Decoupling: Rats, Cheese and the Economics of Efficiency and Distributed Generation – All in a Climate Context Seth Kaplan, Director Clean Energy & Climate Change Program Conservation Law Foundation Restructuring Roundtable September 27, 2007

The Big Context: Climate

More Specific Context: Climate & Load Growth Even with major new clean generation – without big push on efficiency, we can’t meet even modest CO2 emission reduction goals

And even more specific Context: Scenarios from recent ISO-NE “Scenario Analysis” and Synapse “Companion Analysis”

Decoupling as logical next step in allowing the “rat to smell the cheese” of Demand Resources Move to Performance Based Rates, restructuring shifted utility business model further Need to align utility interest with demand reduction – changing the equation on DG Launch of DSM/SBC, shareholder incentives – creation of dueling incentives 1987-1989 1994-1999 Now-Future

The Key Questions Can Demand Resource provision become the most profitable and “core” part of a T&D utility ? Can we avoid the delay inherent in waiting until rate plans are finished and full rate proceedings are undertaken to implement decoupling? Can Customers be shown immediate economic benefit from decoupling? Arguing “long run benefit” will just get you quote of possibly apocryphal Keynes line about how “in the long run we are all dead”

One technical slide – mostly stolen from Marty Kushler of ACEEE •Decoupling–Essentially, “truing up” for actual sales above or below forecast NOTE: INCREASING THE FIXED CHARGE COMPONENT OF THE BILL IS NOT“DECOUPLING” !!! •Direct lost revenue compensation DIRECT LOST REVENUE RECOVERY HAS SEVERAL DISADVANTAGES, AND HAS FALLEN OUT OF FAVOR Vulnerable to ‘gaming’ Leads to very contentious reconciliation hearings Doesn’t do anything to address the utility disincentive regarding broader energy efficiency policies (e.g., codes and standards), Nor does it diminish the general utility interest in pursuing load-building CLF conclusion: Decoupling, removing throughput disincentive is essential predicate to creating positive DSM/DR incentives