To:
EEU E-mail Service List
From: Blair Hamilton, VEIC
Re:
Comments on Strengths and Weaknesses of Current EEU Structure
Date: August 28, 2007
As part of “Next Steps” identified by Public Service Board staff for the EEU Structure
Working Group, participants were asked to circulate comments on the strengths and
weaknesses of the current EEU structure. In our role as the Efficiency Vermont
contractor, the Vermont Energy Investment Corporation is pleased to provide the
following comments.
Structure Strengths
In considering strengths and weaknesses, it is important to begin by recognizing that
the current structure has achieved considerable success. As the Board noted in its
“Revised Task Statement for Discussion of EEU Structure” (8/14/07), “This structure has
served Vermont well over the last seven years. The EEU’s performance has exceeded
expectations and it has been recognized nationally as in innovative government
program.” The exemplary performance of Vermont’s EEU model has been widely
recognized. It is also worth noting that Vermont’s EEU model has been viewed as
worthy of replication in other states and countries, including Canada and China. In
considering potential modifications, it is important to retain the attributes of the current
structure and implementation that have yielded this success.
Key attributes of the current structure which we perceive as contributing to this success
include the following:

Strong Performance Basis – The use of carefully selected performance indices to
measure success is extremely important. It enables a high level of clarity between
the PSB and the contractor about goals, and how success will be evaluated. Having
substantial consequences (both financial and contract- renewal) for the EVT
contractor related to attainment of contractual performance indicators has also been
a strong motivator to achieve “stretch” goals and exemplary performance.

Flexibility and Innovation – Because the current EVT contract is largely a
contract for results, it has promoted unprecedented levels (in Vermont, and to some
extent nationally) of flexibility and innovation in efficiency program delivery. Indeed,
this may be the most important attribute of the current structure. The performance
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contract holds the contractor responsible for results, but then allows great flexibility
in how those results are achieved. This has allowed us to modify market strategies
rapidly, re-design initiatives, and alter how we implement them (including incentive
levels), as experience is gained, as markets change and evolve, and as we learn
from our mistakes. It has also allowed us to take advantage of unforeseen,
sometimes transitory, market opportunities.

Cost-effective Service Delivery – Efficiency Vermont’s performance-based
compensation model requires the contractor to deliver the maximum amount of
savings within a fixed budget. Any unnecessary bureaucracy or administrative costs
lower the contractor’s ability to meet contractual savings goals. The result to date
has been that Efficiency Vermont’s yield rates (MWh savings per dollar invested) for
its core initiatives are among the highest in the country for aggressive efficiency
efforts, and have increased each year.

No Structural Barriers to Coordination – In forming the EEU seven years ago,
the Board recognized the benefits of a statewide contractor to act as Efficiency
Vermont. Through a statewide contractor approach, we have not only kept
administrative and program delivery costs down, but also have been able to design
and implement unified statewide strategies. We have avoided many of the
problems experienced by other states and utilities in coordinating multiple
independent program implementation contractors that deal with the same markets
and customers.

Accountability, Guidance and Transparency – The current EEU structure has a
high level of accountability, clearly understood responsibility, and transparency. The
performance verification, record-keeping, reporting, financial audit, and other
contractual elements of the current model provide a level of accountability and
transparency that is higher than most other state or utility efficiency portfolio
administrators. The Contract Administrator, the Department of Public Service, the
Public Service Board, and the EEU Advisory Committee all have responsibilities in
reviewing the performance of, and providing guidance to, the EEU. The annual
savings verification process carried out by the Department of Public Service is
rigorous. In addition, as required by statute, a triennial independent (outside state
government) audit reports to the Public Service Board and the Vermont Legislature
on the energy and capacity savings of the EEU and the cost-effectiveness of EEU
programs. The Contract Administrator, the Department of Public Service, and the
Board all have full access to detailed information on the costs, savings, plans, and
operations of the EEU. EVT also regularly reports to, and answers questions from,
the EEU Advisory Committee and various committees of the Vermont Legislature.
The current model also includes extensive public reporting requirements and the
solicitation of public input and comment regarding the EVT Annual Plan.
Building and Supporting Vermont’s Energy Efficiency Product and Service
Delivery Infrastructure – The current model has supported development and
growth of Vermont’s energy efficiency product and service delivery infrastructure.
VEIC currently subcontracts with more than 40 Vermont businesses to provide
energy efficiency technical services to Vermonters. The value of these subcontracts
in 2008 will total over $3.8 million. For actual installation of efficiency measures,
VEIC is subcontracting for “direct installation” of measures to be carried out as part
of the geographically targeted energy efficiency efforts. The value of this
subcontract will be over $6.5 million. All other measures installed as part of EVT
efforts are provided and installed by suppliers and contractors selected by
customers. The estimated expenditure on these measures in 2008, which will be
revenue to the businesses that provide and install them, is estimated to be
approximately $39 million.
The current structure has also built the capacity of the existing weatherization
programs, local suppliers’ knowledge of efficiency products, and expertise within the
building design and contracting communities. This infrastructure development and
support is a valuable aspect of the existing model, which should be continued and
built upon in the future.

