LEGISLATIVE, REGULATORY, AND INSTITUTIONAL

BARRIERS TO ELECTRIC UTILITY PARTICIPATION

IN ENERGY CONSERVATION AND RENEWABLE

RESOURCE DEVELOPMENT PROGRAMS

c~ C~ Benson, Director

Development

Dallas Power 0:

and

Assistant to the Vice President

Customer Relations) Conservation and

Edison Electric Institute

ABSTRACT

81a-

activities~

the

National Conservation

Oil Windfall Profit

Act of 19780 Also

the Treasury

Commission, Internal Revenue Service, and

of these laws'!;in

The nation's electric and gas utilities face

tive, , and institutional barriers to cos

in conservation and renewa.ble resource

This paper examines the disincentives or

Public Act of

Act Tax Act of

Tax Act of Public Utili

examined are the

Securities and

of

Treatment of construction work in progress,

tive environment, and allowed rates of return

also examined as institutional disincentives to utili

conservation and renewable resource

in a

ventures are

involvement in

INTRODUCTION

The Edison Electric Institute (EEl) is an association of the

nation's investor-owned electric utilities. EE! member companies supply

more than 77 percent of all electr.ic power generated in the United

States and serve more than three-fourths of all ultimate customers for

electricitye As the representative of this segment of the energy indus­

try, the Institute is keenly aware of the technical and policy aspects

of implementing energy efficiency and renewable resource applications in

buildingse We are particularly interested in examining the legislative

and regulatory activities which may affect our ability to supply an ade­

quate amount of electrical energy in a reliable, least-cost manner ~

This interest in these three concepts of reliability, cost, and adequacy

are, on the bottom line, the cri teria by which we are judged by our

customers--the people who pay periodic electric service billso

The Institute views the role of regulators and legislators as goal

planners, facilitators, and guardians of the social and economic objec­

tives of society, a concept which many find at odds with the perceived

objectives of the electric industry* This, of course, is not so,

because reliability, cost, and adequacy of electric power are inextrica­

bly a part of the economic and social goals of this nation. This is and

should be the focal point for relationships between government and

private industry, and we appreciate the opportunity to participate in

this examination of barriers to full exploitation of the potential for

wise and efficient energy use in buildings~

Gas and electric utilities a central role in the nation's

energy system~ State regulatory authorities, working with the utility

make many of the decisions that affect the operating policies

and ties of utilitiese National energy goals plainly affect deci­

sions made companies and by state utility commissions, and

the effort to address some of these questions----in particular those

ratemaking issues identified in the Public Utili ties Regula-

Policies Act--is just now beginning@

5l97@2

One of the we face in energy is an

'"institutional or What and what institutions

can most effectively the pace at which both individuals and

organizations concrete actions to

increase (1) the with which current energy resources a.re

used, and (2) the use of renewable sources of energy? Utilities

one of several institutional mechanisms to accelerate

energy productivity and they are a one~

In most utili service area.s, these alternative investments can

contribute to the national of our on

oil and gas~ as well as in the

more efficient use of domestic resources and in reduced environmental

the electric

s energy

system,

is to facilitate the transition

of oil and natural gas to the

resources, renews.ble energy

in the use of energy@

initiatives to

~~~~-~~~, have also

The of national energy

from the era of ~ abundant

era of diverse,

sources, and to

However ~ a ntnnber of the recent

these ~ as well as

had the effect of either or

of one element of the energy

utilities~ This exclusion~ or discrimination, is

ductive to the tons realization of the

In the first place, it would be in the nation's best interest to use

all existing institutions involved in the exploration, development)

financing, production, and delivery of energy in the pursuit of our com­

mon national goals~ The arbitrary exclusion of any element in either

the existing or the potential energy supply system would have the effect

of reducing resources that could help find solutions to the nation's

energy problems~ The electric utilities, in particular, can contribute

much experience and expertise. Current legislative and regulatory

disincentives must be removed to provide an ,equal, competitive business

opportunity for utili ties, thus encouraging the application of their

talents and resources to the tasks at hand0

Second, many of the decentralized electrical energy technologies

will require the need for backup power and/or markets for excess energYG

The electric utilities can provide both capabilities and the systems and

resources for more effective integration of both centralized and decen­

tralized energy technologies0

exclusion of any institution could have the

