DPS Comments Re: Public Service Board’s draft “Task Statement for
Discussion of EEU Structure”
In response to the Boards notice to the parties from Dockets 5980 and 7081 on July 13,
2007, the Department of Public Service offers the following comments. The Board’s
Task Statement highlights various structural approaches for addressing problems and
concerns that the Board has observed with the current structure. In general, the DPS
agrees that this is an appropriate time to review the EEU structure and that the Board has
identified appropriate structures.
Summarized in Section I of the DPS comments are the Boards assessment of problems
and challenges. Also summarized are the various structural approaches identified by the
Board. Section II highlights our initial reactions to those structural models. We also
offer some additional considerations for discussion. Section III summarizes a set of
preliminary recommendations. We do, however, look forward to the comments of others
and certainly believe there are a number of potentially fruitful approaches worth
considering.
Section I – Summary of Board’s Assessment of Problems and Challenges
The Board highlighted the following problems associated with the existing contract:
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Forward Market participation – It is challenging for the EEU to participate
effectively in the forward capacity market when it must bid for a time period after
the current contract concludes;
Diminishing Competition – There is an apparent diminishing competition as
evidenced by the last round of bidding;
Planning Difficulty – It is difficult for the EEU to engage in effective long-term
planning when its contract extends for only three years;
Employee Job Stability – It is allegedly difficult in hiring and maintaining staff in
the face of the short contract cycle.
The Board also noted several areas that represent existing and emerging challenges,
including the following:
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Complexity -- The complexity of the enterprise is increasing with time and so
introduces new challenges associated with a contract model;
Apparent Board Conflicts -- The administrative role of the Board potentially
conflicts with its judicial roles with respect to electric utilities;
Restrictions on Participation in Board Proceedings – The Board highlighted
ongoing restrictions on EEU participation in board proceedings;
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Restrictions on Policy Advice and Lobbying – The Board highlighted ongoing
restrictions on EEU policy advice and lobbying.
Section II – DPS Comments on Alternative Structural Approaches
The Department is still in the process of considering different models and looks forward
to the insights and opinions of others. Nevertheless, we offer the following comments in
the spirit for advancing the dialogue.
Comments on Contract Approach
For some of the reasons highlighted by the Board, we agree the current contract model is
no longer ideal. We are particularly troubled by the diminished competition for the
contract in each contract cycle and are concerned that this will eventually lead to an
effective franchise, without the appropriate safeguards necessary for effective oversight
of a regulated franchised utility structure.
With respect to participation in the Forward Capacity Market, the EEU has already
demonstrated an ability to participate and bid effectively. The question, then, is how the
obligation gets passed to a successor in the event VEIC’s contract is not renewed or
another bidder is successful. This issue also raises a question of whether a more enduring
existence as through longer contracts or a franchise could improve both the continuity
and associated ability to hold the organization accountable for any failures related to long
term commitments made as a participant in the market.
Planning responsibilities could be largely addressed by appropriately funding and
authorizing the broader structure of the EEU to perform a planning role, either within the
EEU itself, or as a separable component of the EEU analogous to the Contract
Administrator and the Fiscal Agent. At this junction, we view the added planning
responsibilities as incidental to the pre-existing program design planning that is ongoing
at the EEU. Consequently, establishing a separate entity may not be efficient or
necessary. Further comment on this from others would be welcome.
We are not unduly concerned by the fourth problem highlighted by the Board. We are
not aware of any significant issues associated with the EEU retaining qualified staff.
Indeed, the diminished levels of competition in the current environment may afford
prospective employees with relative stability.
With respect to the further concerns identified by the Board, we are sympathetic to the
concern that the EEU is becoming a more complex institution. Nevertheless,
complexity will prove a difficult element of any structure. Vermont should work to add
new responsibilities only where absolutely needed, but make it no more complex than
necessary. Isolating the clear objectives, transparency, and accountability will be most
important for addressing the concern, regardless of the structure. As we note further
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below, we believe it is important to assign clear goals, performance targets, and
reasonable incentives to any new areas of responsibility assigned to the EEU.
We are sympathetic to other problems identified in the Task Statement. The combined
role of administrator and judge can prove problematic. If the Board chooses to go the
route of a franchise, then the problem should not persist. The franchise can petition the
Board like any utility franchise on matters of concern to the enterprise.
The Department is of two minds on the role of the EEU as a policy advocate and
technical advisor. On the one hand, the EEU’s role in aiding policy and technical
discussions should probably not be constrained going forward by the Board. This is
particularly helpful when considering technical issues relating to issues of public
education, building codes, and standards or other policies under consideration by
legislators and regulators. We are, however, concerned about unfettered advocacy on
matters that could lead to further funding, broadened mission, or regulatory advantage
before the Vermont General Assembly or the Public Service Board. At a minimum, it is
essential for the Department or its experts to review and, if appropriate, challenge any
analysis presented by the EEU in such settings with adequate funding for independent
review.
Comments on Utility Franchises and Economic Regulation
In its notice to the parties, the Board highlighted some options for the structure of the
EEU that included the grant of a franchise, either with a defined term or with an
indefinite term. The Department is not opposed to further consideration and development
of either concept; however, further background on the features of the EEU that
distinguish it from other Board regulated utilities seems warranted. Such discussion
should help to inform decisions about the scope, character, exclusivity, and character of
regulatory oversight of the provider.
