Utilities Watchdog Project In the News

Save-a-Watt, lose common sense

Daren Bakst and Shana Becker

RALEIGH - Electricity consumers soon may face higher rates in order to pay utility companies not to produce electricity and not to build power plants. The General Assembly, by approving last year's Senate Bill 3, created this absurdity through a legislative provision promoting new energy efficiency programs.

These programs, which are paid for by consumers, are designed to encourage consumers to reduce electricity use. For example, they may include educational programs or monetary incentives for consumers to buy energy-efficient appliances.

Before SB 3 was introduced, Duke Energy sought permission from the Utilities Commission to run a program called Save-a-Watt, which includes several energy-efficiency measures. Duke would administer this program and charge consumers an extra fee (i.e., a tax) buried in its rates.

The fee [initially $15 a year] wouldn't be just for program costs, though. There is a new angle.

Consumers would have to make up for any lost sales that Duke Energy alleged it would incur due to consumers' using less electricity. By getting compensated for lost sales, Duke wouldn't have a disincentive to promote energy efficiency. SB 3 authorized this type of recovery for lost sales.

Duke Energy claims that the Save-a-Watt approach actually would save consumers money. Instead of paying what they normally would for electricity and for new power plants, consumers would pay 90 percent of that amount. Therefore, according to Duke, there would be a 10 percent savings for consumers.

Of course, one should expect that not receiving electricity would cost consumers less than receiving electricity.

A Duke Energy official stated at a recent Wall Street Analyst Forum conference: "Our energy-efficiency model will generate enough revenue to recover all program costs and would produce earnings comparable to building new generation."

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THIS IS AN UNDERSTATEMENT. Duke almost certainly would make a lot more profit through Save-a-Watt than if it built new generation, because it would have far fewer costs. While consumers would be making an effort to save electricity, Duke would be reaping a windfall.

Additionally, consumers would be paying for lost sales that are based on Duke's speculative projections, not hard facts. Save-a-Watt also couldn't be the sole reason for lost sales, since many consumers would reduce electricity use on their own. As a result, consumers likely would be paying for lost sales that were greatly exaggerated.

The Save-a-Watt "tax" would have a disproportionate effect on the poor. As the nonpartisan Congressional Budget Office pointed out, "lower-income households tend to spend a larger fraction of their income than wealthier households do and ... energy products account for a bigger share of their spending."

Lower-income households also wouldn't be able to take advantage of many of the incentives that are offered to encourage the purchase of energy-efficient goods and services. They rarely can afford such a purchase even with a subsidy. They would, in effect, be subsidizing the energy efficiency of the wealthy.

There also is a faulty assumption. Regardless of one's perspective, utility companies don't need to run energy-efficiency programs. In states that have such programs, several use an independent nonprofit administrator to run them. Unlike utility companies that sell electricity, the administrator doesn't need to be compensated for lost sales.

Alternatively, from a free-market perspective, the government shouldn't tax people into doing the "right thing." These programs discourage people from saving electricity on their own, as they already do now, because it makes more sense to wait for the government incentives.

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DUKE'S SAVE-A-WATT PROGRAM is a "great" business model, but one that can exist only when backed by the government. Simply encourage people not to buy your product. You get to determine what the lost demand is, with some nominal state oversight, granted. Consumers who have chosen to buy less of your product then pay you for the lost sales. At the same time, you get to brag about how the program is good for the environment and convince people that you're the model of corporate social responsibility.

The Utilities Commission should reject Save-a-Watt, and the legislature should amend SB 3. Utility companies shouldn't be allowed to charge consumers for not producing electricity and for not building power plants. This "lost sales" provision may be good for utility executives and shareholders, but it's a rip-off for consumers.

Daren Bakst is legal and regulatory policy analyst at the John Locke Foundation. Shana Becker is consumer advocate for N.C. PIRG (Public Interest Research Group). Pete MacDowell, program director of N.C. WARN (Waste Awareness & Reduction Network), also contributed to this article.