pressures to preserve those affected institutions,

of new means of energy production0

Therefore, it is in the interest to remove legislative and

barriers and to participation in any

conservation, load management" or renewable resource technologies or

markets 0 Most of this paper will deal with the identification of current

which urgently requires modification~

As we enter this new energy era, a that deserves far more

study than has yet been undertaken is the broad area of of

franchised electric utili ties $ To the extent

that competition becomes more , it may become an appropriate

substitute for obsta.cles to a

cost minimizing to of conservation, load

management, and renewable resource will also be discussed~

LEGISLATIVE BARRIERS TO UTILITY PARTICIPATION

--- --_....... ------- -~_...... -- -- ---Public Act of ~ )

Section 11 of the Public Act of res-

tricts the activities of a company or

thereof to activities that are incidental~O or

necessa.ry or to the of the

utili system~ This limitation be used) for

a utili and medium-Btu gas from

coal or similar fuels, if its business was to

and sell electric! However, as an incentive to the of

these fuels, a utili should be tted and

market fuels with no restrictions as to use or ultimate custo-

mers~ To restrict a s abili to market

its own needs for fuels would reduce the economic

of many combined fuel and

Section 11

c.onstrued to

would include the

of the Public

t a utili

conservation or renewable resource

solar The Securities and

that such activities are not

util-an

Such a restriction would a from a

range of services necessary for financ~

, or maintenance of energy conservation or

11ecessary or

i system

business to

ins

renewable resource facilities& Legislation is needed to clarify that

the participation of a utility in such a business would not violate the

Holding Company Act~ If a utility were permitted to participate in this

sec tor of the energy business, and such a utili ty were able to offer

products and services at a competitive price, the result would be an

increased potential for energy conservation and renewable resource

development in both residential and business sectors e To prohibit a

utility from engaging in this business is to ignore the expertise that a

utility can bring to this area@ Technical expertise, financial

resources, and business incentives are all required to maximize the

potential of energy conservation and renewable resource developmente

National Energy Conservation Act 42 U$S~C~ 8201 et----:;..... ~ )

Under the National Energy Conservation Policy Act, public utilities

are prohibited from supplying, financing, and/or installing end-use

items related to residential energy conservation, such as solar panels,

insulation, or thermal windows ~ This Act generally provides that no

may (1) or install residential energy conservation meas-

ures, or (2) make a loan to any residential customer for the purchase or

installation of any residential energy conservation measures 0 Certain

for installation and financing are provided for furnace

modifications, clock thermostats, and load management devices, and gen-

eral clause, n are included where such actions

were tted by law at the time of the Act's passage $ The Energy

Act) on June 30, 1980, removed the prohibition on lend-

activities but did not remove the prohibition on instal-

lation activities0

Utili ties are in a unique posi tion to implement many conservation

measures, due to their with the residential customer, and

it would be in the national interest for utilities to be authorized to

enter this area of business@

An of how the law works be illustrat1ve~ A

homeowner to his energy costs solar panels

or thermal windows is to make the investment himself@

Although he may receive certain tax benefits associated with such expen­

ditures, as outlined later in this paper, the initial cash

may be a substantial deterrent to such an ture 0 This is espe­

cially true during times for most individuals and famllies~

include the

could

of such

to enter this business area,

maJ..D.1CSI1Sllce ~ and

utilities wereIf

equipment, the needs of the homeowner would be met a reduction in his

energy costs) and the interests of the

another avenue for business investmentse

·would be met

these to

such business investment would be in the interest of the homeowner, the

and the nation as a whole, in that it wouldbusiness

encourage and ~_~i"<l>_I!''i~ te the actions individuals and

businesses to conserve energy~

Tax Act of 1 and

Crude Oil Windfall Profit Tax Act of 1

The Tax Act of exclusion from

Tax Credit. is owned or leased

for the

; such

which would otherwise

:tf t is

1)(17»,

In the Crude 011 Windfall Profit Tax Act (Internal Revenuelie

Code Section

additional ETC will not

W '0._ ..."-. _",- .0•..0. =., and

to which the

includes solar, wind ~ biomass,

of the kinds of

related to the function of

to

are

; this exclusion 1s

exclusion

as defined the Crude Oil Windfall Prof! t Tax of 1980

facilities would for

energy conservation

wasted 0 of

additional use of energy that would otherwise be

facilities utilities, as well as

nonutilities~ should be , if incentives are

available for Donut!l! owners of facilities, should