As noted earlier, the very nature of the Energy Efficiency Utility is distinct from other
utilities governed by Title 30 of the Vermont Statutes. Public utilities, by definition, are
characterized by the features of a natural monopoly. Economies of scale associated with
their generally capital intensive nature of services in relation to the market size leads to
unstable competition and warrants the granting of an exclusive franchise. This fact in
concert with the essential nature of the service necessitates economic regulation.1 The
role of the regulator then is to function as a surrogate for the market in ensuring fair
prices and reasonable service quality.
While there are valid arguments that aspects of Efficiency Vermont are also monopoly in
character, the DPS is not convinced they are well suited to any grants of exclusivity or
traditional forms of cost-of-service regulation. Indeed, the EEU will not ultimately be
successful in its mission until it has helped to foster the development of an effective
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Some aspects of electric utility service have, however, been deemed competitive or subject to competition
in many states and are no longer fully regulated with the wires services. In wires portion of service
continues as a traditional utility service in virtually all states.
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market for efficiency services that no longer depends on the interventions of Efficiency
Vermont.2 Inherent monopoly-like features of the EEU seem to relate largely to the
receipt and distribution of program funds. Any award of a franchise should be
circumspect in granting any rights to exclusivity or indefinite term.
Additionally, the full scope of regulatory oversight afforded through Title 30 would not
be necessary if a franchise is issued. For example, traditional cost-of-service regulation,
or at least traditional application of that authority, would seem largely irrelevant to the
EEU. Many features of service delivery are simply much more dynamic than that of a
traditional utility. Nevertheless, the Department’s ability to investigate and the powers
of the Board to investigate and penalize a franchise for abuse is an integral component of
a franchise model that seems useful and relevant. At this stage we see little advantage in
trying to distill the critical elements of Title 30 to isolate only the relevant components of
it to an EEU franchise.
Comments on Joint Action Agency and Government Model/Direct Administration
At this time, the Department does not support the establishment of a Government Model
or Direct Administration by the Board. Our main reason for opposing them at this time is
simply that they represent a significant departure from the current model that is working
reasonably well. While we recognize that the existing model is imperfect, by all accounts
it appears to be working better than some of the other models referenced by the Board for
a Government Body or Direction Administration in its comments.
That said, the Department believes that the EEU itself may be well suited to functioning
in the capacity of an RFP issuing entity serving as the “general contractor” coordinating
the various initiatives.
Further Comments and Discussion
Fostering Development of a Market for Energy Services -- The EEU is currently working
well and delivering the promised cost-effective energy efficiency. However, the
Department is concerned that the EEU relies almost exclusively on internal resources for
the delivery of most program activities. The geo-targeting efforts of the EEU is a
notable exception, however, the reasons for choosing this direction appear to be driven by
the very short term nature of the experiment. We would like to see the EEU explore ways
to better integrate potential program partners into program delivery. Potential partners
include financial institutions or lenders, as well as delivery contractors, energy service
companies and performance contractors for the design and delivery of elements of
programs.
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Energy efficiency is delivered through multiple avenues. End users can make their own investments
independent of the environment surrounding them. They may be encouraged to do so through tax
incentives. They may be required to do so through standards or codes. In constrained T&D areas, they
may be encouraged to participate through utility incentives, or statewide, may participate in the programs
of Efficiency Vermont. Additionally, performance contractors and energy service companies may help
deliver efficiency serves through share savings program initiatives.
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Integrated Planning -- By noticing the parties in Docket 7081, the Board has helped to
underscore the connection between facility planning efforts and reliance on DSM and
energy efficiency for avoidance or deferral of T&D investments. The EEU needs to
become an effective and an integral component of a cooperative and collaborative
planning environment that allows full consideration of non-wires solutions to T&D
planning efforts on the timely basis. At this stage, we view this role as incidental to its
existing planning functions.
Market Evolution and Transformation – The EEU is helping to transform markets for
energy efficiency devices. However, the Department is concerned that with a potential
grant of perpetual existence through a franchise, the EEU may lose sight of this emphasis.
Consistent with the Board’s comments, the Department would like to see the efficiency
utility help to foster the development of standards, codes, tax incentives, effective
information and education campaigns or other policies that may ultimately achieve the
same or greater overall savings at lower costs to ratepayers.
Section III -- DPS Preliminary Recommendations
At this early stage in the process, the Department does not have specific structures to
recommend. The existing EEU model has performed well and provides a solid
foundation for modifications and improvements. Nevertheless, we have reached broad
conclusions and share them with you in the spirit of focusing discussion at the workshop.
1. Clear goals, performance targeting, and well designed incentives should
continue to be a part of any contract or regulatory structure that emerges
for the EEU;
2. The current budget setting exercise should continue on an every 3 year
basis, however longer term estimates of efficiency resources to be
developed should also be part of the exercise, for purposes of long range
planning;
3. Most features of traditional regulatory oversight through Title 30
regulation should extend to any franchise granted, should the Board
establish an EEU franchise.
4. The Board should not establish any grant of exclusivity if a franchise
model is chosen. Indeed, the EEU should fundamentally aim to foster
further development of the efficiency resource and market transformation
through (1) education and empowerment of consumers, (2) education and
empowerment of upstream service providers, (3) the identification of
appropriate efficiency standards and appropriate complements, and (4) by
relying on and encouraging the development of competitive service
providers.
5. Additional planning responsibilities should extend to (1) assisting the
Vermont System Planning Committee and utilities with forecasting the
effects of EEU programs, both short and long term, (2) participation in
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VSPC meetings (3) providing responses to the VSPC in the context of
Preliminary Non-Transmission Alternative studies.
Whatever route taken by the Board in the context of this investigation, all features of the
existing structure will need to be considered.
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