20070131Comments.pdf

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SCOTT WOODBURY
DEPUTY ATTORNEY GENERAL
IDAHO PUBLIC UTILITIES COMMISSION
PO BOX 83720
BOISE, IDAHO 83720-0074
[phone]
BAR NO. 1895
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UTILITiES CCY/;I,nSSIC;
Street Address for Express Mail:
472 W. WASHINGTON
BOISE, IDAHO 83702-5983
Attorney for the Commission Staff
BEFORE THE IDAHO PUBLIC UTILITIES COMMISSION
IN THE MATTER OFTHE APPLICATION OF
IDAHO POWER COMPANY TO IMPLEMENT
A DEMAND SIDE MANAGEMENT INCENTIVE )PILOT PROGRAM.
CASE NO. IPC-O6-
COMMENTS OF THE
COMMISSION STAFF
COMES NOW the Staff of the Idaho Public Utilities Commission, by and through its
Attorney of record, Scott Woodbury, Deputy Attorney General, and in response to the Notice of
Application, Notice of Modified Procedure and Notice of Comment /Protest Deadline issued on
January 4 2007, submits the following comments.
BACKGROUND
On December 18 , 2006, Idaho Power Company (Idaho Power; Company) filed an
Application ,with the Idaho Public Utilities Commission (Commission) requesting authority to
implement a pilot program that provides for positive incentives (increased revenue or payments) or
negative incentives (reduced revenue or penalties) for achieving, or failing to achieve, agreed-upon
levels of performance in implementing demand-side management (DSM) programs.
Idaho Power proposes that the DSM incentive program first be operated as a pilot program
and only applied to a single DSM program for a three-year period. The Company s Application is
STAFF COMMENTS JANUARY 31 2007
separate from but related to the Joint Motion for Approval of Stipulation filed December 18, 2006
in Case No. IPC-04-15 (Application to Implement a Decoupling Mechanism).
Proposed Pilot Program
In this Application Idaho Power requests authority to implement a DSM incentive
mechanism which would allow the Company to retain a portion of the net benefits accruing from a
DSM program operated by the Company. The incentive would be earned if the Company is
exceptionally successful" in implementing the DSM program. Conversely, the incentive
mechanism would require a penalty payment by Idaho Power if achievement indicators of the
selected DSM program fall below last year s achievement.
Based on discussions between the parties in the IPC-04-15 case workshops, Idaho Power
has selected the ENERGY STARCID Homes Northwest program as the DSM program to be used as
the pilot to test the efficacy of a DSM incentive program. The ENERGY STAR Homes Northwest
program is currently operated by the Company to acquire the resources identified in the Residential
New Construction Option in the Company s 2004 IRP. The essential feature of this program is a
prescriptive building standard, also called a building option package (BOP), that is estimated to
result in approximately 30% greater energy efficiency compared to the existing Idaho residential
building code. Under the program, the Company provides an incentive payment of$750 to the
builder of each home built to the higher standard. The program also provides marketing to
encourage participation in the program. The Idaho Energy Division (lED) certifies that homes are
built to the standard and conducts a quality assurance process. The Northwest Energy Efficiency
Alliance (NEEA) provides the builder outreach and training components of the program.
average, a home constructed to the ENERGY STAR standard in Idaho will save 2 078 kilowatt
hours (kWh) annually as measured at the meter or 2 305 kWh including line losses. This estimate is
based on an engineering simulation study, conducted for the Company in early 2004 by Ecotope
Consulting to determine the program savings potential in Idaho.
The ENERGY STAR Homes Northwest program, the mechanics of the incentive program
proposed by the Company and the rationale supporting the DSM incentive program are more
particularly described in the testimony of Company witness Timothy E. Tatum filed with the
Application.
Idaho Power is proposing a three-year pilot beginning in 2007 and ending at the end of
2009. Under the pilot the Company would receive an incentive payment if the market share of
STAFF COMMENTS JANUARY 31 , 2007
homes constructed under the ENERGY STAR Homes Northwest program exceeds: (1) 7% ofthe
total number of homes permitted in Idaho Power s service area in 2007, (2) exceeds 9.8% of total
service area homes permitted in 2008 and (3) exceeds 11.7% of total service area homes permitted
in 2009. These percentage levels would be the target goals and ifIdaho Power exceeds these
targets, it would receive an incentive payment equal to the percentage benefit that exceeds the
target. For example, ifIdaho Power is able to achieve 105% of the 7% target percentage in 2007
Idaho Power would receive a payment equal to 5% of the total program net benefits. Net benefits
for the purpose of this pilot are equal to total Idaho Power benefits less its direct program costs
(excluding NEEA's costs). The incentive program would be capped at 10% of program net
benefits. Penalties, on the other hand, would be levied at a fixed 50% of net benefits lost for 2007
2008 or 2009 ifin any ofthose years Idaho Power s ENERGY STAR Homes Northwest program
fails to reach a market share of 4.9% (or 3.9%) preliminarily estimated as the achievement in 2006.
