Memorandum
To:
EEU E-mail Service List
From:
Robert Ide, Director for Energy Efficiency
Riley Allen, Director for Regulated Planning
Subject:
EEU Structure Working Group - Comments on Strengths and Weaknesses
of the Current EEU Program Structure
Date:
August 28, 2007
Pursuant to the August 15, 2007 Public Service Board (“PSB”) memo and as
agreed to in the Board’s August 9, 2007 EEU Structure Working Group meeting, this
memo offers the Department of Public Service (“DPS” or “Department”) comments
regarding the strengths and weaknesses of the current EEU program structure and
identifies those most important from the Department’s prospective.
Existing Structure
The current structure is a performance contract for a 3-year period, with a 3-year
renewal option, held by the Public Service Board. At least every six years, the contract is
put out to bid. An RFP for energy efficiency utility services was issued in late 1999 and
again in 2005. Vermont Energy Investment Corporation (“VEIC”) was the successful
bidder for both RFPs. Oversight is provided by the Board through the contract terms, by
a Board EEU Contract Administrator (“CA”) and Fiscal Agent (“FA”), and by the DPS
primarily through the provision for an independent evaluation of the EEU programs and
services, most notably the annual verification of the EEU’s claimed savings and total
resource benefits.
Currently, the Board determines the funding level for a three-year period in
consultation with the DPS, the electric utilities, and stakeholders. The funds are collected
through the Energy Efficiency Charge (“EEC”), set annually by the Board through Board
rule. VEIC invoices the Fiscal Agent monthly for reimbursement of expenses. The EEU
Contract Administrator reviews all invoices before they go to the Fiscal Agent for
payment. The Fiscal Agent provides a monthly report of revenues and disbursements
from the EEC fund. The EEC funds also support Burlington Electric Department
(“BED”) efficiency services, as well as the funding for the EEU Contract Administrator,
Fiscal Agent, the EEC fund and tri-annual audits, and the DPS evaluation budget.
Weaknesses of Existing Structure
As stated in the DPS August 3, 2007 comments, the most important weakness of
the existing structure is the diminishing prospect for a truly competitive RFP for EEU
services as the incumbent’s advantage continues to grow in terms of experience,
expertise, and infrastructure development. Preparing a bid is very expensive and time
consuming, and new bidders are at a distinct disadvantage that becomes more acute over
time. The result is a de facto franchise without all of the same safeguards that are in
place in the oversight a regulated franchised utility structure.
Another important weakness of the existing structure, under DPS consideration,
concerns the EEU participation in the ISO-NE Forward Capacity Market (“FCM”).
Vermont Energy Investment Inc. and BED have already demonstrated an ability to
participate and bid effectively in this market, as evidenced by their June 15, 2007
submittal of qualifications packages to ISO-NE for the February 2008 auction.1 There is,
however, a question concerning how the obligation gets passed to a successor in the event
the current contract is not renewed or another bidder is successful. Also, a more enduring
existence, 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.
The increasing need for the EEU to participate in long-term energy efficiency
resource planning, as part of electricity supply and transmission and distribution (“T&D”)
system alternatives consideration, is somewhat problematic under the existing
performance contract structure. While these planning functions could be added to the
contract scope of work, provision must be made to either increase the EEU budget or
adjust the savings performance goals. This is a cumbersome process under the existing
3-year contract structure. As stated in the DPS August 3 memo, while the additional
planning responsibilities are currently incidental to EVT’s ongoing program design
planning, the planning burden could increase as the emphasis on energy efficiency as a
supply alternative increases.
Under the current contract structure, Efficiency Vermont cannot always be nimble
in adding new services and products that circumstances may dictate, such as an additional
focus on load response and load management resources, delivering services in
geographically targeted areas, or the other needs that may arise. The contract scope of
1
VEIC and BED will be informed by ISO-NE on October 1, 2007 whether or not their
qualifications packages are accepted.
work must be modified and the budgets and targets adjusted accordingly. Historically,
this has been a significant bureaucratic burden to the PSB, the DPS, EVT and BED, and
other parties.
Finally, we agree with the PSB that its dual role of administrator and judge is
becoming increasingly problematic. A structure that has EVT operating as a special
purpose franchise, with administrative functions housed within the organization itself,
would address this problem. The Board’s function with respect to the EEU could be
more like any utility franchise.
Strengths of Existing Structure
Much of the emphasis in the EEU structure discussions thus far is focused on the
structural defects. It is therefore important that the strengths of the existing structure be
identified and kept in mind as this working group proceeds.
Foremost is the focus on performance and mission provided by a contract for
services and the ability of the PSB to direct that activity. A longstanding criticism of the
traditional utility regulatory structure has been that it is not very good at encouraging and
rewarding exemplary performance. The primary purpose of the EEU is to acquire costeffective energy efficiency resources as part of the provision of least-cost electric service
required of electric service providers in Vermont. The existing model has served
Vermont ratepayers well, resulting in the acquisition of a significant amount of energy
efficiency since its 2000 inception. Any new structure must not result in the loss of this
focus.
The current contract contains performance goals and targets, minimum
performance standards, market sector budgets, administrative cost caps, and related
items. It provides the contractor with financial incentives for superior performance and
disincentives if certain minimum performance standards are not met. These are designed
to assure the contractor’s services are aligned with the ratepayers’ interests in acquiring
cost-effective energy efficiency resources. Absent a contract, other performance
assurance mechanisms would need to be developed and implemented.
The existing structure provides considerable third-party, independent oversight
through the contracted services of the Contract Administrator and Fiscal Agent, the DPS
independent evaluation of the EEU programs, the required annual fiscal audit of the
contractor and of the EEC fund, and the Board contracted triennial audit of the EEU costs
and savings to assure cost-effectiveness as required by statute. Any structure alternative
to a contract will require careful consideration of all the functions currently carried out by
these entities and mechanisms and identify how they will provided and funded.
Other Considerations in Contemplating Change
Besides a careful identification of the pros and cons of the current performance
contract mechanism, the Board must also identify what the alternatives might look like in
structure (legal, organizational, administrative), in funding, in mission, and in regulatory
oversight. The following table is offered to start the thought process.
Function
Program Planning &
Implementation
Evaluation
Contract Administration
Budget setting
Determination of Performance
goals and objectives
Determination of Minimum
performance standards
Setting Annual EEC
Collecting EEC revenues
EEC fund accounting
Annual EEU/EEC fund audit
Tri-annual Independent Audit of
Energy & Capacity Savings
Existing Contract Structure
EEU
Alternative Structure
EEU
DPS
CA contract with PSB
PSB
PSB with DPS input
PSB with DPS input
PSB
Utilities
FA contract with PSB
PSB contract
PSB contract
Finally, some vision of how EEU relationships with the various stakeholders
might change will need to be part of any structural change. Currently, the Docket 5980
MOU establishes the relationships with the PSB, the DPS, the utilities, customer credit
program participants, and Vermont’s electric ratepayers. While a franchise-like structure
might clarify the Board’s relationship with the EVT and remove some apparent role
conflicts, it could significantly complicate EVT’s relationship with the utilities with
respect to setting priorities, service delivery, and related overlapping jurisdictional issues.