Plug nickels
Electric plan would decouple use and profits
By JIM GORDON
How does a company that sells energy continue to turn
a profit and meet shareholder expectations at a time
when energy conservation is becoming official policy?
And how does that company implement a new model for
tallying revenue when profits are falling?
That is the situation Central Hudson Energy Group faces
as the summer peak demand season nears, with the company
still seeking state approval of its plan for an energy
conservation strategy that decouples customer use from
company profits.
The traditional utility equation says lower sales volume
translates to lower profits and higher sales means
higher profits. But with rapidly rising costs for fuel
and discussion about combating climate change through
reducing greenhouse gas emissions, energy efficiency
is increasingly seen as a win-win option for consumers
and the environment. The prospect is one of the reasons
regulators and energy companies are considering ways
to decouple revenue from sales.
Officially, the bid for a new business model called
a revenue decoupling mechanism (RDM) originated from
an order by the state Public Service Commission issued
in April 2007 for companies to submit RDM plans. Central
Hudson sent an RDM proposal to the state in September.
“The time has come for Central Hudson to use its energy
expertise to not just deliver energy, but to help our
customers use it more wisely,” said Lant, in announcing
the initiatives last September.
In simplest terms an RDM sets a floor beneath which
profits can’t decrease and a ceiling beyond which profits
would not rise. If profits tumble below the floor,
customer bills for the delivery charges controlled
by Central Hudson would be modified to make up the
difference in future billing cycles. Likewise if profits
exceeded the agreed upon ceiling, bills would be modified
to return the excess profit to customers.
Under the plan, Central Hudson would spend about $22
million over three years on its RDM program to establish
energy efficiency programs, such as conducting energy
audits and recommending use of more efficient motors,
energy-saving fixtures and greater use of insulation,
for example. The company would continue the program
at roughly $7.5 million annually, assuming regulatory
approval. If the program goes well, or regulators require
it, investment in efficiency measures could be increased.
At least initially, its incentives and marketing would
primarily be aimed at residential customers and small-l
to medium-sized businesses, said company spokesman
John Maserjian. Industrial and large commercial users
are being targeted for energy conservation programs
initiated and administered by NYSERDA, the New York
State Energy Research and Development Authority.
Meanwhile, the company reported reduced earnings in
the first quarter of 2008, a fact the Central Hudson
chairman attributed partly to customers reducing their
use in the face of high energy costs, a trend that
is likely to continue.
“We experienced a quarterly reduction in earnings (compared
with last year) due in large part to the effect of
higher energy supply costs and a weakening economy,”
said Steven V. Lant, chairman of the board, president
and C.E.O. of Central Hudson. “Despite this, our core
businesses continued to show signs of strength through
the first quarter.”
First-quarter earnings for CH Energy Group Inc. (NYSE:CHG)
totaled $1.23 per share in 2008, down from the $1.38
per share earned during the first three months of 2007.
“Higher energy supply costs are resulting in higher
total bills, inducing our customers to
conserve and sales volumes were noticeably affected,”
Lant said.
Maserjian said company efficiency experts posit a typical
small business “such as a corner deli” would receive
a free audit that could recommend a new high-efficiency
air conditioner, two new high efficiency refrigerators,
and replacement of standard fluorescent fixtures with
high-efficiency tubes.
The estimated capital cost to the property owner would
be about $6,500 and a $500 incentive would be paid
(net $6,000). Energy use would decline by about 5,700
kwh, about the amount of energy used by an average
home. Annual energy savings would be about $800, and
payback would be 7.5 years – sooner if energy prices
continue their climb. Additional rebates might also
be offered through NYSERDA. The cost of the energy
audit, valued at between $500 and $1,000, would be provided
free by Central Hudson.
Users would see savings not in the so-called wire charges
on their bill – the portion paid to Central Hudson
for infrastructure that is maintained by the company
– but instead would sees savings in the supply segment
of their bill, the larger cost that reflects actual
use.
But before Central Hudson can roll out its RDM program,
it needs state approval and there is no timetable for
a decision. “It’s being evaluated” said PSC spokeswoman
Anne Dalton. She said as standard procedure, the PSC
does not reveal its deliberations until there is a
public meeting on the matter. That information will
be released the Friday before the public meeting, she
said, when the agenda for the meeting is posted on
the PSC Web site. The next PSC meeting is May 21, the
following one is June 18, but she reiterated her refusal
to reveal if Central Hudson’s RDM proposal would be
considered at those meetings.
The delay is at least partly due to a debate how best
to facilitate progress toward the state’s stated goal
of “15 by 2015,” a former Gov. Eliot Spitzer plan to
beat projected 2015 energy consumption levels by 15
percent.
The PSC staff advocates letting NYSERDA take the lead
in devising and implementing energy conservation programs,
while utilities such as Central Hudson seek to take
the lead in such matters. The debate may become more
contentious as oil prices and the environmental stakes
rise, because though proclaimed as the most aggressive
conservation program in the nation, New York’s “15
by 15” program would not actually reduce power use,
but would reduce the rate at which energy use is increasing.
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