ANALYSIS
Rewarding Idaho Power for exceptional achievement in encouraging construction of homes
that are cost-effectively built to reduce both overall energy consumption and peak demand is
conceptually appealing. Clearly, Idaho Power s customers will benefit if more homes in the
Company s Idaho service area are built to Energy Star standards, as opposed to minimum building
code standards.
In seeking a good program to test the DSM incentive concept, Idaho Power said it analyzed
all of its programs for the best candidate. Regardless of this extensive search for the best program
to trial, the metrics of the proposed DSM incentive pilot suffer technical difficulties in the following
areas: 1) arbitrariness in setting reasonable
, "
average" achievement goals; 2) uncertainty in
measuring the actual Energy Star homes percentage achieved; 3) ambiguity in determining what
constitutes "exceptional" and "poor" levels of achievement; 4) potential for rewarding or penalizing
Idaho Power due to factors unrelated to its program efforts; 5) necessary but problematic exclusion
of regional marketing costs and benefits; 6) calculating the incentive or penalty using allocation of
joint costs based only on heating and cooling degree days, not on actual energy savings or peak
reductions; and 7) uncertainties of average savings per home and base percent of Energy Star homes
achieved in 2006. Some of these difficulties will be encountered with other DSM programs if the
pilot incentive mechanism were eventually extended to them. The numerous challenges warrant
close monitoring of this pilot.
STAFF COMMENTS JANUARY 31 , 2007
The first difficulty, setting reasonable
, "
average" goals, became apparent during discussions
prior to the filing of this Application. Idaho Power had suggested setting Energy Star homes
average goals for 2007 through 2009 equal to those calculable from its 2004 IRP megawatt-hour
savings potential listed in its generic "residential efficiency (new construction)" program.
However, Staff noted that the 2004 IRP savings potentials for 2008 and 2009 were far below Idaho
Power s pro rata share of regional goals for Energy Star Homes Northwest, which had had its goals
recently reduced by the Northwest Energy Efficiency Alliance (NEEA). Idaho Power and Staff
ultimately agreed that the Company s goals should mirror NEEA's "utility"l goals for the purposes
ofthis pilot. Absent NEEA's relatively independent achievement goals, there would have been no
reasonable benchmark with which to gauge Idaho Power s performance objectives. And, given
NEEA's own fluctuating goals and differences in data sources and assumptions, even having this
independent benchmark does not completely eliminate arbitrariness of setting goals. Expansion of
the incentive concept to other DSM programs, for which there are no independent benchmarks, may
be even more arbitrary and contentious.
The table below compares estimates of Energy Star homes goals based on the two sources
and actual or estimated achievements for 2005 and 2006:
Year NEEA E.NEEA IPC-IPC 2004 IPC 2004 est.IPC actual IPC actual
utility" %equiv. E.S. #IRP E.S. #IRP E.S. %E. Star #E. Star %
2005 164 464 3.4 %203 5 %
2006 8 %391 675 400 (est.)
2007 681 680
---------
2008 860 690
---------
2009 11.7 %905 700
---------
It should be noted that NEEA-derived numbers were interpolated from a June 26, 2006, memo to
NEEA's board of directors and, thus, its 2005 numbers were historical, while Idaho Power s 2004
IRP numbers were all forecast. The table incorporates estimated overall declining growth rates.
1 "Utility" goals are defined as the estimated numbers of Energy Star homes for which builders receive utility rebates
and excludes the estimated increasing numbers of Energy Star homes that will be built without rebates.
