a summary of revenue decoupling evaluations dan hansen christensen associates energy consulting july...
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A Summary of Revenue A Summary of Revenue Decoupling EvaluationsDecoupling Evaluations
Dan HansenChristensen Associates Energy
ConsultingJuly 2014
July 2014 1
July 2014 2
OutlineOutline
Decoupling overview Description of mechanisms studied Risk issues
Weather risk Economic and price risk Should allowed ROE be reduced
Changes in utility behavior Effect on customer satisfaction
July 2014 3
Purpose of Revenue DecouplingPurpose of Revenue Decoupling
Traditional regulated rates recover fixed costs through volumetric rates
Provides utility with: An incentive to increase usage A disincentive to promote conservation and
energy efficiency
Problem: revenues and sales are directly related
Solution? “Decouple” revenues from sales
July 2014 4
Purpose of Revenue Decoupling (2)Purpose of Revenue Decoupling (2)
Revenue decoupling removes the link between sales and revenues, thus making the utility indifferent to the effects of conservation
Decoupling does not provide an incentive for the utility to promote conservation
Utility revenues are typically “recoupled” to some other factor(s), such as the number of customers
July 2014 5
Basic Decoupling ConceptBasic Decoupling Concept
Basic concept of revenue decoupling (RD):
RD Deferral = Allowed Revenue – Actual Revenue
A positive number means the utility under-recovered, and will lead to a future rate increase
A negative number means the utility over-recovered, and will lead to a future rate decrease
July 2014 6
Basic Decoupling Concept (2)Basic Decoupling Concept (2)
Typically every 6 or 12 months, the RD deferral is rolled into rates as follows:
Rate change from RD = RD Deferral / E(Usage)
July 2014 7
Description of Mechanisms Description of Mechanisms StudiedStudied
July 2014 8
Independent Evaluations of Independent Evaluations of Decoupling MechanismsDecoupling Mechanisms
NW Natural Gas Completed in 2005. Distribution Margin Normalization (DMN).
New Jersey Natural Gas & South Jersey Gas Completed in 2009. Conservation Incentive Program (CIP).
Portland General Electric Completed in 2013. Sales Normalization Adjustment (SNA).
July 2014 9
Decoupling Mechanisms:Decoupling Mechanisms:NW NaturalNW Natural
Revenue per customer decoupling (RPCD). Removes effects of weather from deferrals.
Separate WARM insulates NW Natural from weather.
Initially capped deferrals at 90% of the non-weather difference between allowed and actual revenue. Removed following our report’s
recommendation.
Low-income bill assistance and weatherization funding also approved.
Service quality standards imposed.
July 2014 10
Decoupling Mechanisms:Decoupling Mechanisms:New Jersey Natural Gas and South Jersey GasNew Jersey Natural Gas and South Jersey Gas
RPCD. Includes weather effects.
Separate weather normalization adjustment. ROE test: can’t recover more than
allowed ROE due to deferrals (excess can’t be recovered later).
Basic Gas Supply Service (BGSS) test. Non-weather component of deferral must be
off-set by BGSS savings. Commit shareholder funds to
conservation. Large customer count adjustment.
July 2014 11
Decoupling Mechanisms:Decoupling Mechanisms:Portland General ElectricPortland General Electric
RPCD for residential and small commercial.
Lost revenue adjustment for larger commercial customers.
Largest customers (over 1 aMW) excluded entirely.
Excludes effect of weather. Reduced ROE by 10 basis points. Decoupling includes fixed generation
costs. A proposal has been made to bifurcate the
mechanism such that G&T allowed revenue would be fixed and D allowed revenue would remain linked to the number of customers.
July 2014 12
Decoupling and RiskDecoupling and Risk
July 2014 13
Decoupling and Risk Shifting:Decoupling and Risk Shifting:Weather RiskWeather Risk
Does decoupling shift weather risk from the utility to its ratepayers?
No. A reduction in risk for one party does not necessarily mean that risk is shifted to another party.
July 2014 14
Decoupling and Risk Shifting:Decoupling and Risk Shifting:Coin FlippingCoin Flipping
Suppose I flip a coin Heads = I pay you $20 Tails = You pay me $20
This game exposes me to coin flipping risk. I gain or lose $20 every time we play.
If I decide to stop playing the game, I eliminate my coin flipping risk.
Did I shift the risk to you? No, your risk is eliminated as well.
This can happen when the risk is negatively correlated across parties (e.g., when something makes me better off, it makes you worse off).
July 2014 15
Decoupling and Risk Shifting:Decoupling and Risk Shifting:Coin Flipping (2)Coin Flipping (2)
This example is similar to the effect of weather on utility revenues (e.g., heads = hot summer and tails = cold summer).
Reducing utility weather risk can also reduce ratepayer weather risk.
Complications: decoupling deferrals affect rates paid next year, so weather risk is only eliminated over time and at the class level.
Weather risk can be reduced at the customer level through weather normalization mechanisms, as are found in the natural gas industry.
