Gov. Pence finishes extreme makeover of Ind. efficiency rules

Jeffrey Tomich, E&E reporter

Published: Monday, April 13, 2015

Buried in 31 pages of technical comments filed in response to U.S. EPA's Clean Power Plan, Indiana officials declared that the state lacks legal authority to require energy efficiency programs that could help reduce emissions of greenhouse gases from coal-fired power plants.

What the Dec. 1 comments from state agency leaders didn't mention was that their boss, Gov. Mike Pence (R), is the one who effectively pulled the plug on Indiana's energy efficiency standard months earlier, undoing the work of his predecessor, fellow Republican Mitch Daniels.

Four months later, Pence has waiting on his desk a "replacement" efficiency bill, S.B. 412, that he proposed in January and that emerged from the Republican-dominated Legislature with few changes.

The utility-backed bill, sponsored by Sen. Jim Merritt (R), fundamentally alters how energy efficiency programs are implemented in Indiana. Supporters say the changes ensure cost effectiveness of efficiency programs and provides flexibility. Critics say the measure further undermines efforts to curb energy use and could ultimately shape how the state responds to EPA’s final Clean Power Plan rule.

"It's a way to price efficiency out of the marketplace," said Kerwin Olson, executive director of Citizens Action Coalition, an Indianapolis-based consumer and environmental advocacy group. "Energy efficiency is going to get priced out of the portfolio."

Gone is the requirement that utilities across the state reduce energy demand 2 percent by 2019 and "core" programs that utilities were required to offer. S.B. 412 relies on electric service providers to propose their own programs, budgets and goals subject to regulatory approval.

Specifically, utilities must include energy efficiency in their integrated resource plans -- nonbinding, long-range planning documents filed with the Indiana Utility Regulatory Commission every three years starting in 2017.

It will then be up to the commission to approve or disapprove efficiency programs proposed by utilities, including the amount they spend to help customers cut energy use and goals for energy savings.

The bill specifically authorizes utilities to recover program costs, including lost revenues -- a nuanced and complex issue that became a flashpoint during the legislative debate.

Lost revenue recovery is a key focus for utilities when it comes to energy efficiency programs. That's because many utilities recover a portion of fixed costs through volumetric energy charges, especially when it comes to residential and small commercial customers. So as kilowatt-hour sales start to decline, it can lead to underrecovery of revenue needed to maintain the grid, companies say.

So, to align the interests of utilities and consumers, companies create a mechanism to recover those lost revenues as energy use declines.

Dan Schmidt, Pence's policy director for energy and environment, said in an interview that the governor is pleased with the bill that emerged last week and said it provides the state more flexibility to implement efficiency programs depending on constantly changing energy markets, environmental regulations and other dynamics.

Mark Maassel, executive director of the Indiana Energy Association, said SB 412 leaves it up to the five-member IURC to decide through the integrated resource planning process what resource — efficiency, renewables, fossil generation — is the best solution for meeting future energy demand. Programs are also subject to independent evaluation, measurement and verification.

“It will be more cost-effective and not just effective in reducing kilowatt-hour consumption,” Maassel said.

Backers of the bill pointed to a report commissioned by the state that showed cumulative efficiency program costs under the Energizing Indiana program would have more than doubled to $549 million from $200 million by 2019, or to an average of $3.99 a month for residential customers from $2.87. Rising costs, they said, were proof that the low-hanging fruit had been harvested and reducing energy use would become increasingly expensive under the "one size fits all" program.

Lost in the discussion was the next paragraph in the same report. Even with the rising costs, the programs were expected to continue to produce net benefits for consumers over the same time horizon.

Opponents of the bill point out that it was the utility commission that directed Daniels in 2009 to establish the state's energy efficiency standard because utilities were doing very little to encourage energy savings. The requirement led to the Energizing Indiana program that was dissolved when Pence chose not to veto S.B. 340 last spring (EnergyWire, March 31, 2014).