STAFF COMMENTS JANUARY 31, 2007
The second difficulty, measuring the actual Energy Star homes percentage achieved, is due
to not having an accurate, practicable method of counting total single-family homes built in Idaho
Power s service territory, to serve as the denominator in calculating Energy Star s percent. Idaho
Power stated that it does not currently collect this information and that it would be prohibitively
expensive to do so. Furthermore, the Company suggested that home construction and permit data
are typically derived from very small samples over wide geographic areas that are difficult to
reasonably interpolate to Idaho Power s specific areas of service within Idaho. The data source that
Idaho Power decided was the best one publicly available, Wells Fargo Bank Idaho Construction
Report, consists of permits issued for building single-family homes in much of Idaho Power
service area. Unfortunately, this "best" building permit data source omits many cities and
unincorporated areas in counties served by Idaho Power. For example, some of the missing cities
are: Eagle, Kuna, Garden City, Star, Middleton, Horseshoe Bend, Greenleaf, New Plymouth
Marsing, Homedale, Wilder, Parma, Midvale, Cambridge, Council, New Meadows, Riggins
Hagerman, Buhl, Filer, Castleford, Kimberly, Hansen, Murtaugh, Eden, Hazelton, Oakley,
Aberdeen, Inkom. This data is also missing the unincorporated areas of at least ten counties in
Idaho Power s service area, i.e. Adams, Boise, Camas, Elmore, Gem, Jerome, Lincoln, Payette
Washington and Owyhee.
An additional problem is that the data consists of "permits issued" rather than homes
actually completed. The difference between home permits and home completions is sometimes
several percentage points. NEEA also uses "permit" data to quantify its goals and achievements
but it uses the U.S. Census as its source. A cursory comparison between Census and Wells Fargo
data reveals significant differences between places with reported permits as well as with some of the
reported numbers for those places that are on both lists. Idaho Power s actual Energy Star percents
shown in the above table for 2005 and 2006 are based on a combination of Wells Fargo and U.
Census permit data. Using only the Wells Fargo permit data for the denominator, as proposed by
Idaho Power, would increase both percentages by about 20%.
If the home-building industry were fairly stable, the differences between permits issued in
some, but not all, geographic areas and homes actually completed in all geographic areas might be
sufficiently stable so as to allow reasonably fair comparisons of year-to-year changes in Energy Star
homes percentages. But the home-building industry is clearly not stable. Construction Monitor
data found at www.constructionmonitor.com shows that single-family home permits issued in all of
southern Idaho decreased by nearly 70%, from 783 in December 2005 to just248 in December
STAFF COMMENTS JANUARY 31 , 2007
2006. Such a significant change in permits issued may also result in a change of the ratio of permits
to houses built and both the permit and ratio changes may vary among the geographic areas in and
out of the Wells Fargo data. For example, from August 2005 to August 2006, the Wells Fargo data
shows new dwelling unit permits decreasing by 40% in southwestern Idaho, while increasing by 6%
in southeastern Idaho. Because of the significant, disparate changes the housing industry is
experiencing, Staff believes it is unreasonable to use Wells Fargo s incomplete permit data as a
surrogate for all homes completed in Idaho Power s service area.
The third difficulty, setting "exceptional" and "poor" achievement levels, is, at best, an
arbitrary process. In at least the northwest, Energy Star homes has a short history of not meeting
established goals. As a result, for the purposes of the Idaho Power s incentive pilot, Staff ultimately
agreed that exceeding the established regional goal of 7.0% Energy Star homes for 2007 would be
an "exceptional" achievement, and that falling below 2006's estimated 4.9% (or 3.9%) level would
constitute "poor" performance. These thresholds are obviously not symmetrical around the 7.
average" performance target, but they seem reasonable given the particular circumstances of this
pilot program, especially given the more severe penalty provision of a flat 50% of net benefits lost.
Staff notes that if the proposed DSM incentive mechanism were applied to other programs, those
would also likely require somewhat arbitrary judgments for "exceptional" and "poor" performance
levels.
The fourth difficulty, rewarding or penalizing Idaho Power because of factors unrelated to
its Energy Star homes program, is another concern also caused by the rapid decline in home
building. Such a radical change in this industry may cause more builders to embrace Energy Star as
a competitive way to improve their individual market share, or, alternatively, it may cause more
builders to turn away from the higher construction costs of Energy Star homes in an effort to
compete on price. We don t yet know which direction most builders will go, but under either
scenario, to the extent that Idaho Power s Energy Star homes program success or failure is affected
by the overall downturn ofthe industry, it seems unreasonable to reward or punish the Company for
this factor outside its control.
