Comments for Interim Legislative Committee on Energy

July 25, 2014

Peter Stanton

Putting conservation completely aside, both the EERS and decoupling draft bills rely on each
other to function effectively. Neither functions efficiently for the consumer without the other.
From a purely monetary perspective, energy efficiency portfolio standards allow the consumers
to account for increased future demand at a lower cost than via increasing generating capacity
would.
Accounting for growing populations through efficiency is approximately 1/3 as expensive as new
generation, representing a 66% savings to the consumer.
Nationwide, demand for electricity is expected to increase 25% by 2040, and the Efficiency
Standards set forth in the first BDR meet not only that growth, but also the EIA's high-growth
scenario of 40% demand growh by 2040.
These standards will not work for consumers under the current rate-setting schema.
If the current Lost Revenue Adjustment Mechanisms were used, NV Energy would recover the
costs of lost revenue, not the costs of increasing efficiency.
Without decoupling, the consumer would spend as much to increase efficiency as we would to
build new generation. With decoupling, that cost should be approximately one-third of the cost
of new generation.
Efficiency Standards require decoupling to pass on savings to the consumer, while returning
profit to utilities.
Without Efficiency Standards, a decoupling system can still incentivize firms to increase capital
investment in generation as much as possible.
Simple economics states that when the allowable rate of return is greater than the cost of
borrowing money, a firm has incentive to acquire more capital.
Currently, this IS the case for NV Energy, as shortly before they were acquired by Berkshire in
2013 their price-to-book ratio was 1.38.
For decoupled utilities, this means that the firm has the incentive to increase fixed costs such as
new generation as much as possible; the firm has incentive to meet future demand through the
most expensive means possible.
Legislation mandating an Efficiency Standards, however, fundamentally changes that incentive.
If utilities are required to increase efficiency, earn a return on that investment in a decoupled
market, and increase efficiency enough to cover future demand, as BDR 1 would, utilities have
no further incentive to invest in capital.
These bills are dependent upon each other to provide cost-effective outcomes to consumers. I
highly recommend presenting them as one piece of legislation.
If they are to be presented separately, the only way to prevent incentivization of capital
development over efficiency in a decoupled system is to set the rate of return equal to the cost of
borrowing.
Presented together or separately, I advocate legislating the rate of return in BDR 2 equal to the
firms' cost of borrowing.