DR 98-142 Northern Utilities, Inc. 1998/1999 Demand Side Management Program Order Approving Program O R D E R N O. 23,068 November 23, 1998 APPEARANCES: LeBoeuf, Lamb, Greene & MacRae, L.L.P. by Paul B. Dexter, Esq. for Northern Utilities, Inc. and Larry S. Eckhaus, Esq. for the Staff of the New Hampshire Public Utilities Commission. I. PROCEDURAL HISTORY On August 3, 1998, Northern Utilities, Inc. (Northern) filed with the New Hampshire Public Utilities Commission (Commission) a petition for approval of its 1998/1999 Demand Side Management (DSM) Program for the period November 1, 1998 through October 31, 1999. The filing was made in compliance with Order No. 22,846 (February 4, 1998). Northern proposes to continue offering its currently approved DSM programs for an additional year. By an Order of Notice issued August 13, 1998, the Commission scheduled a prehearing conference for September 1, 1998, set deadlines for intervention requests and objections thereto, and outlined a proposed procedural schedule. No party filed for intervention. The Office of the Consumer Advocate (OCA) is a statutorily recognized intervenor. On September 9, 1998, the Commission issued Order No. 23,014 approving the procedural schedule. Pursuant to the approved procedural schedule, Northern and Staff engaged in formal discovery. On September 23, 1998, Northern filed a request to reschedule the technical session and to extend filing of Staff's testimony. On October 1, 1998, Staff requested an extension to the deadline for the filing of Staff's testimony due to delays in discovery. Staff also requested to reschedule the settlement conference. On October 2, 1998, the Commission granted the requested changes to the procedural schedule. On October 6, 1998, Staff filed the direct testimony of Michelle A. Caraway, Utility Analyst III and the joint testimony of Stephen P. Frink, Assistant Finance Director, and Robert F. Egan, Utility Analyst III. On October 20, 1998, Staff filed a request to extend the date established for the filing of a settlement agreement and also to reschedule the hearing on the merits due to a scheduling conflict identified by Northern's counsel. On October 21, 1998, the Commission granted Staff's request. On October 26, 1998, Staff notified the Commission that Northern and Staff were unable to reach a final resolution to the issues raised in the docket and would not be filing a settlement agreement. Staff stated that the primary issues to be raised at the hearing were whether Northern should continue to sponsor DSM programs and whether Northern should be entitled to recover Lost Net Revenues associated with measures installed for new customers. On October 26, 1998, a hearing was held before the Commission at which time testimony was offered by Northern's witness Paul Smith, Manager, Demand Side Management and Staff's witnesses Michelle Caraway, Stephen Frink and Robert Egan. On November 2, 1998, the Commission issued Order No. 23,059 that suspended Northern's proposed Conservation Charges and required Northern to continue to offer its DSM programs and to collect the Conservation Charges as approved in Order No. 22,846 until the final order in this docket was issued. On November 10, 1998, Staff sent Northern a letter asking Northern to revise the Conservation Charges to reflect the effects on the proposed Conservation Charges of continuing the 1997/1998 Conservation Charges for an additional month and the forecasted therm sales for the remaining eleven-month period. Although the revised Conservation Charges would still be based on estimates, Staff believed that the Commission should have the opportunity to approve Conservation Charges based on the best information available to date. II. POSITIONS OF NORTHERN AND STAFF A. Northern Utilities, Inc. For Residential Water Heating and Residential Heating customers, Northern proposes to implement its programs with direct program budgets of $3,128 and $102,367, respectively. The water heating program offers a 100% incentive for the domestic hot water (DHW) package which includes hot water heater wraps, low flow showerheads, faucet aerators, hot water pipe insulation, and DHW temperature turndown. The heating program provides for a pre-installation audit to identify if a customer needs any of the DHW measures listed above or qualifies for attic insulation, clock thermostats, duct or pipe insulation, or an incremental incentive for the installation of a high efficiency heating system. The incentive level varies depending on whether the participant is low-income qualified, a renter or an owner/landlord. The Total Resource Cost (TRC) test, the method currently accepted by the Commission to evaluate the cost-effectiveness of DSM programs in New Hampshire, resulted in ratios of 1.32 and 1.02, respectively. Based on an impact evaluation, the cost-effectiveness analysis was calculated using a 57% realization rate applied to the engineering estimates of the therm savings. Northern proposes to offer its Small Commercial customers more standardized services at a direct program budget of $359,276. These services include a computer generated audit, contractor arranging, and incentives for all measures that are cost-effective for a particular customer. Measures may include DHW measures, attic insulation, wall insulation, clock thermostats, duct or pipe insulation, a premature heating system replacement, an incremental incentive for the installation of a high efficiency heating system, and heat recovery. The direct incentives offered to these customers consist of a buydown to a 2.5 year payback or 50% of the cost for an early replacement measure, whichever is less, with a maximum incentive of $30,000. The TRC ratio for this program is 1.35 using a 76% realization rate based on a recent impact evaluation. For its Large Commercial customers, Northern provides more customized services by typically offering a walk-through energy audit to identify potential energy savings opportunities. The proposed direct program budget is $71,861. Northern proposes to pay a minimum of 75% of the cost of an engineering study and the customer would pay the remainder. Direct incentives would consist of a buydown to a 2.5 year payback or 50% of the cost for early replacement measures, whichever is less. The maximum incentive that Northern provides to buy down to a payback of 2.5 years is $30,000 or 50% of the cost for the early replacement measure, whichever is less. No incentive will be paid for any measure with less than a 2.5 year payback. Prior to providing a financial incentive, Northern requires a customer to install any measure with a payback less than 2.5 years, unless there is a viable technical or operational reason why such measure should not be installed. The TRC ratio for this program is 2.32 using a 76% realization rate based on a recent impact evaluation. Northern anticipates substantial undercollections for its Residential Heating and Small Commercial customers for the end of the current program year. Northern explained that the undercollections were due to negative Conservation Charges (i.e., credits) that were in effect during the first three months of the 1997/1998 program year, i.e., the high use winter months, and also to warmer than normal weather resulting in decreased sales. Northern had been extremely late in filing its 1997/1998 DSM program, making the filing on October 24, 1997 as opposed to August 1, 1997 as required by Order No. 22,516 (March 3, 1997). The Commission suspended the proposed Conservation Charges associated with the 1997/1998 program year by Order No. 22,780 (November 3, 1997). The Commission acknowledged the effect on rates in Order No. 22,846 which stated: "In order to lessen the rate impact to Northern's customers which would result from compacting recovery of the total DSM costs into the remaining nine months of the Program Year and to enable the Company to implement the proposed CCs on February 1, 1998, any over/undercollection associated with the first three months of the 1997/1998 Program Year will be addressed in Northern's 1998/1999 DSM filing." Thus, Northern proposes that the undercollections be recovered through the Conservation Charges effective in the 1998/1999 program year. At the hearing, Northern's witness Mr. Smith testified that Northern and Staff had agreed to revise the Conservation Charges to reflect the removal of the prospective Shared Savings Incentive of $58,270 related to the upcoming 1998/1999 program year. Mr. Smith stated that any incentive earned by Northern for the 1998/1999 program year would be reconciled in the 1999/2000 DSM program filing (Tr. at 7-8). Mr. Smith testified that he disagreed with Staff's prefiled testimony regarding disallowing recovery of Lost Net Revenues associated with new customers for two reasons. First, Mr. Smith stated that the purpose of Lost Net Revenues was to make Northern whole so that it was not at a disadvantage when it delivers conservation services to its customers. If Northern was not entitled to recover Lost Net Revenues associated with measures installed for new customers, Mr. Smith stated that Northern would be disadvantaged because it would be expecting a certain revenue stream that would not materialize. Additionally, Mr. Smith testified that applying Staff's recommendation retrospectively was not a fair proposal (Tr. at 13-14). Mr. Smith also testified that Northern does not propose that the 1998/1999 program year be used to phase out its DSM programs. He stated that it is appropriate for Northern to file an updated avoided cost study so that the results can be incorporated into the development and proposal of future DSM programs (Tr. 18-20). B. Staff Staff's prefiled testimony dealt primarily with Northern's recovery of Lost Net Revenues associated with conservation measures installed for new customers, financial discrepancies in Northern's supporting schedules, the historic cost-effectiveness of Northern's DSM programs, the need for updated avoided costs, and whether Northern should continue to offer DSM programs. Staff recommended that Northern not be entitled to collect Lost Net Revenues associated with measures installed for new customers. By Order No. 19,905 (August 7, 1990), the Commission allowed electric utilities to collect lost revenues related to "reduced sales due directly to utility C&LM programs." Staff interpreted this phrase to refer to "a utility's existing customer base and not to DSM programs which have the effect of increasing sales" (Ex. 3, pp. 3-4). Staff's testimony conveyed its concern that Northern's DSM program could be having the opposite effect intended by DSM programs; i.e., load-building. In particular, Staff questioned whether the rebates for new heating systems were generating new customers for Northern similar to the experience of EnergyNorth Natural Gas, Inc. (ENGI). Data produced for ENGI's recent DSM proceeding (Docket DR 98-129) showed that 43% of heating system rebates were provided to new customers, either from new construction or switching from an alternate fuel source. Staff testified that Northern's DSM programs were screened for cost-effectiveness using avoided costs that were neither approved nor rejected by the Commission (Docket DR 95-107). Staff recommended that should Northern propose to continue its DSM program into the 1999/2000 program year, then Northern should file an avoided cost study within its Integrated Resource Plan (Docket DR 98-135), by May 15, 1999, so that the study could be reviewed and the results incorporated into the benefit-cost analysis for the upcoming year. Staff also testified that Northern's DSM programs have not been cost-effective for the 1996/1997 and to date 1997/1998 program years when the realization rates are incorporated in the cost-effectiveness analysis. Staff's witnesses stated their belief that the avoided costs, when filed, will be lower than those used to prepare this filing. Given new peaking sources and the new supply portfolio that will be available to Northern from the Wells