The fifth difficulty, excluding regional Energy Star homes marketing costs and benefits, is
caused by the joint nature of Energy Star homes program effort shared by NEEA (of which Idaho
Power is an indirect part), Idaho Power directly, and other entities. This would be a lesser problem
if we could simply count all ofIdaho Power s costs, direct and shared, and all benefits over the life
ofthe homes. But partly due to NEEA's focus on market transformation and future benefits, there
STAFF COMMENTS JANUARY 31 , 2007
is no good way to allocate near-term benefits to Idaho Power. Thus, the Staff agreed, for the
purposes ofthis pilot, to allow exclusion ofIdaho Power s nearly $200 000 share ofNEEA's costs
for this program from its potential incentive/penalty calculations. Even assuming that this is a
reasonable solution to this problem with the pilot, it does decrease the accuracy of the resulting net
benefit calculations. A related problem is that NEEA's Energy Star homes program is another
factor that is mostly outside Idaho Power s direct control, but the relative success or failure of
NEEA's efforts will affect, to some degree, the success or failure ofIdaho Power s program and
the amount of the Company s incentive reward or penalty.
The sixth difficulty, calculating the incentive or penalty using an allocation of joint costs
based only on heating and cooling degree days, is caused by the fact that more than half of the
incremental cost of Energy Star homes is for extra insulation and better windows, which reduce
both average and peak electricity and gas demands. Of the $2 023 average incremental cost per
Energy Star home for better insulation and windows, Idaho Power allocated just $250 or 12% to
electricity costs based only on heating degree days versus cooling degree days. While allocations
joint costs are always somewhat arbitrary, this allocation seems especially so because it ignores the
benefits due to peak load reductions for electricity versus natural gas. Idaho Power calculates the
benefits of Energy Star homes based on time-varying energy and load reductions. Those benefits
should not be ignored when allocating costs that are used to determine net benefits.
The seventh difficulty, uncertainties in average savings and base percent of Energy Star
homes achieved, are not, by themselves, huge problems, but they do add uncertainty to the range of
potential incentive payments or penalties. Idaho Power does not yet have an actual evaluation of
energy savings for Energy Star homes in Idaho Power s service area. Idaho Power and NEEA'
preliminary working estimates for various northwest climates are presumably reasonable, but these
estimates need to be tested by actual measurements specific to Idaho Power s service area. The
other uncertainty results from not yet having Wells Fargo housing permit data beyond August of
2006. Thus, the base 4.9% Energy Star homes percent mentioned by Company witness Tim Tatum
is estimated based upon interpolated data from Construction Monitor that was extrapolated as an
extension to the Wells Fargo data. As previously mentioned, by using a combination of Census and
Wells Fargo data, Staff estimates Idaho Power s Energy Star success will be about 3.9% for 2006.
Staff agrees with Mr. Tatum that the 2006 percentage, which serves as the penalty base, will need to
be recalculated when better data becomes available and after there is agreement on the source(s) of
such data.
STAFF COMMENTS JANUARY 31 , 2007
CONCLUSION
Idaho Power s customers will benefit if more homes are built to Energy Star standards, as
opposed to minimum building code standards. Furthermore, given that 100% of Energy Star homes
are independently inspected, the benefit of Energy Star homes is understated to the extent that not
all non-Energy Star homes meet minimum building code energy efficiency standards. All of the
technical difficulties and uncertainties previously discussed are metrics issues that should remain
negotiable among the Staff, Idaho Power and other parties during the course of the pilot incentive
mechanism. None of the problems by themselves, or even all of them combined, rise to the level of
negating the benefits of cost-effectively building more energy efficient homes. Staff believes that
the proposed incentive mechanism will likely result in more Energy Star homes being built in Idaho
Power s service area than would otherwise have been built.
RECOMMENDATION
Staff recommends that the proposed pilot incentive mechanism be approved, contingent
upon quarterly progress reports being filed by Idaho Power, and a clear understanding that the
pilot's metrics may need to be refined or otherwisy modified , or the pilot eliminated, before the end
of the three year trial. Staff expects that such modifications would be presented to the Commission
for its approval before any incentives or penalties are incurred.
Respectfully submitted this 31 day of January 2007.
Scott Woodbury
Deputy Attorney General
Technical Staff: Lynn Anderson
i: umisc: commen Is/i pceO6.3 2s w la
STAFF COMMENTS JANUARY 31 , 2007
CERTIFICATE OF SERVICE
HEREBY CERTIFY THAT I HAVE THIS 31ST DAY OF JANUARY 2007
SERVED THE FOREGOING COMMENTS OF THE COMMISSION STAFF, IN CASE
NO. IPC-06-, BY MAILING A COpy THEREOF, POSTAGE PREPAID , TO THE
FOLLOWING:
BARTON L KLINE
MONICA B MOEN
IDAHO POWER COMPANY
PO BOX 70
BOISE ID 83707-0070
RIC GALE
VP - PRICING & REGULATORY
IDAHO POWER COMPANY
PO BOX 70
BOISE ID 83707-0070
SECRET
CERTIFICATE OF SERVICE