Comments on the
Vermont Electric Energy Efficiency Potential Study
Submitted on behalf of
Associated Industries of Vermont
Greater Burlington Industrial Corporation
Home Builders and Remodelers Association of Vermont
International Business Machines, Inc.
Lake Champlain Regional Chamber of Commerce
Vermont Business Roundtable
Vermont Chamber of Commerce
Vermont Grocers' Association
Vermont Retail Association
Vermont Ski Areas Association
May 3, 2006
TABLE OF CONTENTS
Executive Summary
1. Introduction and Summary ......................................................................................... 1
A. Efficiency Utility Budget Framework........................................................................ 1
B. Purpose of Technical Potential Study ........................................................................ 3
C. Findings of the Commenting Parties .......................................................................... 3
2. Increasing the EU Budget Will Harm the Vermont Economy ................................. 4
A. Improved Competitiveness Requires Truly “Least-Cost” Investments ..................... 5
B. Need to Assess Non-Energy Operational Improvements ........................................... 5
C. Adverse Economic Impacts of Higher Electric Rates ................................................ 6
D. The Ability to Capture Energy Efficiency Improvements Outside Vermont ............ 8
3. Measuring the Economic Benefits of Lower Energy Bills ......................................... 8
4. Funds Collected for the EU are not Used in an Economically Efficient Manner . 10
A. Market Barriers to Improved Energy Efficiency ..................................................... 10
B. Inefficiency Created by the Discrepancy Between Avoided Costs and Rates ......... 11
C. The Efficiency of the Marketplace ........................................................................... 12
5. Modeling Flaws in the Technical Potential Study .................................................... 13
A. Cost-Effectiveness vs. Least-Cost............................................................................ 14
B. Flaws in the Technical Potential Study’s Avoided Cost Models ............................. 19
C. The Failure to Address Uncertainty ......................................................................... 20
D. Erroneous Non-Economic Benefits Estimates ......................................................... 22
6. Conclusions and Recommendations .......................................................................... 23
EXECUTIVE SUMMARY
On behalf of the Associated Industries of Vermont, the Greater Burlington Industrial
Corporation, Home Builders and Remodelers Association of Vermont, International
Business Machines, Inc., the Lake Champlain Regional Chamber of Commerce, the
Vermont Business Roundtable, and the Vermont Chamber of Commerce, the Vermont
Grocers' Association, the Vermont Retail Association, and the Vermont Ski Areas
Association (collectively “the Commenting Parties”) we are pleased to submit these
comments on the Draft Report: Vermont Electric Energy Efficiency Potential Study
(“Technical Potential Study” or “the Study”) to the Vermont Public Service Board (“PSB”
or “the Board”).
The intended purpose of the Technical Potential Study is to identify the magnitude of all
cost-effective energy efficiency savings that could be obtained and estimate the annual
Efficiency Utility (“EU”) budget necessary to capture those savings, based on assumptions
regarding the relative contributions between the EU and Vermont ratepayers. The Study
estimates that capturing all cost-effective energy efficiency savings will require a two- to
three-fold increase in the current EU budget. The Study also concludes that such a budget
increase will reduce total electric consumption in Vermont by almost 20 percent below
current load forecasts by the year 2015 and provide significant environmental and economic
benefits.
The Commenting Parties disagree with the conclusions in the Technical Potential Study,
which form the basis for potential increases in the EU budget, for the following reasons:

First, in contrast to the conclusions made in the Technical Potential Study,
increasing the EU budget will disproportionately harm Vermont businesses,
not help them. Vermont already has the highest per capita tax burden of all
50 states. Increasing the EU benefits charge to accommodate a higher EU
budget will increase this tax burden and further disadvantage Vermont
businesses, which already labor in a high tax, high cost environment.

Second, electric rates matter as much, or more than, bills. Rates are a critical
factor in the decisions made by Vermont businesses to expand operations in
state and create new employment opportunities, or to expand outside the
state and send jobs elsewhere.

Third, markets are far more efficient allocators of scarce economic resources
than are governments. Yet, because of the multiple, and competing,
objectives that must be satisfied under 30 V.S.A. § 209(d), the EU budgeting
process cannot be as efficient as the market.
EX-1

Fourth, the mechanical aspects of the Technical Potential Study, which form
the basis for recommendations to increase the EU budget, suffer from
significant methodological flaws. By basing budget estimates on a costeffectiveness standard, the Study has failed to identify a least-cost solution.
Moreover, the avoided cost approach used to identify maximum achievable
cost-effective savings suffers from numerous flaws. Not only do some of the
assumptions used appear inconsistent, the approach also fails to account for
the very real impacts of market and non-market uncertainties. These
inconsistencies need to be examined in more detail. Given the limited time
the Commenting Parties have had to review the specific models developed
by the authors of the Technical Potential Study, we ask the Board to delay
the schedule so as to provide more time for us to review those models.
The Commenting Parties recognize the benefits of improved operating efficiency, including
improved energy efficiency.
Having to compete in a global economy, the individual
businesses represented by the Commenting Parties are well aware of the need to seek out
efficiencies continually. It is for this overarching reason that the Commenting Parties
oppose any budget increase for the EU. We believe there are alternatives to increasing the
EU budget and raising rates for business customers, and we urge the Board to explore such
alternatives.
EX-2
1. Introduction and Summary
On behalf of the Associated Industries of Vermont, the Greater Burlington Industrial
Corporation, International Business Machines, Inc., the Lake Champlain Regional Chamber
of Commerce, the Vermont Business Roundtable, and the Vermont Chamber of Commerce,
the Vermont Grocers' Association, the Vermont Retail Association, and the Vermont Ski
Areas Association (collectively “the Commenting Parties”) we are pleased to submit these
comments on the Draft Report: Vermont Electric Energy Efficiency Potential Study
(“Technical Potential Study” or “the Study”) to the Vermont Public Service Board (“PSB”
or “the Board”).
These comments have been prepared by Dr. Jonathan Lesser, of Bates White, LLC, an
economic and business consulting firm, and have benefited from review and input of the
Commenting Parties. Dr. Lesser is an economist with extensive experience in the energy
field, both in Vermont and elsewhere. He was previously employed by Green Mountain
Power as the Manager, Economic Analysis, and also served as the Director of Planning at
the Vermont Department of Public Service. Dr. Lesser has testified before public utility
commissions in Alaska, Arkansas, Connecticut, Illinois, Oklahoma, Rhode Island, Vermont,
and before the Federal Energy Regulatory Commission (FERC).
These comments discuss specific issues and concerns we have with the Technical Potential
Study, as well as issues regarding increasing the EU budget and how the Board must balance
the three objectives established by the Legislature in Act 61. We believe it is important to
consider all of these issues jointly, as they are closely linked.
A. Efficiency Utility Budget Framework
In 2005, the Vermont Legislature passed, and the Governor signed into law, Act 61. One
section of that Act modified 30 V.S.A. § 209(d), which had previously set a cap of
$17,500,000 for the amount that could be collected from Vermont’s electric customers to
fund the Efficiency Utility (“EU”). Specifically, 30 V.S.A. § 209(d) was modified to state
that the EU budget will be established by the Board, in a manner that is “consistent with the
principles of least cost integrated planning as defined in section 218c of this title.”