July 2014 16
Decoupling and Risk Shifting:Decoupling and Risk Shifting:Economic and Price RiskEconomic and Price Risk
Decoupling may shift two types of risk from the utility to ratepayers: Economic risk: recession may cause
customers to use less energy, which decreases the current bill but increases future rates.
Price risk: high commodity prices may cause customers to use less energy.
In an RPCD, these risk shifts can only occur when economic conditions and/or prices affect use per customer (UPC).
July 2014 17
Decoupling and Risk Shifting:Decoupling and Risk Shifting:Economic and Price Risk (2)Economic and Price Risk (2)
In each study, I conducted a statistical analysis of UPC as a function of: Weather Economic conditions Price Time trend
Findings: Very strong relationship between UPC and weather
across all utilities and customer groups. Very limited evidence of price response. Somewhat limited evidence of a relationship
between UPC and economic conditions.– Stronger for commercial than residential customers.
– Stronger in PGE study, which contained much more severe recession than other studies.
July 2014 18
Decoupling and Risk Shifting:Decoupling and Risk Shifting:ConclusionsConclusions
Argument that decoupling shifts risk from utilities to ratepayers may be exaggerated. Doesn’t occur for weather. Limited evidence of shifting price
risk. Some evidence of shifting economic
risk.– Could be mitigated by capping
decoupling adjustments.
July 2014 19
Decoupling and Risk:Decoupling and Risk:Reduce Allowed ROE?Reduce Allowed ROE?
In the PGE study, we conducted a statistical analysis of the effect of decoupling on the variability of utility returns.
Used FERC Form 1 data from 1993 through 2011 for 44 utilities.
Approximated utility rate of return as annual operating income divided by book assets.
Calculated the 3-year standard deviations of this measure as the dependent variable (also examined 5-year SDs).
July 2014 20
Decoupling and Risk:Decoupling and Risk:Reduce Allowed ROE? (2)Reduce Allowed ROE? (2)
Estimated a panel regression model to determine whether decoupling is associated with less variable returns.
Did not find any statistically significant effects.
Caveats: Did not distinguish types of decoupling
mechanisms. Relatively short time period, many
decoupled utilities did not have it in place for very long.
Effect may be small compared to “noise” in the data.
July 2014 21
Decoupling and Risk:Decoupling and Risk:Utility Credit ReportsUtility Credit Reports
Also examined PGE credit reports. Mostly favorable toward
decoupling, but effects are limited. Does not cover all customers. Not as important as the fuel cost
adjustment mechanism approved shortly before decoupling.
Appears to have contributed to improved credit rating.
July 2014 22
Effect of Decoupling on Effect of Decoupling on Utility BehaviorUtility Behavior
July 2014 23
Changes in Behavior:Changes in Behavior:Employee MessagingEmployee Messaging
NJ Natural and SJ Gas trained all employees on how CIP changed corporate incentives. Tent cards, posters, laminated cards,
intra-office messages emphasizing change in incentives.
Description of CIP programs being introduced.
Expectation that all employees help spread conservation messages.
E-tips provided to employees before public.
July 2014 24
Changes in Behavior:Changes in Behavior:Employee IncentivesEmployee Incentives
NJ Natural and SJ Gas: Replaced incentives based on burner tip
counts with incentives based on enrolling new customers.
CSRs provided incentives for including CIP messaging in calls.
– $50 drawings for 8% increasing to 15%
– Changed union contract to include bonuses for 20%+
NW Natural had incentives based on conservation objectives, customer satisfaction, and cooperation with ETO.
PGE: no compensation changes reported.
July 2014 25
Changes in Behavior:Changes in Behavior:StaffingStaffing
NW Natural reallocated staff away from sales positions and toward customer service (some of this was due to time study, the remainder could perhaps be attributed to decoupling).
PGE hired several employees to work on conservation and energy efficiency.
July 2014 26
Changes in Behavior:Changes in Behavior:Home AnalyzersHome Analyzers
All utilities implemented on-line systems to allow customers to audit their usage. Provides recommendations based on
customer-specific circumstances. Can serve as a referral mechanism to
specific conservation programs. Provides CSRs with a tool to help
with high bill complaints. Helps the utility work with customers.
July 2014 27
Changes in Behavior:Changes in Behavior:Customer MessagingCustomer Messaging
NJNG: Prior to CIP, 75% of articles in NJ Living
Times devoted to load growth (gas grills, patio heaters, gas fireplaces).
After CIP, 0%.
SJG: When working with potential conversion
customers, previously provided materials on gas fireplaces, snow melt systems, patio heaters, gas grills, garage heaters, gas lighting, pool and spa heaters.
Stopped that practice once CIP was implemented.
July 2014 28
Changes in Behavior:Changes in Behavior:Customer Messaging (2)Customer Messaging (2)
NW Natural shifted from promotional advertising toward conservation messaging.
NJNG field staff Carried larger pads with
conservation tips to distribute, but often left in the truck due to size.
