CONSERVING FOR PROFIT Pepco plan encourages utility to reduce demand


Sometime next year, power company workers may come to your house and help you plug drafts, install money-saving light bulbs and lower your electric bill.

That's right, area electric companies could start spending tens of millions of dollars more on energy conservation programs that will cut into their electricity sales.

The reason: Maryland regulators are trying to kick-start energy conservation by giving utility companies a bonus for reducing power sales.

Although Americans just spent billions of tax dollars and sacrificed the lives of dozens of soldiers to free oil-rich Kuwait, they have shown a marked reluctance to bother with energy conservation that could reduce reliance on foreign oil.

So, as U.S. soldiers and diplomats try to forge a "new world order" out of the distant battlefield, consumer advocates, state energy officials and utility executives are forming a new energy order here at home by radically changing the rules that determine how electric companies earn their profits.

It's a revolutionary idea, those in the industry say. After all, arranging for electric companies to earn more by selling less turns upside down a centuries-old business formula.

And it is a controversial idea. Some industrial and utility executives feel government should not reward people for doingwhat they ought to do on their own.

Instead, they say, regulators simply should make sure prices are fair and let people and companies make their own decisions.

Though radical, plans giving utility companies a little extra profit whenever they help customers cut their power bills are sweeping the nation. Maryland has joined a rush of at least 27 states devising experiments to reward power companies for selling less.

If the state Public Service Commission approves a proposal now being negotiated with the Potomac Electric Power Co., residents of Prince George's and Montgomery counties are likely to see the beginnings of a dramatic expansion of conservation programs sometime this summer. And customers of other area utilities may see similar reforms sometime next year: Baltimore Gas and Electric Co. executives are currently negotiating with state regulators for a reform similar to Pepco's.

Pepco was pushed into the experiment last summer. Consumer representatives offered not to fight the utility's plan to build a power plant if the utility would agree to reform the rules that set its profits.

The agreement reached by Pepco, consumer advocates and state officials after months of negotiations allows Pepco to charge customers for its expenses on conservation, the interest on those expenses and a little extra.

Area utilities, which until now could collect only their conservation expenses, have long had small, though growing, conservation programs, explained Paul Buckley, an attorney for the People's Counsel, the state agency that represents consumers in utility matters.

But since they only earned their profit when they sold electricity from their power plants, the utility companies, understandably, soft-pedaled conservation, he added. The new plan, which goes beyond mere coverage of expenses, is designed to turn around the utilities' emphasis.

Mr. Buckley and state regulators have agreed that Pepco can for one year add a small fee -- both sides say it would be a fraction of a penny on each customer's bill -- to recover the money it would have made if it hadn't helped customers conserve.

While this may mean that all customers pay a little more than they normally would in the first year, the customers who conserve will save money because they will use less electricity, Mr. Buckley said. And all customers -- even those who don't conserve -- will benefit after the first year is up, he said. If conservation means Pepco won't have to build new power plants, all customers will avoid rate increases, he explained.

Under the plan, for example, if Pepco helps a business replace an energy-wasting exit sign with an energy-efficient one, it can charge customers an amount that makes up for one year's worth of the new sign's electricity savings. But after the first year is up, nearly all of the savings are passed on to customers.

If Pepco finds that the sign saved even more electricity than expected, it can continue charging its customers the value of 5 percent of the extra savings as a bonus.

Pepco is now negotiating the details of the plan, such as what conservation programs ought to be included, how much energy each program will actually save and how much money each ought to cost, Mr. Buckley said.

In New England, where states set up similar reforms more than a year ago, utility companies are now rapidly beefing up once-anemic energy conservation programs.

Overall, New England utilities are expected to spend a total of $1.5 billion on conservation programs -- ranging from free home insulation to building construction advice to equipment improvements -- over the next five years, according to the Boston-based Conservation Law Foundation.

That's several times the amount spent just a few years ago, before the utilities earned a profit on these programs, said

Robert Russell, a foundation attorney.

For example, New England Electric Systems workers will -- at no charge -- wrap power-saving insulation around homeowners' water heaters and install as many as eight super-efficient light bulbs around the house.

The free conservation assistance saved NEES customers $161 million in 1990, and the company earned $10.2 million on a conservation expenditure of $65 million last year, said NEES Vice President Al Destribats.

Before the reform, NEES didn't emphasize conservation programs, Mr. Destribats said.

"We knew it was the right thing to do, but we weren't making any money on it," he said. "Reducing your customers' bills is a hard concept in many businesses. You don't want to sell less.

"We spent $40 million on conservation in 1989 and made no profit on it." The company will likely spend more than double that this year, he said.

Maryland energy officials hope to see similarly spectacular results here.

Frank Heintz, chairman of the state PSC, has said he wants to start negotiations for programs similar to Pepco's with all major electric utilities in the state.

Mr. Heintz, a long-time conservation advocate, is tired of waiting for local utilities to install conservation programs, which, he believes, would benefit everyone from utility stockholders to customers and the neighbors of power plants.

"We don't want any more delay," he said. "Delay hurts consumers. It hurts everybody."

The collaboration between Pepco and consumer groups came up with a less-than-perfect solution, Mr. Heintz conceded. Ideally, utilities and their customers ought to conserve because it makes good economic sense for each of them, he said.

But utilities haven't focused on conservation because it seemed to cut into their profits. And, Mr. Heintz said, several studies have shown that homeowners and business people don't want to bother with conservation even though such investments usually pay for themselves in as little as two years -- a far better return than on almost any other purchase.

By paying utilities to conserve, Maryland and other states hope to teach both groups that conservation pays, he said.

"Reduced usage makes everybody a winner," Mr. Heintz said, explaining that besides cutting monthly power bills, conservation makes "businesses competitive and our air and water cleaner."

Not everyone agrees, of course, and many industry experts say the proposed reforms are by no means guaranteed.

Those in charge of big electricity users -- such as Bethlehem Steel Corp.'s Sparrows Point steel yard -- tend to be skeptical of such reforms, said Dick Fillman, Bethlehem Steel director of corporate energy affairs. They fear they may have to pay extra for new programs that don't save energy.

If Maryland requires utilities to pay rebates to customers who turn in old air conditioners for new, energy-efficient ones, all customers pay a share of that rebate. But power demand might not be reduced. The owner of the new, improved air conditioner might keep it operating longer, he said.

Mr. Fillman said he'd rather have everyone pay for power the way Bethlehem does: surcharges during the peak demand periods, and discounts during low demand periods.

That way, he said, people will make their own conservation decisions according to electricity's true costs.

"We're in favor of conservation," Mr. Fillman said. "But it is a matter of who pays and who benefits."

Disputes over reforming the way utilities do business mean "the battle is not over," said Tom Feiler, an energy expert who works for Cambridge Energy Research Associates in Massachusetts.

Political battles are beginning to brew in Vermont, Maine and other states that have been at the forefront of the reform movement, he said.

No matter what happens, though, Mr. Feiler said he believes the movement toward utility reform is "not the fad of the year. . . . It is absolutely for real."

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