First Energy Offers a Case Study of How Not to Implement Energy Efficiency

by Richard T. Stuebi

On October 5, First Energy (NYSE: FE) announced a planned energy efficiency program, involving the delivery of two compact fluorescent lightbulbs (CFLs) to each of its residential and small commercial customers in Ohio. This was to be a part of First Energy’s revived energy efficiency programs, stimulated in large part by the 2008 passage of Ohio SB 221, which stipulates that utilities must reduce their customers’ energy consumption by 22.5% by 2025.

Approved in a case by the Public Utilities Commission of Ohio (PUCO) without comment on September 23, the plan would have had each customer pay $21.60 on bill surcharges over 36 months for this package of two CFLs – whether they were used or not, or even wanted or not.

The story accompanying the roll-out of this program in the Plain-Dealer went into considerable detail about its economics. The $21.60 in extra charges not only covered the cost to First Energy of acquiring and delivering the two CFLs, but also would reimburse First Energy for the reduction in revenue associated with the use of these more efficient CFLs in lieu of traditional incandescent bulbs.

Although seemingly shocking to Ohio readers, the provisions of SB 221 do in fact allow for utilities to recover lost revenues associated with energy efficiency implementation, in recognition of some basic utility economic realities.

In traditional regulatory approaches, utilities earn more profits by selling more electricity. As is the case with most businesses, the company succeeds by selling higher volumes of its product. Thus, if we agree that we want to encourage less electricity consumption, we have to eliminate the financial motivations that utilities have against that desirable goal. In other words, we have to make it equally attractive for utilities to promote saving energy instead of consuming energy; we have to "decouple" electricity volumes from utility profitability.

Recovery of lost revenues from energy efficiency is by no means a novel concept. Indeed, California pioneered such "decoupling" ratemaking treatment all the way back in 1982 with the adoption of its Electric Revenue Adjustment Mechanism. But, in Ohio, it is very new – only now being adopted in the wake of SB 221. And, neither First Energy nor the PUCO made significant effort to educate the public that ratemaking practices of this type have been employed for decades, and are being increasingly employed around the country, for very sensible reasons.

At least equally concerning, First Energy claimed that each bulb was costing the company $3.50, for a total of $7.00 for the package of two. However, a little snooping around area stores revealed that a five-pack of CFLs could be bought at Ace Hardware (hardly the lowest-cost source) for $13.99, or about 20% lower on a per-bulb basis than what First Energy was proposing to charge customers for similar products sourced elsewhere – at presumably higher volumes and more favorable pricing.

In the wake of the initial article, reader reaction was overwhelmingly negative. People didn’t want to pay for light bulbs they didn’t request, and may not use. They didn’t want to get gouged on the cost of the bulbs. And, they didn’t want to pay First Energy for kilowatt-hours that weren’t being sold.

Not only did readers call the Plain-Dealer in complaint, they called their elected officials as well – including all the way to Governor Ted Strickland, who asked the PUCO to stop the program. Within a couple of days, the resulting political pressure prompted the PUCO Chairman Alan Schriber to ask First Energy to withdraw this proposed energy efficiency program. And so, in compliance with the PUCO order, First Energy postponed the program.

As reported in a follow-up Plain-Dealer article, John Paganie of First Energy admitted that “we didn’t do a good enough job in helping customers understand the purpose, the reason for [the program] and the impact.” Yep: First Energy didn’t sufficiently communicate to customers – or engage with trusted advocates such as the Ohio Consumers Counsel in working out the details of the program so they could offer their support – before the program roll-out appeared in newspaper ink.

In the same article, PUCO Chairman Alan Schriber noted that "although the PUCO allowed FirstEnergy to implement its program, we did not approve the charge that will appear on monthly bills as a result." In other words, PUCO gave First Energy the go-ahead to do the program, but PUCO didn’t consent to how First Energy would be compensated. Huh?

So, the net result of this program announcement was a lose-lose-lose: First Energy came off as being greedy, the PUCO came off as being inattentive to program details, and promoters of energy efficiency came off as imposing unwanted economic burdens on customers. Certainly, Thomas Suddes' editorial in the Plain-Dealer makes everyone look bad.

I thus submit this little vignette as a classic case study of how NOT to implement energy efficiency.

In my humble opinion, this would not have been such a public relations debacle if First Energy and the PUCO had both accumulated a greater store of citizen goodwill over the preceding decades. Unfortunately, this hasn’t been the case. And, resulting from this bungling by distrusted players, the generally-favorable cause of energy efficiency gets a public black eye in Ohio.

Comments

[captainccs:]

We The People must stop the government-industrial complex from overreaching, specially into our pockets. Good for We The People of Ohio!

Oct 13 09:14 AM

[Jimbo:]

I believe this is not the last time we shall see this type of debacle.

Oct 13 11:26 AM

[jarco:]

But, for rate setting purposes, most state regulators concentrate on "return on assets" barometer not "electricity volumes" as depicted here.

Oct 13 11:40 AM

[User 499469:]

Utilities should not be charging for lost revenue but capping charges from having to build new generating faclities. With cap and trade they can get payed for cutting CO2 emmissions, which I am sure they are looking into. Once again the consumer takes the financial hit. When will the utilties recognize that they can profit from being a part of the solution rather than taking every chance they get to gouge the public.

Oct 13 12:13 PM

[Will Deliver:]

In addition... The design of Compact Fluorescent Bulbs includes the toxic metal Mercury. Although CFLs use less energy then incandescent light bulbs, I believe it is offset 10 fold by the poisoning of the environment when all of those CFLs are discarded by consumers that have been conditioned to just throw 'burned out bulbs' in the trash, which end up in landfills, poisoning our water sources, etc.

Oct 13 02:33 PM

[Will Deliver:]

A responsible solution to the use of CFL bulbs is to switch to 'Light Emitting Diodes' or LEDs. LEDs use less energy then either incandesscent of CFL bulbs. Currently, they are more expensive. In my opinion, the cost is justified. Please use LEDs in your home and businesses when you update you lighting. Disclosure: I do not own any companies that make of sell LEDs.

Oct 13 02:39 PM

[TinyTim:]

"the company succeeds by selling higher volumes of its product."

I always wondered how electric utilities could promote energy conservation, which is against their economic interest.

First Energy is one monopoly I'm glad I don't have to live with.

Oct 13 03:41 PM