also be extended to ut1lities~ Since conservation by cogeneration can

be substantial when applied to industrial uses, it is inconsistent with

the national goal of encouraging energy conservation to exclude such

utility-owned cogeneration facilities from the additional ETC~

The Energy Tax Act of 1978 provided for a residential energy tax

credi t for qualified energy conserva tion expend! tures and qualified

renewable energy source expenditures (I.RoC. Sec~ 44C)e However, this

credi t is available only to individual taxpayers ~ The thrust of this

provision is to provide incentives to the residential homeowner or

tenant to make either conservation expenditures (i.e*, insulation, ther­

mal windows, weatherstripping, cost-of-usage meters, devices modifying

flue openings to increase efficiency, and furnace burner replacements to

increase combustion efficiency) or renewable resource expenditures

(i0e~, residential installations related to solar, geothermal, or wind

energY)Q If a utility were to make this same type of investment in a

business facility~ it should be entitled to the same tax benefits as the

individual The potential for energy conservation in the busi­

ness sector of the economy is substantial, and to ignore this potential

is inconsistent wi th the national goal of energy conserva tion in all

sectors of the economy~

Further, if a utili were tted to lease to others, including

businesses, the of devices or equipment enumerated above, it

should also be able to receive the tax benefits associated wi th such

energy conservation and renewable resource expenditures 0 This option

would encourage conservation where an individual homeowner, tenant, or

business may not be able to furnish the original investment necessary

for such an ture ~ This is a reali ty for many people, particu-

in these timeS0

Title II of the Crude Oil Windfall Profit Tax Act specifically pro­

vides for tax incentives for the production of fuel @ The principal

incentive is an income tax credit for the production of alternate fuels

sold to unrelated persons (I~R@C0 Sec0 44D)0 Thus, a public utility

could not take advantage of this incentive if the fuel were being pro­

duced for its own use in serving its customers & If a public utili ty

fuel for its own use in a facil-

for tax benefits outlined above~ This

the incentives

who their resources toward

were to use a

it would not be

is inconsistent wi

to

fuel use@

The Crude Oil Windfall Profit Tax Act also for a specific

of 15 of revenues that will be the

windfall tax to energy and programs 0 No further

allocation of such revenues has been made0 Utilities should. not be

excluded from the benefits of those programs~ which should be

to achieve the of a national energy Careful

should be to the use of such funds to

increase the sbill of utilities to finance their contribution to

national energy , these funds could be used to

a.ssist utilities in of alternative energy

sources or electric vehicle commercialization to assist in the

reduction of oil-fired

The duration of any tax incentives to facilities

or must be for a ~ufficient number of years to allow for the

time to construct new facilities or enter new markets.

Public

cogen-

in

is

or less of

to

under the PURPA

as defined in

to Section 201 of the Public Utili

established 1f that a utili

, that will

and is not for the

issued u.nder Section

The issued

Policies Act (

owns more than 50 of a

not be a

rates and outlined in the

210 of PURPA~ The ETC with

is not allowed for

eration that is

not be considered

lations, Section l@ )~ in that such

the traditional cost-af-service manner~ Therefore~ a

able to take of the ETC if it owns 50

a cogeneration facil1ty~ Any restriction on utility ownership percen­

tages acts as a disincentive for utilities interested in cogeneration

and should be removed~ Further, the tax benefits applicable to owners

of uqualified cogeneration facilities U should be made available to util­

ities on a equal basis.

PURPA also that sales of electrici a fied cogen-

erator to a utili are to be at the Havoided cost, tt as opposed

to the traditional cost~of-service The avoided cost essentially

the total of all costs virtue of the pertinent

s energy which would otherwise have been

Given both the effect

of costs associated wi th new construction and

the economic of utili generating facilities on the basis of

costs, the avoided costs will almost always be substan.....

than the embedded costs that form the basis for tradi­

tional cost-af-service

Under the to Section 210 of PURPA,

a would be avoided cos t

for each unit of a, while at the same

time the would sold to that j act-

ing as a customer, on the basis of the low embedded

cost& In electric! to that less than

the to the for

fied the would~ of necessi ,be forced to recover the

loss through transactions from all customers ~ Thus, a n will

flow from utili customers as a. whole to Such

1ncentives toward should be avoided'R; Further, utili ties

should be allowed to all energy utili cogen-

era tion facil! ties which flows into their transmission at the

avoided cost to the risk associated with

power

REGULATORY RESTRAINTS

Treatment of Construction Work in for Alt~

fac.il-

, which

s rate baseupon

