Rewarding Successful Efficiency Investment in Three Neighboring States: The Sequel, the Re-Make and the Next Generation (In Vermont, Massachusetts and Connecticut)

John J. Plunkett and Stuart A. Slote, Optimal Energy, Inc.
Paul A. Horowitz, PAH Associates

Keywords

Abstract

This paper examines energy efficiency portfolio performance incentive (“PI”) mechanisms in Vermont, Massachusetts and Connecticut. While different in structure and design, all are aimed at similar policy objectives. After advancing principles for guiding the design of effective performance incentive mechanisms for administrators of efficiency investment portfolios, the paper traces the evolution of the three states’ incentive mechanisms. It then compares and contrasts them in the context of the suggested design principles, concluding with findings and recommendations on common features to include in future efficiency administrator performance incentive mechanisms .

In 2002, Vermont’s energy efficiency utility, Efficiency Vermont (“EVT”), negotiated a three-year extension to its initial performance contract with the State of Vermont Public Service Board (“VT PSB”), originally designed in 2000 to reward it for superior achievements of Vermont’s multiple policy objectives. Foremost among the goals of Vermont’s $14 million annual energy efficiency portfolio are maximizing resource benefits, electricity savings and market transformation, all while delivering equitable distribution of benefits throughout the state across customer groups. Toward these broad ends, EVT’s 2003-2005 performance incentive mechanism defines new targets for peak savings, as well as minimum performance requirements concerning distributional equity. This paper considers both the original 2000-2002 mechanism and the 2003-2005 “sequel.”

Also in 2002, Massachusetts electric utilities and non-utility parties agreed on a new performance incentive mechanism which was incorporated into each program administrator’s 2003 energy efficiency plan. This is the “remake” of the original Vermont mechanism, as it borrowed many of the latter’s basic features. Like Vermont’s revised mechanisms, the new Massachusetts formula gives major weight to net resource benefits and peak demand savings. The new focus on total resource benefits requires administrators to incorporate non-electric benefits into economic analysis for planning and implementation, something Massachusetts utilities had not done previously.

In 2003, the Connecticut Office of Consumer Counsel (“CT OCC”) reported on performance incentives to utility administrators of the state’s $88 million annual conservation and load management (“C&LM”) investments. Having previously opposed incentives, the CT OCC report recommends a new performance incentive mechanism, modeled on Efficiency Vermont’s current version, and emphasizes targeted savings in constrained areas. Because it builds on the Vermont “sequel,” we consider the proposed Connecticut model “the next generation.” The Connecticut Department of Utility Control’s (“CT DPUC”) review and decision on CT OCC’s recommended mechanism is expected sometime in 2004.