Moreover, in establishing the EU budget and how it is allocated among different customer
groups, the Board is to balance three different objectives:
1. “Providing efficiency and conservation as part of a comprehensive resource supply
strategy;”
2. “Providing the opportunity for all Vermonters to participate in efficiency and
conservation programs;” and
1
3. “The value of targeting efficiency and conservation efforts to locations, markets, or
customers, where they provide the greatest value.”
(emph. added). Thus, the Board must set a EU budget that balances these different
objectives while maintaining consistency with the least-cost planning guidelines of 30 VSA §
218c. These three objectives are not entirely coincident. As a result, the Board must
determine how much weight each should receive. For example, were the Board to place the
entire weight on the third objective, EU programs might be designed with a much greater
emphasis on programs in the Chittenden County area, which is experiencing more rapid load
growth than other parts of Vermont. This could conflict with the second objective, which
calls for opportunities for all Vermonters to have an opportunity to participate in energy
efficiency programs.
The Legislature did not establish specific guidelines as to how the Board is to balance these
objectives. For example, it’s not clear how much weight should be given to the third
objective, which is arguably focused most closely on pure economic efficiency and which we
believe to be the most important underlying value to be considered, given the cost challenges
Vermont businesses face. It is also not clear whether the Board must develop any sort of
objective criteria for balancing the three objectives, nor how the success or failure in meeting
those objectives will be measured. However, it makes no economic sense to establish an
overall EU budget before determining those weighting factors, because it is those factors
that will determine the overall cost-effectiveness of the funds spent by the EU.1
Without some guidance as to the weights, the Board cannot establish an “efficient” EU
budget. For example, suppose the second objective, which addresses equity in the form of
program access by all Vermonters, is given the most weight.2 In that case, more emphasis
would be given to programs that necessarily will be less-cost effective than targeting DSM
efforts where they provide the greatest value.3 In effect, the more the Board emphasizes this
second goal, the greater the upward shift in the energy efficiency supply curves. Capturing
energy efficiency savings will become more costly and less efficient because the EU will not
be concentrating its efforts on capturing the most cost-effective energy efficiency savings.
1
There are established mathematical techniques that can be used to solve these so-called
“multi-attribute” or “multi-objective” capital budgeting problems.
2
The Commenting parties believe that the second legislative objective has been met by the
Board, because all Vermonters have had an opportunity to participate in efficiency and
conservations programs since the inception of the EU and the program already receives
significant funding.
3
This presupposes that the “avoided-cost” approach used to identify all cost-effective
energy efficiency is correct. As discussed in Section 5, however, this approach suffers from
fundamental economic flaws.
2
Therefore, the Commenting Parties believe the Board should place by far the greatest weight
on meeting the third objective established by the Legislature.4
B. Purpose of Technical Potential Study
The intended purpose of the Technical Potential Study is to identify the magnitude of all
cost-effective energy efficiency savings that could be obtained and estimate the annual EU
budget necessary to capture those savings, based on assumptions regarding the relative
contributions between the EU and Vermont ratepayers. Specifically, the Study states
“It is clear that to achieve all of the maximum achievable cost effective
savings, Efficiency Vermont … would have to spend over $385 million in
today’s dollars (this figure includes financial incentives) over the next decade
to achieve such results (or $38.5 million a year in 2006 dollars, assuming the
EVT pays 50% of measure incremental costs)” (emph. in original, fn.
omitted).5
The Study further concludes that this $38.5 million annual value6 would need to be increased
by at least $15.4 million if Efficiency Vermont “had to pay 100% of measure incremental or
full costs to obtain maximum achievable cost effective potential savings levels.”7 This
equates to a $53.9 million dollar annual budget,8 a three-fold increase over the previous
budget ceiling. The Technical Potential Study concludes that such large increases in EU
expenditures will not only reduce total electric consumption in Vermont by almost 20
percent below current load forecasts by the year 2015, but will also provide significant
environmental and economic benefits.
C. Findings of the Commenting Parties
The Commenting Parties disagree with the conclusions in the Technical Potential Study
because they are based on unsupported assumptions and a modeling framework that appears
to have significant flaws. The increases in spending on the EU identified in the Study
cannot be justified economically, would further damage the competitiveness of Vermont
businesses and industry, and adversely affect Vermont’s already tenuous economy, which
4
Distribution utilities and VELCO retain separate energy efficiency responsibilities,
independent of the EEU, related to network planning and the potential use of DSM as a
“distributed resource.” The Technical Potential Study did not address these efforts, nor
their potential cost, which add to the Commenting Parties rate impact concerns.
5
Technical Potential Study, at 7.
effectiveness” concept.
Below, we discuss problems with the entire “cost-
6
In an email dated April 20, 2006 from Mr. Riley Allen, Mr. Allen states that the quoted
budget figure is erroneous and should be $30 million per year.
7
Ibid.
8
This equates to just over $45 million, based on Mr. Allen’s email.
3
labors under the highest overall tax burden per person of all 50 states. That tax burden now
stands at $3,600 per year, which stands in stark contrast to New Hampshire, which imposes
a per capita tax burden of only $1,544, the third lowest in the nation. 9
The Commenting Parties oppose any increases in the EU budget that will further increase
the tax burden on the business community. The Commenting Parties represent the majority
of Vermont businesses, many of which are struggling to maintain their Vermont operations.
In the last few years, a number of businesses have expanded elsewhere or closed because
they cannot compete in Vermont’s high-cost business environment.10
Our comments regarding the Technical Potential Study do not mean that the Commenting
Parties oppose improvements in energy efficiency. We are acutely aware that, to maintain
our competitiveness in a global market, the businesses and industries we represent must
always seek out ways to improve the efficiency of our operations. We are continually
examining strategies to improve efficiency, whether it is our manufacturing processes,
employee utilization, marketing effectiveness, or energy use.
Finally, the Commenting parties believe there are alternatives to increasing the EU budget
that deserve further exploration and development, such as voluntary “opt-ins,” revolving
loans, and shared savings contracts, all of which could be provided by the EU, other
vendors, or through other policy approaches. We believe such alternatives can capture
energy efficiency savings at a lower overall cost, by harnessing the power of the market. We
recommend that the Board explore these and other alternatives as part of its deliberations on
the EU budget for the next three years.
2. Increasing the EU Budget Will Harm the Vermont Economy
Raising the EU budget will impose higher taxes on all Vermont’s business community,
which is already struggling to maintain its competitiveness. There is little disagreement
among economists that increasing marginal tax rates, especially when those rates are already
high, reduces economic growth. As a result, doubling or trebling the EU budget will not
create thousands of jobs, as the figures cited in the Technical Potential Study imply.11 More
likely, it could eliminate existing jobs that Vermont can ill afford to lose.
Proponents of an increased EU budget may point to the Study’s contention that investments
in energy efficiency “can make businesses in Vermont more competitive with businesses in
9
Source: U.S. Census Bureau, Governments Division, March 29, 2006.
