Testimony: Maryland Energy-Saving Investment Program

The Alliance to Save Energy is pleased to provide this statement of support for SB541. A coalition of business, government, environmental, and consumer leaders dedicated to promoting energy efficiency as an essential element of national security, economic growth, and environmental protection, the Alliance has a 25-year record of accomplishment on energy efficiency.

Alliance Associate members comprise the leading organizations in their fields: appliance manufacturers, electric and gas utilities, research organizations, state energy agencies, and makers of insulation, windows, heating and cooling equipment, lighting equipment, control systems, and other energy efficient products and services. In this respect the Alliance is the voice of the energy efficiency industry. A list of our Associates is attached.

Maryland's energy policy is precariously out of balance. We are running the risk of losing control of our energy future. SB 541 is a modest effort to regain a measure of balance in the state's energy markets. It proposes the fastest, cleanest, and cheapest option for assuring reliable, affordable, and clean energy-energy efficiency.

Deregulation of the energy industry in recent years has left Maryland's residents at risk of higher energy prices, dirtier air, and possibly future energy shortages:

• Maryland customers have less choice. Since the electricity restructuring bill passed in 1999, market conditions have changed. Wholesale prices in the PJM market are running substantially above the levels seen three years ago. This makes it impossible for the power marketers who were to offer Maryland customers a choice of lower energy purchasing options to make any money under Maryland's frozen retail rates. As a result, almost no one is marketing to residential and small business customers. The choice that was promised in the 1999 legislation has not appeared. Also, utility programs to support energy efficiency have been ended, giving customers less choice to reduce their bills through efficiency investments.
• Natural gas prices have become volatile, tripling at the wholesale level 15 months ago, before plunging back last fall. Maryland retail customers have paid bills that have never been seen before.
• Maryland has lost control of its electric energy supply. Prior to restructuring, the Public Service Commission could order utilities to construct generating plants to serve customer needs. They could also review the rates that were charged to ensure that they were reasonable. Now, generation is owned by unregulated companies, and the Commission has no say over what gets built, where and when the power gets sold, or how much these companies charge for their power. Most of the new plants reported to be planned for this region will be gas-fired. With higher gas prices, there is significant risk that future power prices will be higher, not lower.

These market conditions were unforeseen when the restructuring bill was passed in 1999. The assumption then was that prices would go down, and that all customers would enjoy the benefits of competition. This assumption has not been borne out. We will have higher prices, less control, and less choice.

Consumers also have little incentive to invest in electric energy efficiency, since their rates have been frozen until 2004. This provides no price signal to help moderate demand growth over the next two years; in fact, it provides the opposite signal, encouraging customers to use more electricity. While many energy suppliers testified in 1999 that market forces would moderate energy demand via private-sector energy services, frozen rates and the lack of private service offerings have held these market forces back. Even where price signals are there, as with gas prices, the effect on electricity use could be counter-productive. To guard against high gas prices, customers are beginning to make greater use of electric heating and hot water. This could create even steeper demand growth for electricity.

The key question is: what happens in 2004, when the retail rate freeze ends and most customers are exposed to whatever the PJM market price dictates? While Maryland has avoided some of the pitfalls of the California restructuring legislation, it still faces some of the same risks:

• If demand resumes strong growth with the economic rebound, consumers will face rate shock in 2004. Competitive power marketers will not be able to offer lower prices, and most customers, especially residential and small business, will see higher bills.
• If some of the new, unregulated power plant capacity is not brought on line because of scarce capital and deferred construction in the wake of the Enron collapse, we may face shortages. The fact is, Maryland has no effective way of planning for its energy supply future, because most of the generating capacity is outside the control of the PSC.

Given these risks, what can Maryland lawmakers do to limit them? The fastest, cheapest, and cleanest option is to buy "insurance" against future price spikes and shortages through energy efficiency. By moderating the rate of demand growth at modest cost, efficiency programs help insure against high prices and shortages.

In the 1999 restructuring legislation, the only focus given to energy efficiency was to order the Public Service Commission to develop a report on the future of energy efficiency programs. The Commission issued its report a year ago: they recommended that the state fund energy efficiency programs. The Commission report states:

"The Commission believes that DSM programs are valuable, are in the overall public interest, and…maintain reliable, cost-effective natural gas and electric delivery systems. Other values include the overall economic benefits to the state including job creation and job retention, a cleaner environment with fewer pollutants, and enhanced personal economics for our citizens as their out-of-pocket expenses for electricity are reduced." (p. 6)

You may hear from other witnesses that Maryland's utilities tried energy efficiency programs in the 1990s, and that they were terminated because they were not cost-effective. This argument is used as a basis for opposing any new efficiency programs. The fact is that most of the programs run during the 1990s were found to be cost-effective for the years they operated, under the cost-effectiveness tests then in place.

A few of the 1990s-era DSM programs were found not cost-effective, but the cause typically was not that they were not effective, but that they cost too much or were poorly designed. For example, BGE's commercial new construction program offered incentives that paid 100% of the added energy-related costs of a building that exceeded the ASHRAE 90.1 standard. Because they did not cap the incentive, and because the ASHRAE standard was too vague, some designers were able to obtain large payments. Pepco's new construction program, on the other hand, paid a fixed amount per kilowatt saved, and tended to rely on simpler, clearer standards. This program fared better.

The other factor that affected the cost-effectiveness of the utility programs of the 1990s was the rapid drop in avoided costs that were used as the basis for valuing the benefits of these programs in the benefit-cost tests used to assess them. As utilities phased out their plans to build power plants, the projections of avoided costs dropped nearly to zero. Under those conditions, it was impossible for almost any worthy DSM program to pass the conventional cost-effectiveness tests.

Looking forward, new energy efficiency programs need to be examined under a newer, broader cost-effectiveness framework. While the Commission can no longer include avoided generation costs in benefit-cost tests as it once did, it is possible to use wholesale market prices as a reasonable proxy for the generation cost that would be avoided. We recommend that the Commission and other state agencies develop a new cost-effectiveness analysis framework that takes such factors into account.

The fact that some of the early programs of the 1990s did not work as planned should not discourage Maryland from investing in new efficiency programs. Over the last 15 years, energy efficiency program managers have learned from their experience. The programs recommended by the Commission are very similar to those anticipated under SB 541. These programs are different than those of the 1990s in several ways:

• They cost less. They are less reliant on direct customer rebates, and more oriented to education and efficiency marketing.
• They use established national programs. Since the DSM programs of the 1990s, the federal government has created the Energy Star™ program, which sets performance criteria and provides marketing support for high-efficiency products and appliances. Building on the Energy Star program allows Maryland's efficiency programs to be run at lower cost that having each utility develop its own program infrastructure.
• They use better design approaches. Today's programs seek to transform markets by working all the way through the manufacturing and distribution chain, engaging manufacturers, distributors, retailers, and contractors in marketing efforts that gain maximum leverage from these market actors. In the old days, programs would typically just offer rebates at retail, and didn't work as effectively upstream in the market.

It should also be pointed out that these programs are not expensive, and do not raise rates. In 1998, Marylanders paid about $120 million for energy efficiency programs-with no damage to the economy. What is proposed in SB 541 is a fraction of that amount. While this might eventually add 75 cents per month to a typical residential bill, it will still keep rates lower than they were before the restructuring legislation took effect. We assert that this is a small insurance premium to pay for all the benefits of energy efficiency to the state of Maryland.

In summary, we urge the Finance Committee to approve SB 541. It is a low-cost insurance policy against high energy prices, potential energy shortages, and environmental degradation. It is the cleanest, fastest, and cheapest way for Maryland to regain a measure of control of its energy future.