Strange Bedfellows

Today's News & Observer printed an op-ed authored by representatives of the John Locke Foundation, NC PIRG and NC WARN. Their common foe? Duke Energy.

Duke Energy has proposed a "Save A Watt" program where Duke invests to improve conservation efforts. The goal is to reduce demand by 1700 megawatts per year by 2012. This would exceed the production of two Cliffside plants. If successful, new sources of energy production (coal fired, nuclear or gas) need not be built or existing dirty plants can be used less or shut down. If the Duke program succeeds, the environmental benefits would seem to be astounding.

So what is there to complain about from these strange bedfellows? While it is hard to follow (as are most diatribes authored in whole or part by the JLF "analysts") it is either 1) consumers will have to bear some of the cost of Duke's investment; 2) this is a government subsidized program of conservation; and/or 3)conservation efforts should be left to non-profits.

These conclusions seem to be reached on "facts" that don't seem to comport to the proposed program or common sense. For example, the article claims that consumers will pay for electricity they do not use but at 90% of the regular cost; that low income families will be subsidizing the conservation efforts of the well-heeled; and that it doesn't cost Duke anything for people to use less energy so they should not profit from the program. Each of these claims appears flawed.

Regulated utilities are guaranteed a rate of return (kind of like profit) in return for a guarantee that it will provide power to a certain service area regardless of where a residence or business is located or how many residences and businesses locate there. As a result there is a rate of return for both the number of kws sold and the investment made to produce those kws. This structure is designed to maximize profits the more power is sold and the more plants are built (there are many other complications that can affect profitability but this is the basic model). This is a deadly combination given the environmental effects of such a model in a publically traded for profit company. Why would any shareholder want to have the company sell less power or build fewer plants?

The simple beauty of the Duke plan is that shareholders will not suffer as much if Duke gets people to use less energy. This is not done by charging consumers for not using the electricity, but by allowing Duke to put into their rates a cost that would equal 90% of what it would cost consumers had new plants been built to produce the power that was conserved by virtue of Duke's investment in reducing power consumption. The reason shareholders would like this plan is that while they get slightly less profit (both from the lower recovery in the investment and loss of kw sales) there is less risk of cost overruns or construction stoppage associated with plant construction (things consumers do not neccessarily have to pay for).

The benefit to consumers, who don't seem to conserve voluntarily is that Duke will be providing tools to help them conserve. Tools we may not even know about today such as a smart meter in the home that a consumer can view the current cost of electric use in real time. Computer programs that can control usage from a laptop at work. Who knows what? We are only limited by imagination. But instead of consumers paying directly for all that, the cost is spread out in the rates. And if the tools are successful in reducing usage, then the consumer pays even less because they are using less (albeit at a slightly higher rate, but still a lower rate than if a plant was built).

This does not seem like a government subsidized program. And as much as a profit based approach has its problems, it also has its benefits and I am hard pressed to see non-profits in a position to do the things a power provider can do as quickly as Duke is proposing to do it.

My quarel with the program is two fold. First, consumers who actually use the tools and succeed in conserving ought to get a break in rates compared to those that don't reduce consumption. This creates not only an incentive for Duke to sell less power but an added incentive for the user to use less power. Second, there is still a slight profit incentive to build than invest in conservation tools. I wonder weather the program would be better if Duke shareholders made more in conservation efforts than in building plants. What would happen? Our first investor owned company solely geared to reducing power usage? What a wonderful world.