10
See, e.g., Testimony of Robert Lang, International Business Machines, Inc., Before the
Senate Finance Committee, February 1, 2005, in reference to IBM’s decision to expand
production levels in Bromont, Quebec, rather than in Essex Junction, Vermont because of
high electricity costs.
11
Section 3 below discusses some of the analytical flaws with the economic impact studies
cited by in the Technical Potential Study
4
other states and other countries,”12 to refute our claim of economic harm. They may argue
that competitiveness will be improved because investing in energy efficiency reduces energy
bills. However, having analyzed this argument, the Commenting Parties reject it, because it
fails to account for at least four other important economic factors.
A. Improved Competitiveness Requires Truly “Least-Cost” Investments
Investments in energy efficiency will improve business competitiveness only if those
investments truly are “least-cost.” Clearly, spending two dollars to save one is no bargain.
Under the current EU structure, all ratepayers must decide whether to “opt-in” to invest in
energy efficiency. For example, IBM currently pays about $900,000 per year to the EU. To
receive any of that money back, it must decide to install energy efficiency measures and then
have those measures verified by the EU. Under IBM’s current agreement, it can only receive
at most 70 percent of its EU contribution back. In other words, IBM pays an effective
minimum 30 percent tax on all of its contributions.
Since a larger EU budget will impose a higher tax burden on all businesses, any business
must be able to “opt-in” sufficiently to EU programs to overcome the adverse economic
impacts of the higher EU charges on its electric bill. Ironically, raising the EU charge will
further penalize the most energy efficient businesses that already have invested in energy
efficiency and will thus have fewer least-cost measures available for which they can “optin.”13 Moreover, the rational reaction in such cases is for businesses to stop their own
investment in energy efficiency measures and instead channel them through government
programs, thus exacerbating free-rider effects.
Furthermore, the EU programs only create “least-cost” investments to the extent that the
companies that contribute relatively more to the EU budget are those that have more room
to make energy efficient investments. The Study’s authors do not explain why this would be
the case. In fact, as we explained above, the opposite would happen if large industrial
customers have already exhausted most of the DSM measures available. In attempting to
recoup their contributions, these companies would make unnecessary investments, while
relatively small customers with more energy-saving opportunities would have little incentive
to invest.
B. Need to Assess Non-Energy Operational Improvements
Even if an energy efficiency investment is “least-cost” among all possible such investments,
it must still be compared with other investment opportunities, so that a business can
maximize overall improvements in economic efficiency. This is called the capital budgeting
12
Technical Potential Study, at 81.
13
The Study also fails to address the fact that, while it has based energy efficiency costeffectiveness on a societal test, businesses and individuals all will decide to opt-in based on
the retail rates they pay. This is discussed further in Section 4, below.
5
problem and is fundamental to any business. Given finite investment resources, any
business will allocate those resources to provide the greatest overall returns. Those may be
through energy efficiency or they may involve far different investments. Increasing the EU
tax, however, forces energy efficiency investments to take priority over other operating
efficiency improvements. Not only does that create losses for Vermont businesses that
would choose to invest in other operational improvements, the entire tax and “opt-in”
approach to efficiency investments implies that the government has a better understanding
of how Vermont’s businesses can best improve their operating efficiency than the businesses
themselves. We reject this proposition.
Forcing energy efficiency investments to take priority over other operating efficiency
improvements distorts business investment decisions. That causes economic harm by
imposing what economists call a “second-best” solution. By raising the EU tax on business
customers, Vermont will reduce the amount of available capital firms have to invest. That
will cause economic harm in itself, just as any tax increase causes economic harm to an
individual firm. Then, however, when the firm determines how best to allocate its remaining
investment dollars, it will consider the potential return of some portion of those tax dollars if
it makes DSM investments. This will introduce a price distortion that biases the firm’s
perceived return on investment and leads to inefficient investment choices.14 As a
consequence, the firm’s overall operating efficiency will be reduced, as will its overall
competitiveness.
C. Adverse Economic Impacts of Higher Electric Rates
Because the EU charge is a tax on electric rates, increasing the EU budget (and the per kWh
tax) will raise the marginal cost of additional electric use and automatically imposes a “drag”
on business expansion decisions. There is a standard result from economics that taxing
intermediate goods in the production process, such as electricity, reduces economic wellbeing.15 As a result, Vermont businesses contemplating expansion, with all of the
concomitant economic benefits, will be less likely to do so when faced with a higher EU tax
and more likely to relocate elsewhere, just as they would be less likely to expand in Vermont
if the state raises other taxes. Simply put, rates matter, not just bills.
Table 1 compares average electric rates in Vermont by sector to average rates in the U.S. as a
whole for the years 2003 – 2005. As the table shows, average electric rates in Vermont are
significantly greater than the nation as a whole, ranging from 30 percent in the commercial
14
Only if the EU tax paid by the business is exactly what the business would have spent on
energy efficiency investments will there be no price distortion. The likelihood of this
happening is small.
15
For a survey of the literature on taxation, see V. V. Chari and Patrick J. Kehoe, “Optimal
Fiscal and Monetary Policy,” Research Department Staff Report 251, Federal Reserve Bank of
Minneapolis, 1998, p. 21.
6
sector to 45 percent in the industrial sector.
significant cost on the Vermont economy.
These rate disparities already impose a
Moreover, with a number of utilities filing for rate increases, including Burlington Electric,
Vermont Electric Cooperative and, most recently, Green Mountain Power, the competitive
pressures on Vermont businesses because of high electric rates will only increase. Moreover,
according to the DPS’s own analysis, increasing the EU budget will lead to immediate rate
increases. By 2009, the DPS estimates rates will be seven percent higher with the EU budget
increases than if the current budget is maintained. By 2015, the rate increase will be almost
11 percent higher. These rate increases will impose a significant economic cost on all
Vermont businesses. Furthermore, they will increase the distortion between the relative
costs of doing business in Vermont and doing business elsewhere.
Table 1: Comparison of Retail Electric Rates, Vermont and U.S. Average
(Cents per kWh)
Year
2003
U.S.
Vermont
Difference (Pct)
2004
U.S.
Vermont
Difference (Pct)
2005
U.S.
Vermont
Difference (Pct)
Residential
Commercial
Industrial
8.70
12.82
47%
8.00
11.29
41%
5.12
8.05
57%
8.97
12.94
44%
8.16
11.42
40%
5.27
7.96
51%
9.42
13.06
39%
8.68
11.35
31%
5.57
8.08
45%
Source: USDOE/EIA, Electric Power Monthly, March 2006, Tables 5.3 and 5.6b; Electric Power
Monthly, March 2005, Table 5.6b.
Under the principle of “Ramsey pricing,” which has long been established in the public
finance literature, the most price-sensitive consumers – in this case Vermont businesses –
should not be heavily taxed, because doing so leads to greater losses in economic welfare
than taxing less price-sensitive consumers.16 This means that, if a uniform tax (such as a per16
See, e.g., F. P. Ramsey, “A Contribution to the Theory of Taxation,” Economic Journal, Vol.