Tank, the Portland Natural Gas Pipeline, and Maritimes & Northeast Pipeline, L.L.C., Staff believes that the avoided costs used to prepare the cost-effectiveness analysis will be lower, thus reducing the TRC ratios that have been presented in this filing. Staff testified that these options will reduce the cost of supplemental gas which drives the savings or benefits of the DSM programs. Northern will be avoiding its peaking costs, which are the most expensive supplies and therefore the benefits derived from the DSM program will be considerably less (Tr. 79 and 86). Staff stated that because the DSM programs have not been cost-effective for the last two years and the avoided costs used to prepare the 1998/1999 filing may be producing TRC ratios that are higher than should be, it is their recommendation that Northern's DSM programs be phased out during the 1998/1999 program year. Staff is not supportive of DSM programs which have not been proven to be cost-effective and which do not provide any benefits to non-participants. III. COMMISSION ANALYSIS Staff testimony at the hearing focused primarily on two issues: (1) whether Northern should be denied Lost Net Revenues associated with measures provided to new customers and (2) whether Northern should phase out its entire DSM program over this coming program year. Based on the evidence and the arguments presented, we will approve Northern's DSM program proposal, subject to the removal of the prospective Shared Savings Incentive of $58,270 related to the upcoming 1998/1999 program year and subject to the elimination of the Lost Net Revenues associated with prospective DSM services to new customers. The Commission will not require that Lost Net Revenues associated with such services be eliminated on a retrospective basis. DSM programs were implemented as part of Integrated Resource Plan filings so that demand side and supply side options could be analyzed to "determine the optimal mix of resources that will provide ratepayers' energy service needs at the least cost consistent with the reliable supply..." (Order No. 19,052 dated April 7, 1988). It was the Commission's intention that these programs be used to conserve energy and would not be used as potential marketing tools to build load on a utility's system at other ratepayers' expense, a concern heightened by the move to increased competition in energy markets. Consistent with our decision in the order addressing ENGI's 1998/1999 DSM Program (docket DR 98-129), we believe it is premature to decide whether gas utility-sponsored DSM programs should be phased out. Staff presented evidence that suggests that Northern's TRC ratios may be lower for the programs now being offered, given changes in the determinants of its avoided costs in recent months. Northern has agreed to file an updated avoided cost study if it wishes to justify further ratepayer- funded DSM programs after this year. However, it may be that improvements to program design could increase the retention rates for the programs, or otherwise increase the cost-effectiveness of the programs. Thus, we will not prejudge at this time whether DSM for Northern should be continued past this program year. We note, however, the need to make such a determination in a timely fashion, before customer expectations are raised or lowered unnecessarily. It is particularly important for Northern to make timely filings of its avoided cost study within the IRP docket on or before May 15, 1999, and make its proposals for DSM for program year 1999/2000 on or before July 15, 1999. We believe that removal of the prospective Shared Savings Incentive is consistent with previous Commission orders for the electric utilities regarding performance incentives related to conservation programs and with Order No. 21,881 (October 30, 1995) regarding Northern's 1995/1996 DSM program, which stated: "Northern may collect a Performance Incentive as a result of the DSM programs... to be calculated and collected in the next Program Year." On November 12, 1998, Northern submitted revised Conservation Charges in response to a request made by Staff. We believe that these revised Conservation Charges reflect our decisions regarding Lost Net Revenues and Shared Savings Incentives, and are based on the best information to date. Therefore, we will approve the following Conservation Charges: for Residential Water Heating, $0.0090/therm; for Residential Heating, $0.0203/therm; for Small Commercial, $0.0382/therm; and for Large Commercial, $0.0078/therm. Finally, we waive the application of N.H. Admin. Rules, Puc 1203.05(a), which requires generally that rate changes be implemented on a service-rendered basis, and will allow Northern to implement its Conservation Charges on a bills-rendered basis. This waiver, pursuant to Puc 201.05, produces a result consistent with the principles embodied in Puc 1203.05(b), which sets forth exceptions for allowing rate changes on a bills-rendered basis, and is in the public interest because it eliminates consumer confusion and reduces administrative costs. Based upon the foregoing, it is hereby ORDERED, that Northern's 1998/1999 DSM Program proposal, as filed at the hearing held October 26, 1998, and as revised by our analysis detailed above, is APPROVED; and it is FURTHER ORDERED, that the following Conservation Charges are APPROVED effective December 1, 1998 on a bills-rendered basis: for Residential Water Heating, $0.0090/therm; for Residential Heating, $0.0203/therm; for Small Commercial, $0.0382/therm; and for Large Commercial, $0.0078/therm; and it is FURTHER ORDERED, that Northern shall file properly annotated tariff pages in compliance with this Order no later than 15 days from the issuance date of this Order, as required by N.H. Admin. Rules, Puc 1603. By order of the Public Utilities Commission of New Hampshire this twenty-third day of November, 1998. Douglas L. Patch Susan S. Geiger Nancy Brockway Chairman Commissioner Commissioner Attested by: Thomas B. Getz Executive Director and Secretary