There is no uniform among as to the

rates to construction work in progress ( , two

treatments of CWIP exist ~ First, CWIP may be included in a utili s

rate base, upon which the utili is allowed the to earn a

return to its inveatment~ an allowance for funds

used construction ) may be accrued

construction~ AFUDC is a noncash form of

of construction is in the

with the construction cost of the constructed

ities~ Thus, when CWIP ia in a s rate base the

earllS construction actual ca.sh returns on the tal used to

finance that construction~ when AFUDC is accrued, cash

returns are deferred to the at which the is the

lie, and a noncash return is accrued instead the of con-

struction<?>

From the standpoint of the financial markets, potential investors

prefer current cash earnings to current noncash "earnings that are

deferred to a later point in time~ Utilities that are not permitted to

include CWIP in the rate base are placed at a significant disadvantage

with respect to other utilities and nonutilities in their ability to

attract investment and thus maintain their capital requirements~ When

considered along with the dual effects of the tremendously eroding

impact on earnings of inflation and regulatory lag, regulatory policies

that do not permit the inclusion of CWIP in utility rate bases create a

severe competitive disadvantage for affected utilities and erode their

positions in the capital marketsfI If alternative technologies are to

begin making significant contributions to the nation .... s energy needs,

limitations on financing must be reduced as much as possible~ A uni­

form, nationwide acknowledgement that CWIP should be allowed in the rate

base--at least for construction pertaining to conservation, load manage­

ment, and alternative energy source development--would materially

improve the abili of utilities to respond to those needs~

Environment

The rationale for electric utilities is that such firms

are monopolies,n due to the fact that one supplier of electric

service in a geographic area may serve the entire public more

than several of charged by

electric utilities is intended to act as substitute for competition~

Yet, in many instances, utili involvement in alternative energy source

and conservation does not carry with it the natural monopoly

element~ Utilities that pursue the development of solar energy

in their markets will be competing wi th solar equipment suppliers and

installers whose business activi is in that area$ Thus, a

free market may well exist in the development of many decen-

tralized energy , of which solar is but one example4S The

ts of many cogeneration arrangements may well be subject to a

competitive environment~ Retrofitting existing structures to achieve a

of efficiency in energy use represents a potential busi­

ness opportunity for a number of industries and institutions, including

electric utilities~ Indeed, the very nature of an energy service

company

di

operate, in

to meet the overall energy needs of its customers, as

from their electric energy needs ) dictates that it

) in a market 0

reasons exist for the need for

in a market environ-

s business which, of necessity,

firms should itself be unregu~

s in a competitive

the rates and tariffs charged

of its

Therefore,

price regulation of ~

ment 0 That portion of a

operates in with

lated~ Earnings derived from a

market should not be considered in se

within the more traditional~

If utilities are allowed to in a free market, the goal of

should be to ensure that treatment is table)

with other that have access to that market~

Rates of Return Ventures

If utili ties are not allowed to in tive markets

without must at least that utilities

service in such areas as alternative energy source

and conservation will be to risks and will

returns on invested to for such risks~ Since

the of alternative energy sources and conservation

that a fim in a tive market, the risk of com-

must be met with allowed returns on invested in

these markets to stimulate such investment~

allowed returns should be considered in circumstances in

which utilities the conservation market may realize some degree

of erosion as a result of their stimulation of conservatioD0

For , utilities that install in cus-

tomers' structures will realize immediate and sustainable energy sales

reductions~ The full amount of cost attributable to conserva­

tion will not be realized a utili ,however~ until additions to gen-

can be deferred 0 A near~term erosion of will

result 0 Utilities should be for such erosion per-

mitted rates of return that act as an incentive to enter the market for

5 7

conservation measures~

CONCLUSION

As discussed above, legislation and regulations that prevent or

discourage a utility from directing its expertise towards and investing

its capital in) energy conservation and renewable resource facilities

are not consistent with our national energy goals and tend only to delay

the development of an economy that is not overly dependent on scarce

resources for its energy needs. Preventing a utility from providing a

more complete package of energy services to the customer only tends

further to inhibit the development of the country's energy conservation

and renewable resource potential~