37, No. 145 (March 1927), p.59: “If several commodities which are independent for demand
require precisely the same resources for their production, that should be taxed most for
which the elasticity of demand is least.”
7
kWh tax on electric rates) is levied on two disparate groups of consumers, the most pricesensitive group will create a disproportional economic loss compared to the less pricesensitive group.
Empirical studies of electric consumption nationwide have found that commercial and
industrial customers generally have a larger price elasticity of demand than residential
customers, and will therefore create greater economic losses to the Vermont economy. One
rational economic response by businesses to higher taxes will be to reduce in-state
production and/or relocate their operations out-of-state, further damaging the Vermont
economy. This, in fact, raises a fourth economic factor that must be considered: the
availability of energy efficiency improvements outside the state.
D. The Ability to Capture Energy Efficiency Improvements Outside Vermont
Firms do not have to be located in Vermont to improve their energy efficiency and their
competitiveness. A firm contemplating expansion in Vermont or relocation out-of-state will
determine the most “efficient” solution by examining the relative costs it faces for land,
labor, and materials, including energy. If it is “more efficient” to do business outside of
Vermont, firms will expand or relocate elsewhere. Moreover, just because a firm leaves
Vermont does not mean it cannot invest in the same energy efficiency measures elsewhere.
Given the “opt-in” provisions of Vermont’s approach to energy efficiency and the
requirement that the Board balance other objectives besides capturing the most valuable
energy savings, firms’ decisions will be biased towards not expanding in Vermont and/or
relocating outside of Vermont. Worse, the bias will be greatest for the most efficient and
competitive firms, which will have the fewest opportunities for low-cost energy efficiency
investments. In effect, increasing the EU budget is most likely to reward the least energy
efficient firms, who are least likely to survive the rigor of the competitive marketplace. And,
given the tenuous state of the Vermont economy, this should not be a policy goal.
For some firms, especially those that are the least energy efficient, the economic benefits
stemming from reduction in their energy bills will be greater than the economic costs of
higher electric rates. However, all of the firms that pay more in EU taxes than they receive
back from the EU will suffer economic harm. And, again, the most energy efficient firms
are likely to suffer the greatest economic losses from EU budget increases, precisely because
they have fewer opportunities for additional, least-cost energy efficiency improvements and
will thus be most adversely affected by higher EU charges on their electric rates.
3. Measuring the Economic Benefits of Lower Energy Bills
Earlier drafts of the Technical Potential Study quoted from a study that estimated 46 new
full-time jobs created per million dollars of spending on energy efficiency measures.17 There
17
State of Wisconsin Department of Administration Division of Energy, Focus on Energy
Public Benefits Statewide Evaluation, Quarterly Summary Report: Contract Year 2, Second
8
are a number of technical problems with this study, as well as a more fundamental policy
problem raised by appealing to such studies to justify economic benefits of increased
spending on energy efficiency.
One major problem with this study is that it fails to adequately account for the source of the
investment funds and, therefore, misses the costs imposed by raising those funds. To
understand this, suppose the Federal government sent a check to every Vermonter for $100,
increasing total discretionary income in the state by some $65 million. In essence, this
income simply arrives out of thin air. Some of that money would be spent in Vermont,
some would “leak” outside the state as a result of additional imports, and some would be
saved. Many economic impact models are available to estimate these types of impacts and
most develop “multipliers” that account for all of the impacts of the increased spending.
Next, suppose that the $65 million is distributed to every Vermonter in the exact same way,
except now the money has been raised by an equivalent increase in the state income tax. In
this case, the economic impacts are likely to be negative because higher taxes have been
imposed and used to transfer money between different groups. (Economists call these, not
surprisingly, “transfer payments”). Tracing the net economic impacts of such a tax increase
is much more difficult, because those impacts will depend on who are the primary payers of
the additional $65 million and who are the primary payees, all this without incorporating the
administrative costs necessary to implement the program itself—a clear economic loss.
In a similar manner, because increasing the EU budget is a tax on Vermonters, the economic
impacts associated with the funds collected should be considered transfer payments.
Calculating the overall economic impacts of such transfer payments would require a detailed
study that accurately followed the dollar flows from residences and businesses to other
residents and businesses. Certainly, some firms would benefit, especially those whose
business was installing energy efficiency measures. However, many other firms would be
adversely affected. The overall impacts of tax increases that simply transfer money between
different groups will be negative. Therefore, the prospect of creating 46 full-time jobs per
million dollars of DSM spending in Vermont, which would translate into another 800 fulltime jobs if the EU budget were doubled, is not realistic.
Finally, from a policy perspective, there is a significant difference between economic benefits
and economic impacts. This is an especially crucial difference given the use of the so-called
“societal” test to evaluate cost-effectiveness. Under the societal test, economic “benefits”
accruing to Vermont from (say) reduced energy imports must be offset by economic
“losses” accruing to exporting firms. Ultimately, economic impacts are secondary to
investment efficiency. Just as the State does not build schools in order to create new jobs
for school bus drivers, increases in the EU budget should be justified on other grounds —
Quarter, March 31, 2003, Evaluation Contractor: PA Government Services Inc. Prepared by:
Focus Evaluation Team.
9
and as this paper makes clear we do not find economically efficient grounds for an increase
— rather than on the basis of a presumed ability to create new jobs.
4. Funds Collected for the EU are not Used in an Economically
Efficient Manner
The Commenting Parties believe an important question surrounding a higher EU budget is
whether the additional funds will be collected and allocated in the most economically
efficient manner. This is not meant as a criticism of Efficiency Vermont, which clearly must
operate under the guidelines established for it by the Legislature. Nor is it meant as a
criticism of the Board, which must balance the three objectives established by the Legislature
in Act 61.
One of the basic premises underlying the formation of the EU was that businesses and
individual consumers either could not, or would not, respond to market signals “efficiently.”
In other words, they won’t make the “correct” economic decisions. This has been attributed
to lack of information, market barriers, and even consumer “irrationality.” The
Commenting Parties disagree that an increase is needed in the EEU budget to fully prompt
good market-based decision making.
As an example, the rapid increases in the price of gasoline last year as a result of Hurricanes
Katrina and Rita showed that, in fact, consumers do respond to market signals, and respond
quickly. Sales of gas-guzzling SUVs plummeted, and consumers sought out other ways to
reduce their gasoline consumption. And, as noted previously, businesses have a tremendous
market incentive to improve their overall operational efficiency, including their use of
energy, so they can remain competitive and profitable. Thus, we believe energy efficiency
savings can be captured at a lower cost when businesses and individuals make their own,
market-based decisions about energy efficiency ─ be it purchasing a hybrid car, a frontloading washing machine, or compact fluorescent bulbs ─ rather than levying what
effectively will be higher taxes on businesses, creating an administrative burden to collect
those taxes, and using them to fund programs that subsidize energy efficiency investments
for selected groups.
