There are several ways state legislatures and commissions can encourage utilities to invest in energy efficiency, including cost recovery, lost revenue recovery, utility incentives and penalties for under performing.
Rate Structure & Incentive Policies in the Midwest
| State | Cost Recovery Mechanism | Lost Revenue Recovery | Utility Incentives | Penalties |
|---|---|---|---|---|
| Illinois | ✔ | ✔ | ||
| Indiana | ✔ | ✔ | ✔ | |
| Iowa | ✔ | ✔ | ||
| Kansas | ✔ | ✔ | ✔ | |
| Kentucky | ✔ | ✔ | ✔ | |
| Michigan | ✔ | ✔ | ✔ | ✔ |
| Minnesota | ✔ | ✔ | ✔ | |
| Missouri | ✔ | ✔ | ✔ | |
| Nebraska | All Nebraska utilities are publicly-owned or not-for-profit corporations. These mechanisms are not applicable. | |||
| North Dakota | ||||
| Ohio | ✔ | ✔ | ✔ | |
| South Dakota | ✔ | ✔ | ||
| Wisconsin | ✔ | ✔ | ||
Cost Recovery
The ability for a utility to recoup the costs it incurs in developing, promoting, and delivering programs is critical to the success of energy efficiency programs, regardless of whether utilities are mandated to have such programs or not. Just as utilities are able to recoup the costs incurred for generation, transmission and distribution infrastructure, they need to be able to recover their costs for energy efficiency and demand-side programs.
Policymakers in the Midwestern states have taken different approaches to cost recovery. Some states have adopted automatic adjustment mechanisms while others approach this issue on a case-by-case basis. States with a cap on the level of utility funding under their EEPS do not allow recovery above and beyond the spending ceiling. While the approaches may be different, the critical elements are the following:
- Ensuring that costs associated with the utility energy efficiency programs are reasonable
- The inclusion of both capital and non-capital costs
- A recovery period limited to the life of the program
- Annual reconciliation of amounts collected versus actual costs
Lost Revenue Recovery
One of the barriers facing utilities when it comes to investing in energy efficiency is the negative effect energy efficiency has on their revenue streams. Under the traditional regulatory model, utilities can only increase their revenues by selling more of their product: electricity or natural gas. Energy efficiency policies ask them not only to sell less of their product, but also to invest in programs that will continue to decrease their sales into the future. This places the utility in a difficult position of having to please both policymakers and shareholders, and without a proper lost revenue recovery mechanism, utilities are unlikely to invest in energy efficiency without being mandated to do so by legislators or regulators. The basic premise behind a lost revenue recovery mechanism is that the utility will earn a return on its investment in energy efficiency as it would on its investment into generation, transmission or distribution facilities.
Utility Incentives
In addition to cost and revenue recovery, utility incentives are a way for policymakers to work with utilities and show stockholders that energy efficiency programs are worthwhile investments. Upon achieving a certain level of energy efficiency, the utility will receive additional monetary compensation. Incentives have been utilized in states with an EERS as well as those without a mandated target. Some states allow the utilities to propose the incentive, while others are more prescriptive in their approach.
Penalties
For those states with mandated energy efficiency targets or incentive mechanisms, penalties are imposed on utilities that fail to achieve those targets, with authority falling to the regulatory commission. For the most part, Midwestern states have been reluctant to adopt strict penalties for either under-compliance or non-compliance. It is important to understand the reasons driving under-compliance or non-compliance to determine if it is related to program administration or some other reason, such as an economic downturn.
In Ohio, the public utility commission can order forfeiture; in Minnesota, utilities can be denied a certificate of need required to build new energy supply if they have not met energy efficiency targets; and in Michigan, the Attorney General or a co-op member is allowed to bring civil action for non-compliance. Illinois is the lone state with strict, daily fines written into the statute and a law that states that if utilities fail to meet their targets, their programs may be taken away.