuning new fixed costs due to customer growth and its incremental
fixed costs exceed its incremental fixed-cost revenues. In other words, customer growth does not
mitigate fixed-cost revenue losses.
7) It is unacceptable to the IPUC StatIto adopt a financial mechanism that would simply
al1ow Idaho Power, without a rate case, to automatical1y collect all fixed.,cost losses" associated
with all kWh per customer sales reductions, much of which is caused by factors not associated
with the company s DSM, e.g. increased gas market share. The I O-year lapse between Idaho
Power s last two rate cases, in spite of reduced sales per customer, is an indicator that profitability
is largely independent of sales per customer.
8) It is unacceptable to Idaho Power to adopt a financial mechanism that considers only
total sales; i.e. that does not account for growth in the number of customers.
9) Removing the primary financial disincentive for DSM can be reasonably accomplished
through a mechanism that targets only DSM-caused sales reductions. There are two ways to do
this: a) The financial disincentive could be removed by allowing specific fixed-cost revenue
recovery for all verified DSM savings; b) The financial disincentive could be removed by
providing other financial rewards for verified DSM accomplishments. Method b)'s financial
rewards could be stand-alone or used in conjunction with method a) or with decoupling.
Summary of the December 2004, Workshop
Strawman Trial Proposal
Unlike decoupling, both methods a) and b) above require preci se measurement and
verification of DSM program implementation details, baselines and DSM results, and, as such, are
inherently complex, subject to measurement en-or, and require significant regulatory oversight.
Thus, It is reasonable to implement either of these methods on a trial basis.
For a strawman trial, we have selected a proposal that combines methods a) and (b) above;
e. recovery of DSM-caused fixed-cost revenue losses with a bonus financial incentive for
exceeding cost-efJective DSM targets. We suggest that the trial be restricted to the Residential
New Construction program. Residential energy rates have a relatively high fixed-cost recovery
component, which means that Idaho Power s financial disincentive for DSM for this class may be
higher than for other customer classes. This is a comparatively small program, thus minimizing
the effects of any mistakes made in the trial. Nevertheless, this program is projected to be very
cost-effective for both energy and peak demand savings and "lost opportunity" will occur if it is
not vigorously pursued.
The table below illustrates some of the projections forthe Residential New Construction
program as contained ill the IRP. Also shown are discussion starting points for financially
rewarding Idaho Power for significantly outperforming its projections. Whatever combination of
indicators and incentives are used, the program must remain cost effective to customers.
Possible Indicators Annual Fixed-Cost Bonus Bonus Financial Incentive
Targets Rev. Recovery Threshold (for illustration only)
MW reduction 10% ? target 200/0 of net $ savings
MWh reduction 661 actual MWh 10% ? target 1 O~/O of net $ savings
saved x $31.20
Idaho Power $/peak kW 10%
.:;::
target 50/0 of program costs
Idaho Power $/kWh 036 10% , target 5% of program costs
Total Resource $/peak kW 0% 0:( target 5 ~/O of total costs
Total Resource $/kWh 058 10%
.:;::
target 5% of total costs
Participant Payback 5 yr.10% 'target 5% of particIpants' costs
Number of Participants 10% ? target 5% of program costs
Market Transformation 50/0 of program costs
Summary of the December 2004, Workshop
ApPENDIX 10-FLIPCHARTS REGARDING PERFORMANCE-BASED MECHANISM
PBR/Hypothesis Discussion
1) Managers = utility company managers
2) This proposal does not address "found"
revenues and has a narrow view of "lost"
revenues (DSM-related only)
3) #7 Concern about not linking advantages of
true-up with issues about increased gas
market share
Staff wants fixed-cost recovery for DSM-
related programs (utility co. control) --7 NOT
consensus with group on this
ApPENDIX 11-ADDITIONAL SUGGESTIONS
Bin
1) 18-month financial simulation of proposals-
real, documented numbers for FCR
Options
1) Model period of 10 years
a) "Council level" of conservation against
IPUC staff proposal
b) True-up with "Council levels" of
conservation
Use maximum net benefit scenario:
rate impacts
IRP baseline
4) Energy savings calculations would be difficult
and problematic
5) Cost recovery may be a bigger issue than
lost reven ues
6) Proposal is for residential construction only
(Energy Star program-exceeding building
codes)
7) Some potential for perverse incentives-
need to monitor closely
Summary of the December 2004, Workshop
ApPENDIX 12-INTEREST REPORTS
Interest Reports
IPC
1) Disallowance of program costs will kill
DSM-first and foremost disincentive
2) Problem of lost revenues will have
a.. .material impact on amount of load-
reducing activities we undertake in short and
long term
3) Next couple years, company will undertake
DSM identified in IRP-can t take on any
additional in this period (ramp-up ability
limited)
4) 18-month simulation of T.U. mech. would
help relieve uncertainties (unintended
consequences) prior to next rate case
5) Intrigued with staff incentive mechanism, and
piloting with one program then determining
applicability to others
IPUC-Staff
1) Staff will continue cost-effectiveness/
prudence review
2) Interested in pilot incentive based program.
Can work on measurement and evaluation to
see if doable.
3) 18-month simulation-main impact of T.
mechanism is to see how it changes
company s behavior. Wouldn t oppose
proceeding with this, though unsure of real
value of simulation. May be best we can do
now to keep alive without killing it.
NWEC
1) Not convinced simulation will change
minds-not interested in pursuing unless
group is really committed to moving forward
and simulation/test is credible with everyone
and materially improve likelihood of approval
by Commission
2) Retain right to bring proposal to Commission
directly, but would rather work as a group
Summary of the December 2004, Workshop
ApPENDIX 13-NEXT STEPS AND ACTION ITEMS
Next Steps
1) Status report on 15th
2) Flesh out concept of pilot and simulation on
13th (9:00-Noon)
3) Provide full report in January with
recommendation , what we discussed and
why we re proposing this approach. Decision
at end point.
Action Items
What Who When
1) Draft status report Scott 12/03/04
for review and and
comment Susan
2) Bring what is IPC 12/1 3/04
necessary for pilot (Darlene)
proposal-outline
for filing
3) Bring simulation IPC 12/13/04
design (Mike)
4) IPC would submit application for pilot to
commission-projected date by end of
January (simultaneous with filing or at least
final report first)
5) Assuming model can be set up, could
possibly start accounting after first of year
(January 1 if possible)
Summary of the December 2004, Workshop
ApPENDIX 14-WORKSHOP EVALUATION COMMENTS
1) Good job!
2) Frankness
conversation useful
& appreciated
3) Like smaller room
4) Like facilitating
5) Like someone
ramrodding it"
6) Appreciate
deadlines and
follow-up
7) First class job
1) Room is too
small and too
warm
13) Appreciate cheese
and celery!
14) Appreciate
com prehensive
summaries
15) Enjoyed open and
honest discussion
and movement in
positions
16) Like follow-up with
meeting summary-
that it is right
8) Like smaller room
9) Like fruit!
10) Like summaries-
timely and well-
structured
11) Nice to get prework
discussion items
ahead of time
12) Very important that
everyone is here-
adds to the process
Summary of the December 2004, Workshop