A. Market Barriers to Improved Energy Efficiency
One of the original reasons for creating the EU was the assertion that market barriers
prevented the widespread adoption of energy efficiency measures. One of those barriers was
the high initial cost of energy efficiency measures. Although there is no single definition of
market barriers, the “classic” operational definition used in economics encompasses any
costs that must be borne by firms seeking to enter (or exit) an industry that are not borne by
incumbent firms. 18
18
See, Stigler, G. (1968), The Organization of Industry, Chicago, IL: University of Chicago
Press.
10
The fact that the price of a good or service is higher than a similar one is not evidence of
barriers to entry. Instead, a high market price can be indicative of a different demand and
supply structure. For example, the price of a Rolls Royce is much higher than the price of
an average automobile. But this does not mean that Rolls Royce faces market barriers in the
automobile market, even if most people cannot afford to buy one. Similarly, the fact that
front-loading washing machines sell for higher prices than typical top-loading ones does not
mean manufacturers of front-loading washing machines face market barriers. The validity of
barriers to entry arguments preventing more widespread adoption of energy efficiency
measures is questionable. While there may be informational barriers that can be addressed
by the EU, addressing price barriers through rebate programs and subsidies, which are a
major component of Vermont’s approach to energy efficiency spending, is not addressing a
legitimate market barrier. Indeed, presuming that information barriers are overcome,
consumers will not need any other incentives to invest in cost-effective energy efficiency,
since they will know how beneficial such investments are.
B. Inefficiency Created by the Discrepancy Between Avoided Costs and Rates
The Technical Potential Study uses a forecast of wholesale electric market prices in New
England, plus estimates of avoided transmission and distribution (“T&D” costs) and
externalities, as the basis for the avoided costs used to determine the cost-effectiveness of
energy efficiency programs. But “opt-in” decisions made by businesses and individual
consumers will be based on their personal “avoided costs,” in other words their retail rates.
This price distortion reduces economic benefits and increases the overall costs to obtain
energy savings.
As long as retail rates differ from the avoided cost estimate, the optimal level of DSM
investment will not occur. Consumers will either “opt-in” too much or not opt-in enough.19
Moreover, to the extent that consumers’ retail rates reflect fixed and variable costs, then
non-participants will be harmed disproportionately compared with program participants.
Since the largest business and industrial customers tend to have the lowest retail rates, they
will tend to “opt-in” to EU programs less than residential consumers, who pay higher retail
rates. Thus, business consumers will end up subsidizing residential customers, much as
electric utility customers who participate in net-billing arrangements are subsidized by nonparticipants. Those subsidies will further exacerbate the adverse economic impacts on
Vermont businesses.
Now, it is possible that energy efficiency investments will slightly reduce wholesale electric
prices, i.e. avoided costs, in Vermont. (However, even if one were to accept the Technical
Potential Study’s forecast annual energy savings if all cost-effective energy efficiency is
captured – and we believe those energy savings are significantly overstated, the magnitude of
those savings is less than one percent of the forecast energy sales in New England as a
19
This presumes the entire avoided cost approach and identification of all cost-effective
energy savings is correct, which, as discussed in Section V, it is not.
11
whole.20) The amount of such price decreases, if any, will depend on the magnitude and type
of energy efficiency measures targeted, and the price elasticity of demand. For example,
energy efficiency investments that reduce peak loads may help reduce peak-hour price
spikes.21
Lower wholesale prices would eventually benefit Vermont businesses. However, because all
of Vermont’s electric utilities are fully regulated, they will only benefit to the extent that
energy efficiency investments lead to lower retail rate increases than they otherwise would, or
defer future retail rate increases. Therefore, energy efficiency investments will provide
neither contemporaneous rate relief nor economic benefits, because retail rates are fixed and
utilities do not file for new rates whenever there is a change in wholesale electric prices. 22
Thus, while the adverse economic costs of higher EU taxes will be felt immediately, any
economic benefits from lower wholesale market prices and lower retail rates will be deferred.
This will further reduce the economic value of those benefits compared to other investments
in operational efficiency businesses can undertake immediately on their own. Moreover,
wholesale price decreases, if any, are likely to be far outweighed by retail rate increases, based
on the DPS’s rate impact analysis.
Additionally, the “benefits” of lower electric prices cannot be counted in the societal test
framework used in the Technical Potential Study. The reason is that market price decreases
are simply a transfer payment from suppliers to consumers.23 Furthermore, to the extent
that DSM investments lower wholesale rates in New England as a whole, investments paid
for by Vermont businesses and individuals will subsidize the rest of New England.
Ironically, for businesses in Vermont, this means that a higher EU budget may force them to
subsidize their direct competitors.
C. The Efficiency of the Marketplace
Economists agree that allowing consumers, especially businesses, to make their own energy
efficiency decisions is more efficient than using government programs, because markets are
20
Appendix D of the Technical Potential Study estimates annual energy savings of about
1300 GWh, less than one percent of the estimated total New England energy sales of over
151,000 GWh in 2015, as published in the April 2006 ISO-NE Report, “2006- 2015
Forecast of Capacity Energy Loads and Transmission” (“CELT Report”). The average
wholesale price change from such a reduction in demand is likely to be quite small.
21
Peak load reductions will also reduce Vermont utilities’ capability reserve requirements,
and thus their locational installed capacity payments.
22
Even under a so-called “alternative regulation” framework that provides for automatic
power cost adjustments (“power cost adjustment clause”), rate changes would not be a daily
occurrence. Instead, power cost adjustments are more likely to occur periodically.
23
In technical terms, increased spending on energy efficiency that leads to lower wholesale
rates is what economists refer to as a “pecuniary externality.”
12
the most efficient allocators of scarce resources. It avoids unnecessary administrative costs
associated with collecting and distributing funds, avoids having to address multiple,
competing objectives that increase the cost of achieving cost-effective energy savings, and,
most importantly for firms, allows firms to determine for themselves their most efficient
capital investment strategies for improving overall operating efficiency and competitiveness.
The Commenting Parties contend that the distribution of EU funds collected is not efficient
and, in particular, penalizes businesses. Indeed, the language of Act 61 requiring the Board
to balance three different, and competing, objectives strongly suggests that the distribution
of the EU funds is less efficient than the market. But it makes no economic sense to
establish a budget amount before determining those weighting factors – it is those factors
that drive the overall cost-effectiveness of the funds spent by the EU.
Since the inception of the EU, Vermont businesses have been most affected by the
inefficiency of fund distribution and allocation, paying in more to the EU than they have
received in payments for energy efficiency investments. This hardly seems an appropriate
way to encourage greater energy efficiency among Vermont’s businesses. Moreover,
increasing the EU budget and therefore the effective tax on electric rates paid by electric
intensive industries will imposes additional economic costs on the Vermont economy: goods
and services that require relatively more electricity as an input will become more expensive
relative to the same goods produced in other states, as well as goods that require less
electricity in their production.