What's more, Olson and other critics say the language in S.B. 412 is purposely vague to allow utilities to recover lost revenues over the life of an energy efficiency measure. For a CFL bulb, that "lifetime" might mean five years. For attic insulation or a new pump or motor, the lifetime can be two decades or longer, during which utilities are able to recoup lost revenues.

In sum, lost revenues can add up to tens of millions of dollars for utilities.

"It can be a very lucrative situation for utilities," said Martin Kushler, a senior fellow at the American Council for an Energy-Efficient Economy, a Washington, D.C.-based advocacy group.

Kushler said ACEEE favors rate decoupling -- or separating utility revenue from the volume of kilowatt-hour sales -- over a lost revenue adjustment mechanism such as the one in S.B. 412.

The reason: With decoupling, any revenue overcollection flows back to customers. With lost revenue mechanisms, such as those allowed under S.B. 412, utilities can continue to "double collect" until the next rate case.

In Indiana, investor-owned utilities aren't required by law to file rate cases on a regular basis. Some utilities can wait seven years between rate cases, while others have no such requirement.

The efficiency debate in Indiana is rooted in helping reduce energy costs for Hoosiers. Retail electricity prices in the state, where coal generates 85 percent of electricity, have risen steadily in recent years.

But it's not just a pocketbook issue. Energy efficiency is also expected to play a key role in helping the state meet its CO2 reduction goal under the Clean Power Plan.

But as state officials point out in their reply comments to EPA, the Clean Power Plan is based on data from 2012, when Indiana had an energy efficiency resource standard in place. That's no longer the case.

Pence, who took to a ballroom at the Indianapolis Hyatt last spring on the day the Clean Power Plan was released and vowed to "use every means at our disposal" to fight the rule, has remained a vocal critic. But Indiana hasn't indicated how it will seek to comply if the rule withstands legal challenges or how big of a role energy efficiency will play.

"We didn't design SB 412 with 111(d) specifically in mind," Schmidt said. "It was not the driving force."

Schmidt said he didn't want to speculate whether Indiana's CO2 emissions goal would be changed in EPA's final rule because of the change in state policy.

Jodi Perras of the Indiana Chapter of the Sierra Club said that, while the state has challenged federal environmental regulations in the past, it has ultimately chosen to develop its own implementation plans.

"I would think that the utilities would rather have Indiana write a plan than have a federal plan forced upon them," she said.

Cost disagreements

As it has been from the beginning of the energy efficiency debate in Indiana, cost will continue to be the central theme. In fact, cost is cited as another reason why state officials contend that Indiana cannot meet the 1.5-percent annual energy savings goal assumed by EPA in Building Block 4 in the Clean Power Plan.

According to the state's comments to EPA, utility efficiency programs approved by the IURC for 2015 cost 11 cents to 16 cents per kWh. Add in financial incentives and lost revenues, and the cost balloons to 32 cents per kWh, according to the Indiana Office of Utility Consumer Counselor, the state's consumer advocate.

The OUCC, who is appointed by the governor, didn't take a position on S.B. 412.

But Kushler, who spent almost a decade analyzing utility efficiency programs as part of the Michigan Public Service Commission staff, said the cost figures cited by Indiana are misleading and likely represent only first-year program costs.

According to ACEEE, the average levelized costs of utility energy efficiency programs -- which look at costs over a number of years, the same way a power plant investment is considered -- are about 2.8 cents per kwh.

A separate study by Lawrence Berkeley National Laboratory last year came up with a similar figure. Even EPA's conservative estimate of 9 cents per kWh is significantly below Indiana's figure.

In the case of the ACEEE estimate, the figure does not include costs related to utility lost revenues, which Kushler said should be considered separately and not included as energy efficiency program cost. But even including generous allowance for lost revenues, it would add only a penny or two per kWh to the cost, he said.

While that could make efficiency programs less attractive than they would otherwise be, it's hardly enough to dethrone efficiency as the cheapest energy resource.

"It's important to understand that utilities don't like to make their customers more efficient," Kushler said. "Almost everything they do needs to be viewed through that prism."