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Helping Consumers Cope

By Branko Terzic
Global & US Regulatory Policy Leader, Energy & Resources, Deloitte Services LP

File this under, “Things the Public Should Know”, when it comes to energy.

Projections by the US Energy Information Agency show a 50 per cent increase in electricity consumption and a doubling of demand in the US over the next 25 years.  America will need to invest $ 1.6 trillion in new power plants, transmission lines and distribution systems to keep pace with that increase and ensure reliable electric power sufficient to meet our needs.

One clear economic consequence will be that the cost of new construction, fuel supplies and electricity will increase.  Additionally, the technology investment needed to reduce or eliminate greenhouse gas emissions will add significantly to the cost of electricity.

While the future cost of electricity is destined to rise, individual electricity consumers are not necessarily fated to be stuck with monster bills.  So how do we create this economic magic of higher electric costs without staggering electric bills? 

We live in a world today where electricity prices are affected by a combination of forces – some based on markets and others based on the actions of regulators. 

In either case, the size of a consumer’s monthly electric bill is also affected by the consumer’s own metered consumption and maximum demand, as well as the prices charged. Electricity consumption is a matter of lifestyle choices, weather conditions and the efficiency of a  home and its power-consuming equipment and appliances. Most consumers can lower their bills today with a combination of end-use efficiency programs, improved weatherization and attention to their usage patterns. Few choose to do so.

While consumers need to take charge of their own consumption, here are four things that state and federal regulators need to do to help lower electricity bills for consumers:

1. Implement electricity tariffs and metering policies that would enable consumers to take advantage of energy savings from technologies already available. Today, “smart” meters and “smart” appliances are on the market, or ready to go on the market, but are awaiting the implementation by state regulators of “smart” electricity tariffs with real-time pricing schemes and other demand reduction features.
2. Remove disincentives utilities have to encourage end-use efficiency and conservation. State regulators can adopt “decoupling” policies which remove penalties on those electric utilities that would support consumers’ efficiency and conservation efforts. Increasing efficiency and conservation reduces costs.
3. Institute incentive programs which encourage electric utilities to improve operating efficiency in production, transmission and distribution of electricity wherever it is subject to regulation. Such “incentive ratemaking” or “performance based ratemaking” programs are widely recognized and were included by Congress in the Energy Policy Act of 2005.
4. Regulate wholesale electricity markets effectively. In many parts of the US, the supply portion of a consumer’s bill is the result of the operation of a regional wholesale power market.  Wholesale markets have to work effectively.

In summary, American electric power costs will rise dramatically over the next two decades to keep pace with demand, reduce greenhouse gas emissions and introduce new technologies.  Two key actions can help manage rising electric power costs.  First, homeowners will need to be increasingly responsible as managers of their own household energy use, including controlling peak-demand consumption.  Second, state and federal regulators need to move quickly to build a regulatory environment that incentivizes efficiency and conservation as a key bulwark against dramatic electricity price increases. 

With a sensible, logical and coordinated approach, consumers and regulators can help to create market incentives to provide the reliable electric power we will need while better managing how we use it and what it costs.

Branko Terzic is Global Regulatory Policy Leader, Energy & Resources Group, Deloitte Services LP and a former commissioner on the US Federal Energy Regulatory Commission and Wisconsin Public Service Commission.

(Reprinted from NEW POWER EXECUTIVE, Terzic on Strategy January 31, 2007)