Commercial and industrial customers have more energy choices than residential customers
and should be allowed to make their own energy efficiency decisions, based on market
forces. The Commenting Parties believe there are many ways to improve energy efficiency
and that Vermont businesses should not be treated as a single class like the Residential
sector. Simply put, we believe there needs to be more emphasis on market-based
alternatives, rather than increasing the EU budget, to deliver additional energy efficiency at a
lower cost while meeting the objectives set out by the Legislature. For example, there are
many firms that offer “shared-savings” arrangements and performance contracts. These
could be offered by the EU, other vendors, or through other policies. Revolving credit
arrangements are another alternative. A third is voluntary EU membership, in which
businesses who most need information and assistance could sign-up with the EU, while
those who had their own, internal expertise would be able to “opt-out.” No doubt there are
many other alternatives as well. The Board should thoroughly explore these and other
alternatives before increasing the EU budget.
5. Modeling Flaws in the Technical Potential Study
The Technical Potential Study sets out to identify all “cost-effective” energy savings and the
budget necessary to capture those savings. But in balancing the three objectives set out by
the Legislature, however, the Board should be cognizant of the fundamental difference
between what is “cost-effective” and what is “least-cost.” This is especially important in
13
light of the third legislative objective: capturing energy efficiency savings where they have the
greatest value.
A. Cost-Effectiveness vs. Least-Cost
The discrepancy between cost-effectiveness and least-cost arises because capturing all costeffective efficiency investments cannot, by definition, be a “least-cost” strategy. The reason
is that the cost-effectiveness argument used in the Study to justify the EU budget increase is
an average cost concept, while “least-cost” is a marginal cost one. The two are not the same.
To determine whether a given efficiency measure is cost-effective, the GDS study compares
the present value of the energy savings of the measure, based on the forecast price of
electricity and the expected energy savings the measure will provide, against the expected
cost of the measure. If the total cost of purchasing and installing the measure is no greater
than the present value of the energy savings over the measure’s anticipated lifetime, that
measure is deemed cost-effective. For example, a compact fluorescent (“CF”) bulb costing
five dollars more than the incandescent bulbs it replaces (because the CF is supposed to last
longer) will be cost-effective as long as the present value of the electric savings it provides
over time is at least five dollars.
In designing a residential lighting program, it’s not possible to evaluate the cost-effectiveness
of every single CF that could conceivably be installed. Instead, the typical approach, which
is the approach used by GDS, is to estimate the total number of incandescent bulbs that
might be conceivably replaced (technical potential), then reduce that number to reflect how
many bulbs might actually be replaced even with unlimited resources (maximum achievable
potential), and then finally determine the total number of replacements that are costeffective (maximum achievable cost-effective potential). The maximum achievable costeffective potential would be determined by, in essence, constructing a CF supply curve and
then moving along that supply curve until reaching a point where the total replacement cost
just equals the net present value of the energy saved. Put another way, the maximum
achievable cost-effective potential occurs where the average cost of saved energy from the
program just equals the average avoided cost. At that point, the marginal cost of replacing
some specific CFs will therefore be greater than the average cost. (Unless the average cost
of replacing each and every CF is exactly the same, meaning the average cost equals the
marginal cost, then the cost of some CF replacements will be less than average cost and
others will be more than the average cost.)
The net energy expenditure savings, if the maximum achievable cost-effective potential is
captured, compared with a status quo case of no program, are zero. This is because, by
definition, the total cost of achieving the savings just offset the NPV savings themselves. In
other words, what is cost-effective is not necessarily what is economically efficient. This is
the fundamental economic reason why the cost-effectiveness standard used in the Study is
wrong: it bases cost-effectiveness on average cost, rather than using marginal cost analysis to
determine the least-cost level of efficiency. The latter approach is the correct economic
framework. As a result, the entire analysis should be redone to determine the least-cost level
14
of investment, which will necessarily be less. Another example further clarifies this point:
suppose a firm faces a lawsuit that would cost it $100 million if no legal efforts were made.
The firm can spend $99,900,000 on attorneys and be certain it will win the lawsuit. Such a
decision would be cost-effective, because the firm gains $100,000. But it will not necessarily
be the least-cost decision. After all, the firm only saves $100,000, while a smaller
expenditure in legal counsel might provide it with a high probability of saving the entire $100
million.24
In essence, determining the EU budget necessary to achieve the “full-amount of costeffective energy savings,” as is done in the Technical Potential Study, is the same as asking
“how long can we defer investments in new generating capacity with demand side
management (“DSM”) investments?” Indeed, this question has been explicitly asked in the
distributed utility (“DU”) planning efforts undertaken by the DPS and Vermont utilities
under the DU Planning Guidelines.
To understand this point more clearly, consider the total cost of supplying electricity, either
in the form of generation or DSM savings. The goal is to determine the level of DSM
investment that will defer generation investments and yield the lowest present value cost
supply of electricity. This is shown in Figure 3. The curve labeled “PV Total Cost”
represents the total present value of each combination of deferred generation and DSM that
meets customer needs. The curve labeled “PV-DSM Cost” is the present value cost of all
of the DSM investments. The curve labeled “PV-Avoided Cost” represents the present
value of the avoided (deferred) cost of electricity, including capacity cost savings, T&D,
environmental externalities, and so forth. The maximum cost-effective level of DSM
investment is shown as DSMC/E, where the present value of the DSM investment just equals
the present value of the avoided (deferred) generation costs (Point A). Deferring new
generation investment beyond this time has a lower average present value benefit than the
average present value cost of additional DSM investment.
The level of DSM investment at Point A, while capturing all cost-effective savings, does not
result in a least-cost electric supply. Instead, the least-cost generation mix is achieved with
an investment of DSM*. This level of DSM occurs where the difference between the “PVDSM” and “PV-Avoided Cost of Energy” curves is largest. It is also the point where the
slopes of the two curves, representing the marginal cost of additional DSM and the marginal
benefit of deferred generation are equal. Thus, maximum deferral (i.e., acquiring all costeffective DSM) is not the same as least-cost.25
24
Under a marginal cost analysis, the firm would hire additional attorneys until the last dollar
spent in legal counsel provides one dollar of expected savings.
25
For a more detailed analysis, see, J. Lesser and C. Feinstein, “Electric Utility Restructuring,
Regulation of Distribution Utilities, and the Fallacy of “Avoided Cost” Rules,” Journal of
15
Present Value Cost ($)
C/E
Deferral
"Least-Cost"
Deferral
A
PV Generation
Cost
PV DSM Cost
PV Total Cost
Slopes Equal
PV Avoided
Cost
DSM*
DSMC/E
Deferral time (years)
Figure 3: Cost-Effective vs. Least-Cost Deferral Times
An Example: Early Appliance Replacement Programs
The Technical Potential Study evaluates several different appliance replacement programs
(including fuel-switching programs) that replace older, less efficient appliances with newer,
more energy efficient ones. To see how the economic benefits and costs of such programs
are calculated, and illustrate how those costs and benefits can vary, consider a program that
encourages consumers to replace their older refrigerators with new ones. The economic
value of this program will depend on the value of the annual electricity savings (based on net
kWh savings per year and the price of electricity) and the expected lifetimes of old and new
refrigerators. It will also depend on the size of the rebates provided to consumers to induce
them to switch.
Analyzing the value of replacing a single refrigerator is straightforward: we simply compare
the present value of the energy savings26 against the present value cost of buying a new
Regulatory Economics 15 (1999), at 93-110 (“Lesser and Feinstein 1999”). A copy of this paper
is available on request.