Feedback from field staff led to smaller materials and door hangers being provided.
July 2014 29
Changes in Behavior:Changes in Behavior:Customer Messaging (3)Customer Messaging (3)
NJNG has a difficult mass media market in which to operate, so they focused on grass roots efforts. Community Rewards: $5 to the
school for every referral to the Conserve to Preserve Dashboard (very cost effective compared to mass mailers).
Outreach to realtors to increase program awareness.
July 2014 30
Changes in Behavior:Changes in Behavior:Customer Messaging (4)Customer Messaging (4)
SJG used more mass media than NJNG. CEO message: “Your partner in
energy efficiency, comfort, and savings.”
CEO emphasized that decoupling is important to larger corporate mission, as unregulated divisions sell energy-efficient technologies.
July 2014 31
Changes in Behavior:Changes in Behavior:Home Analyzers, EffectsHome Analyzers, Effects
Shares of NJCEP Audits
0%
10%
20%
30%
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70%
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90%
100%
Feb-0
7
Mar
-07
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-07
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7
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Oct-07
Nov-0
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Dec-0
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Jan-
08
Feb-0
8
Mar
-08
Apr-0
8
May
-08
Jun-
08
Jul-0
8
Aug-0
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Oct-08
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8
Month-Year
Per
cen
t S
har
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NJNG
SJG
"Controls"
July 2014 32
Changes in Behavior:Changes in Behavior:High Efficiency Furnace (HEF) ProgramsHigh Efficiency Furnace (HEF) Programs NW Natural:
Improved program by working more directly with distributors.
Interviews with distributors indicated increased sales of HEF to NW Natural customers compared to customers of other utilities.
New Jersey: Emphasized HEF for new
conversions. Pre-CIP HEF rates = 30 to 35% Post-CIP = 50%
July 2014 33
Changes in Behavior:Changes in Behavior:Third-Party Provider of EEThird-Party Provider of EE
Oregon has a third-party provider of energy efficiency programs, the Energy Trust of Oregon (ETO).
I interviewed the Executive Director of the ETO (Margie Harris) as part of both the NW Natural and PGE evaluations.
She conveyed the importance of utility cooperation in meeting ETO objectives.
She was not opposed to decoupling, but could not say definitively whether it affected utility behavior regarding conservation (relative to other factors such as legislation or least-cost planning as part of the IRP).
July 2014 34
Effect of Decoupling on Effect of Decoupling on Customer SatisfactionCustomer Satisfaction
July 2014 35
Effect on Customer Satisfaction:Effect on Customer Satisfaction:NW NaturalNW Natural
No complaints regarding DMN registered with OPUC (DMN deferrals are not itemized on the bill).
Internal customer service ratings were quite stable before and after DMN.
July 2014 36
Effect on Customer Satisfaction:Effect on Customer Satisfaction:NW Natural JD Power Rank Among 55 UtilitiesNW Natural JD Power Rank Among 55 Utilities
Question 2003 2004
Ability of utility to help reduce bill
26 14
Familiarity w/ programs to help use less gas
6 6
Overall customer satisfaction index
10 9
Customer service index 4 5
July 2014 37
Effect on Customer Satisfaction:Effect on Customer Satisfaction:New JerseyNew Jersey
President of the New Jersey Board of Public Utilities Jeanne M. Fox:
“I believe that the high level of customer satisfaction for South Jersey Gas and New Jersey Natural Gas is largely attributable to their respective customer incentive programs.”
July 2014 38
Effect on Customer Satisfaction:Effect on Customer Satisfaction:PGE, Customer ComplaintsPGE, Customer Complaints
Three complaints registered with OPUC: Don’t want to pay for energy they
don’t use. Unethical to charge customers for
conservation given PGE’s corporate waste.
A clarification of the program, not a complaint.
July 2014 39
Effect on Customer Satisfaction:Effect on Customer Satisfaction:PGE, JD Power SurveyPGE, JD Power Survey
Table 6.5.2: PGE’s Rank among Large West Region Utilities, Residential
Year Overall CSI Power
Quality & Reliability
Price Customer Service
2006 6 of 12 4 of 12 10 of 12 3 of 12 2007 3 of 13 2 of 13 4 of 13 1 of 13 2008 3 of 13 2 of 13 5 of 13 2 of 13 2009 3 of 13 3 of 13 5 of 13 1 of 13 2010 3 of 13 2 of 13 4 of 13 2 of 13 2011 3 of 13 2 of 13 7 of 13 4 of 13 2012 3 of 13 2 of 13 5 of 13 2 of 13
July 2014 40
Other Effects of Decoupling?Other Effects of Decoupling?
No evidence of reduced service quality (i.e., outages).
Possible distributional effects. Customers who do not conserve may
experience bill increases. Small effect with decoupling
compared to Straight Fixed Variable rates.
Not quantified in the evaluations.
July 2014 41
Questions?Questions?
If you have questions, please contact Dan Hansen at [email protected]