Institutionalized High-Level Delivery Capability – The existing model has built
and institutionalized one of the world’s most highly regarded, technically advanced,
and operationally efficient capabilities to acquire energy efficiency resources. The
staff and subcontractors, organizational systems, partnerships with market providers
of energy-related products and services, and relationships with customers are all
valuable EEU assets that have been built under the current structure.
Structure Weaknesses
We believe the Board’s “Revised Task Statement for Discussion of EEU Structure”
(8/14/07) provides an excellent summation of the most important problems with, and
opportunities for improvement in the EEU structure. We offer below some further
thoughts on these issues and suggest a few additional considerations.

End-effects of Contract Cycle – The Board has specifically identified weaknesses
of the three-year contract cycle, and the Working Group has before it alternatives
that include various fixed-term structural models. We suggest that it is useful to
separate this issue into two components: (1) the length of the 3-year term, and (2)
the adverse end-effects of the term. As we see it, the adverse effects of the 3-year
contract cycle identified by the Board in the Task Statement are largely end-effects
of the contract. Therefore, changing the term alone simply changes the frequency
with which these end-effects will need to be addressed. When it is two (or any other
number of) years before the end of a term, the same barriers to long-term planning,
commitments, financing, FCM participation, etc., will still exist.
In this context, regarding the length of the term, we agree with the Board’s
identification of problems with the current 3-year contract. We note, however, that
while a longer term lessens and defers these issues, it does not resolve them.
With respect to end-effects of any fixed-term structure, we offer, from our
experience, the following additional considerations to those identified by the Board:

Effects on operations toward end of contract – In the last year or two of any
contract term, a contractor will naturally (and increasingly, as the end nears),
focus on the uncertainty of the future contract. Even with contractual
mechanisms to promote projects being in the “pipeline” at the end of a term,
projects under development are likely to receive less attention, and
development of new projects could plummet. Significant resources may also
be diverted from operations to address re-bidding the contract.

The interest of the contractor in entering into long-term relationships with
partners, subcontractors, and customers may be diminished

Financing limitations
 Constraints on the ability to guarantee loans
 Effects on the development and use of new, long-term financing

Effects on long-term planning (EVT and utility)

Effects on participation in the FCM

Effects on pursuit of market transformation

Oversight of EEU Contract by PSB – We have little to add to the excellent
characterization of this issue put forward by the Board in the Task Statement for
Discussion of the EEU Structure. The most important of these issues, from our
perspective, is that our position relative to the Board has, in a number of instances,
limited our participation in matters before the Board where we might otherwise have
provided significant information, analysis, or other beneficial contributions based on
our unique knowledge and experience as both the EVT implementation contractor
and one of North America’s pre-eminent consultants in the design and evaluation of
energy efficiency programs. In various proceedings considering the costs and
savings of potential efficiency resources, efficiency planning, and utility planning, our
role has often been constrained to responding solely to questions, if asked.

Financing constraints – Efficiency Vermont’s budget is funded currently out of the
proceeds of the Energy Efficiency Charge (EEC). As previously noted by the Board
(8/9/07), it may be advantageous for Vermont to amortize each year’s energy
efficiency investment expenditures to recover costs over the life of the measures
installed, and thereby reduce current rate impacts. The current model does not
readily support amortization because the contractor is not in a position to provide
such long-term financing for efficiency expenditures.

Value of Market Transformation – Efficiency Vermont’s contract includes, and
we perform, a range of responsibilities with respect to market transformation
efforts. However, the performance contract model has not supported the same level
of clarity about goals, responsibilities, and level of effort in this area as it has for
efficiency resource acquisition efforts. These activities are clearly of value,
particularly over the longer term, but are often difficult to quantify without
challenging evaluation techniques. Specific examples of these areas include:

Upstream supplier market transformation efforts

Development and implementation of Codes and Standards

Training and certification for design professionals, builders, and trades

Workforce development

Education, including K-12 schools (and the Vermont Energy Education
Program) and colleges and universities

Public information and education
We expend considerable resources under the current contract structure in these
areas. However, these activities are not reflected in our current performance
indicators and performance goals. They pose difficulties both in budgeting and
assessment of results. There may be ways that they could be addressed more
directly in the current structure, but it may also be that other structures could better
address them in the future.