26
A complicating factor is technological improvement. Specifically, if refrigerators in the
future are expected to be even more energy efficient, encouraging consumers to replace
today will, all other things equal, reduce the benefits of early replacement.
16
refrigerator before the old one wears out. (For simplicity, it’s easiest to assume that the
consumer will purchase the energy efficient refrigerator when the old one wears out. Thus,
there are no incremental energy savings beyond the expected time when the old refrigerator
will be replaced.)
Assume that a new refrigerator has an expected lifetime of 20 years, that an old refrigerator
is currently 10 years old (and therefore has an expected remaining life of 10 years), and that
the price of electricity is $100/MWh ($0.10/kWh).27 We also assume that the old
refrigerator uses 800 kWh/year, while the new one uses only 200 kWh/year. We also
assume there is no rebate offered. Finally, we assume an inflation rate of 2.5 percent and a
real discount rate of 2.3 percent. The NPV of early replacement in a given year (prior to
year 10, when the old refrigerator is assumed to wear out), is shown in Figure 4.
NPV Savings of Early Equipment Replacement
$15.00
$10.00
$5.00
$0.00
($5.00)
($10.00)
($15.00)
0
2
4
6
8
10
12
14
16
18
20
Early Replacem ent in Year T
Figure 4: NPV Early Replacement – Consumer Perspective
As Figure 4 shows, from an individual consumer’s standpoint, it is cost-effective for the
consumer to switch as early as year 2, when the NPV first becomes positive. However, the
most economically efficient time to replace the old refrigerator, i.e. the least-cost
replacement policy, is when the NPV is at a maximum. That does not occur until year 6,
when the NPV is just over $11. Suppose, however, the consumer is offered a $50 rebate. In
that case, it is cost-effective for the consumer to switch immediately, even though the best
year to switch is year 3, as shown on in Figure 5. But if the consumer has a higher real
27
To simplify the example, we assume that the retail rate paid by the consumer is the
same as the wholesale avoided cost. To the extent that per kWh retail rates include some
fraction of a utility’s fixed costs, the disparity between the optimal replacement decision
from the consumer’s standpoint and the optimal replacement decision from society’s
standpoint will diverge further.
17
discount rate, say 3.5 percent, early replacement is not cost-effective until year 5, and not
value maximizing until year 7, as shown in Figure 6.
NPV Savings of Early Equipment Replacement
$30.00
$25.00
$20.00
$15.00
$10.00
$5.00
$0.00
0
2
4
6
8
10
12
14
16
18
20
Early Replacem ent in Year T
Figure 5: NPV Early Replacement – with Rebate
NPV Savings of Early Equipment Replacement
$10.00
$5.00
$0.00
($5.00)
($10.00)
($15.00)
($20.00)
($25.00)
($30.00)
($35.00)
0
2
4
6
8
10
12
14
16
18
20
Early Replacem ent in Year T
Figure 6: NPV Early Replacement – Higher Discount Rate
This example further illustrates another program issue, which stems from the dichotomy
between societal benefits and benefits to the individual consumer. This is shown in Figure
7. From society’s perspective, it is cost-effective to replace the old refrigerator immediately,
but most valuable to replace it in year 5. However, from the consumer’s standpoint, if there
18
is no rebate, it is never worthwhile to replace the old refrigerator. It turns out that a rebate
of $120 is necessary to align the optimal replacement year for consumers and society, also in
year 5.
NPV Savings of Early Equipment Replacement
$40.00
$20.00
$0.00
($20.00)
Consumer
($40.00)
Society
($60.00)
($80.00)
($100.00)
($120.00)
0
2
4
6
8
10
12
14
16
18
20
Early Replacem ent in Year T
Figure 7: NPV Early Replacement – Consumer and Society
Finally, the societal analysis also assumes, crucially, that the rebate, which is funded by the
EU tax, has no negative impact on overall economic welfare. However, as discussed
previously in Section III, levying taxes, especially on intermediate goods like electricity, will
have adverse impacts on welfare, unless the tax exactly equals the external costs of
producing the intermediate good.
B. Flaws in the Technical Potential Study’s Avoided Cost Models
The Commenting parties have not had sufficient time to properly evaluate the avoided cost
spreadsheet models used to determine the level of cost-effective energy savings. We were
provided with the models on April 25, 2006, allowing only one week for review. The very
large size of these spreadsheet models makes a comprehensive evaluation of the results
difficult, as many modeling assumptions and formulae must be traced and evaluated for their
accuracy. We request that the Board provide additional time to allow for a complete
evaluation of these models.
In our brief review of the models, however, we have encountered three potential problems
and inconsistencies. The first is a discrepancy between the discount rate used to develop
levelized avoided costs and the discount rate used to determine the NPV and costeffectiveness of program measures. Specifically, the avoided energy supply costs (“AESC”)
used in the spreadsheet models were estimated using a model developed by ICF
19
Corporation. ICF used a real discount rate of 2.03% to levelize those avoided costs. 28
However, in the spreadsheet “GDS Vermont Model-Light Mfg-existing.xls,” the worksheet
entitled “Input” the assumed real discount rate is 5.60%. We are not aware of a societal
analysis that uses one (societal) discount rate to calculate levelized avoided costs and another
discount rate to estimate net present value savings.
A second concern we have is the use of energy “loss multipliers” ranging between 15
percent and 24 percent. It appears that energy efficiency measures are credited with
additional 15 – 24 percent in savings, presumably to address system losses. The source of
these loss multipliers is shown to be “Dave Lamont VDPS.” The Commenting Parties are
concerned that these loss multipliers are far too high and that there is no documentation as
to how they have been estimated.
A third concern is the assumed value for avoided T&D costs. The same spreadsheet model
uses a value of $162.75/kW-year. We question the validity of this avoided cost figure, which
appears to account for a significant portion of the total NPV benefits of some efficiency
programs. For example, in the same spreadsheet, avoided T&D costs account for over 40
percent of the total NPV benefits for Program P1. The problem with the T&D “avoided
cost” assumption has been well-documented by Dr. Lesser in several peer-reviewed
publications,29 as well as in testimony he provided in Docket No. 6860 on behalf of the DPS.
Together with the assumed energy loss multipliers, it appears that energy efficiency measures
are being credited with an additional 60 percent in value on top of their expected energy
savings.
Given these three modeling issues, which we found in a brief review of the accompanying
spreadsheets to the Technical Potential Study, we are concerned there may be other
inconsistencies and problematic assumptions. We strongly urge the Board to delay the
schedule so as to allow us sufficient time to investigate these models thoroughly and for all
parties to understand these issues.
C. The Failure to Address Uncertainty
In a brief section on “Fairness and Equity Issues,” the Technical Potential Study discusses
uncertainty over program savings and costs. The Study states that,“[d]espite the
considerable experience with programs, savings estimates always require some degree of
understanding of what would have happened but for the existence of the program. This is
not simply a question of engineering calculations or metering, but of judgment for which
reasonable persons may differ and certainty is never assured.”30 This is true. However, the
28
See the spreadsheet file “aescpoweravoidedcostsexhibits2002.xls,” worksheet “Exhibit 12005$,” Note 3.
29
See, e.g., Lesser and Feinstein (1999), op. cit.
30
Technical Potential Study, at 84.
20
Study authors fail to understand that the correct economic approach to addressing
uncertainty is not to assume it away, as they have done. Moreover, there is another
important uncertainty the Study’s authors fail to mention: uncertainty over future electric
and fossil fuel prices, whose volatility has increased substantially over the last few years
The avoided cost approach, whether embodied in a societal test, total resource test, or any
other test, has never correctly addressed the treatment of uncertainty. In fact, the Study
does not deal with uncertainty at all, other than to say, “certainty can never be guaranteed.”
By ignoring the issue and relying solely on point forecasts, the results of the analysis are
wrong, because the probability that all of the assumptions they have employed are correct is
zero. Since they are a point forecast, by definition, we know that those forecasts will be
wrong. Moreover, the effects of uncertainty cannot be addressed simply through sensitivity
or scenario analysis.
The problem is that the optimal investment solution when uncertainty is present, in this case
the level of energy efficiency investment, will not equal the level of investment determined
when using a point forecast. For example, suppose we think the price of electricity will vary
between $50/MWh and $100/MWh, with an average value of $75/MWh. Using the
$75/MWh value as the avoided cost, we determine that the least-cost level of energy
efficiency investment should be 100 units. If we specifically address uncertainty in the cost
of electricity to determine the number of energy efficiency units that should be purchased,
the answer will be less than 100 units. This is because risky investments are less valuable
than safer investments that provide the same average outcome—a result that stems from
basic financial principles.31
When there are multiple uncertainties, such as measure lifetime, savings per measure, electric
and fossil fuel prices, even changes in regulation, such as the evolving locational installed
capacity market (“LICAP”) in New England, it becomes even more important to address
those uncertainties explicitly to determine a truly least-cost solution. Fortunately, there are
well-established methods to address uncertainty, such as using dynamic programming
methods, such as decision tree analysis. In fact, just such an approach was used in testimony
Dr. Lesser submitted on behalf of the DPS in Docket No. 6860 to determine whether the
Northwest Reliability Project could be deferred by DSM investments.
This surfeit of mechanical flaws – the failure to address uncertainty and the failure to
provide any empirical basis for many of the underlying assumptions – is disturbing because
the adverse economic impacts on Vermont businesses from analytical errors will be quite
real. This is not a risk Vermont businesses can absorb, given the already difficult economic
conditions under which they must struggle.
31
For additional discussion, see, Electric Power Research Institute, Utility Capital Budgeting
Notebook, Final Report, TR-104369, July 1994, Chapter 12.
21
D. Erroneous Non-Economic Benefits Estimates
The Technical Potential Study also contains a discussion about the numerous “noneconomic” benefits of increased investments in energy efficiency.32 The Study lists
environmental benefits, improved reliability, greater comfort, improved competitiveness, and
the creation of new jobs, among others. Not only are these non-economic benefits
unsubstantiated, most are at odds with the societal test framework used in the Study.
Specifically, the authors confuse impacts with benefits.
Consider environmental benefits. The Technical Potential Study includes environmental
externality values established by the Board. Those benefits stem from avoided emissions of
SO2, NOx, and greenhouse gases. The problem with this is that SO2 and NOx emissions
are already capped under the Clean Air Act. Additional energy efficiency investments do not
change that cap. Instead, the net effect will be a slight reduction in the market clearing
prices of emissions allowances, but no change whatsoever in total emissions levels. In other
words, businesses outside Vermont would purchase emission allowances at a discount –
financed at the expense of Vermont businesses and ratepayers.
As for reductions in carbon dioxide emissions, the benefits of such reductions, if any, will be
distributed worldwide, and the fraction of benefits accruing to Vermonters will be de minimus.
Thus, Vermont businesses will absorb 100 percent of the costs, in the form of higher
electricity rates, while enjoying almost none of the benefits. Instead, customers elsewhere in
New England will free-ride on Vermont’s actions.
Regarding reliability benefits, it appears that the authors equate reliability with fuel supply
adequacy and price volatility. While those are important issues, the effects of DSM
investments on them will be negligible. Moreover, in testimony before the Board in Docket
No. 6860, proponents of using energy efficiency investments to defer or obviate the need
for the Northwest Reliability Project made similar arguments. However, witnesses for ISONE strongly disagreed with their arguments, because energy efficiency investments cannot
be controlled by the ISO. The problem is that, since energy efficiency measures are on the
customer side of the meter, there is no way to know whether those measures are actually
saving as much energy, at the necessary times, as predicted by modeling exercises. That
uncertainty poses a significant reliability risk.
Moreover, the Study fails to account for differences in the value of efficiency measures that
reduce peak loads and those that do not. Yet, this is an important consideration, for several
reasons. First, the value of peak energy savings is greater than off-peak energy savings.
Second, and more importantly, reductions in peak loads will reduce Vermont utilities’
capability reserve requirements under Standard Market Design (“SMD”) and thus their
required LICAP payments.
32
Technical Potential Study, at 81-84.
22
6. Conclusions and Recommendations
The Commenting Parties recognize the benefits of improved operating efficiency, including
improved energy efficiency. Having to compete in a global economy, the individual
businesses represented by the Commenting Parties are well aware of the need to seek out
efficiencies continually. It is for this overarching reason that the Commenting Parties
oppose any budget increase for the EU.
First, in contrast to the conclusions made in the Technical Potential Study, increasing the
EU budget will disproportionately harm Vermont businesses, not help them. Vermont
already has the highest per capita tax burden of all 50 states. Additional increases in this tax
burden will further disadvantage Vermont businesses, which already labor in a high tax, high
cost environment.
Second, electric rates matter as much, or more than, bills. Rates are a critical factor in the
decisions made by Vermont businesses to expand operations in state and create new
employment opportunities, or to expand outside the state and send jobs elsewhere.
Third, markets are far more efficient allocators of scarce economic resources than are
governments. Yet, because of the multiple, and competing, objectives that must be satisfied
under 30 V.S.A. § 209(d), the EU budgeting process cannot be as efficient as the market.
We believe there are alternatives to increasing the EU budget and raising rates for business
customers, and we urge the Board to explore such alternatives.
Fourth, the mechanical aspects of the Technical Potential Study, which form the basis for
recommendations to increase the EU budget, suffer from significant methodological flaws.
By basing budget estimates on a cost-effectiveness standard, the Study has failed to identify a
least-cost solution. Moreover, the avoided cost approach used to identify maximum
achievable cost-effective savings suffers from numerous flaws. Some of the assumptions
used in the Study appear inconsistent and the entire analytical approach fails to account for
the very real impacts of market and non-market uncertainties. These inconsistencies need to
be examined in more detail. Given the limited time the Commenting Parties have had to
review the specific models developed by the authors of the Technical Potential Study, we ask
the Board to delay the schedule so as to provide more time for us to review those models.
23