By Friedman, Mark
IN AN ERA OF SOARING ENERGY COSTS, Arkansas’ investor-owned utilities are facing many of the same price pressures as their customers, causing some to encourage consumer conservation.
The utilities, however, must balance efforts to conserve with their duty to shareholders, which is to make a profit.
At the heart of the struggle is their business model, one that generally rewards utilities for selling more energy and, again generally, provides few incentives for selling less. The challenge is how to give for-profit utilities reasons to sell less.
Although the Arkansas Public Service Commission late last year approved a series of initial programs to encourage the conservation of electricity and natural gas, critics are skeptical that investor- owned utilities – IOUs – will push hard to persuade their customers to use less energy.
“It is somewhat like asking them to shoot themselves in the foot,” said Bill Ball, chairman of the Arkansas Renewable Energy Association of Little Rock. “They very carefully aim between each toe…. It is counter to their business model.”
Kevin Smith, co-chair of the Arkansas Governor’s Commission on Global Warming, also has some concerns about IOUs, whose goals are to represent the company and shareholders.
“A lot of times, the public’s goals arc not the same as the utilities’ goals,” Smith said.
Arkansas Western Gas Co. of Fayetteville has even said that promoting conservation could financially hurt the company because it receives lower revenue.
Entergy Arkansas Inc. of Little Rock, however, points out that it’s now supporting programs that encourage its customers to use less energy. That’s because the electric utility must have sufficient generating capacity to meet what’s called “peak” demand, when almost every air conditioner, every fan, every TV in Arkansas is operating.
“You’ve got to have enough generation capability to meet the customers’ peak demand for electricity,” said Kurt Castleberry, Entergy’s director of resource planning. “That peak demand may only occur for one hour a year, but we’ve got to have enough generation capability to meet that peak demand.”
If the utility doesn’t have the capacity to meet peak demand, then it has to start looking to buy energy or produce energy from other, higher-cost sources. Or the utility eventually would have to build an expensive power plant to meet the demand, said John Bethel, a spokesman for the PSC.
If utilities can help customers reduce their use and demand for electricity and natural gas, that would reduce the amount of electricity or natural gas the utility has to deliver, Bethel said.
One example is investor-owned Southwestern Electric Power Co. of Shreveport. It serves nearly 500,000 customers in three states, including more than 110,000 in Arkansas. On Aug. 4, Swepco set an all-time high for customer demand for energy.
Swepco couldn’t produce enough energy, so it had to buy electricity from a third party at a higher cost, spokesman Scott McCloud said.
To recover the higher energy costs, Swepco has to appeal to the Arkansas Public Service Commission for a rate increase, but there’s no guarantee that the increase will be approved. And a rate increase can be permitted only twice a year.
And as a result of the climbing peak demand, Swepco is trying to build a $1.5 billion coal-fired power plant in Hempstead County, but the controversial project has been delayed by more than a year. McCloud said the project is awaiting approval from the Arkansas Department of Environmental Quality.
Entergy Arkansas, however, said keeping a lid on peak use would financially help the company, which saw its assessable revenue drop 2.7 percent between 2006 and 2007 to $1.6 billion. The company’s net income was $139.1 million in 2007, off nearly 20 percent from 2006.
Entergy has several sources to tap to get electricity for its customers, including its own nuclear-, coal- or natural gas-fueled plants. And if it gets into a bind, it could also buy electricity from the wholesale market.
Each fuel source, though, has a different cost associated with generating the energy, from a half-penny per kilowatt-hour at a nuclear power plant to 10 cents – or more – on the open market.
“So we like our customers to use energy wisely,” Castleberry said. “When they do that, that helps us avoid the highest-cost energy out there.”
Changing Energy Policy
In 2006, the Arkansas Public Service Commission issued an order that encourages utilities to focus on energy efficiency and conservation programs to improve Arkansas’ dismal energy record. The order said Arkansas ranked in the lowest tier among the states in terms of spending on energy efficiency, whether measured on a per- capita basis, as a percentage of total retail energy sales or as a percent of total revenue.
“Due to the current high energy prices and the minimal level of energy efficiency programs in Arkansas, Commission action regarding energy efficiency is necessary,” the order said.
In November 2007, the PSC approved a series of initial programs designed to encourage the conservation of electricity and natural gas, PSC spokesman Bethel said.
But critics say investor-owed utilities are rewarded for selling more energy.
“They’re unenthusiastic about energy efficiency that hurts their shareholders,” Amory Lovins, CEO of the Rocky Mountain Institute at Snowmass, Colo., wrote in a September 2005 report. “Nearly all architects and engineers, too, are paid for what they spend, not for what they save; ‘performance-based fees’ have been shown to yield superior design, but are rarely used.”
Ball, of the Arkansas Renewable Energy Association of Little Rock, said utilities have their own incentive to cut peak demand though.
“Peak demand electricity is very expensive,” he said.
And he said utilities typically don’t charge residential customers different rates based on the time of day of their energy use.
“They have to charge the same for that cheap kilowatt-hour that they can make at 2 o’clock in the morning as they do for that very expensive kilowatt-hour that they’re making at 2 o’clock in the afternoon,” Ball said “It’s in their interest to lower that peak.”
He thinks there will be a bigger push in the 2009 legislative session to reduce energy use.
Ball also is working on legislation for a Renewable Energy Feed- In Tariff, which would allow customers producing excess solar power or any other renewable energy – to feed it directly into the power grid and get paid for it.
Ball said he was working with legislators – he wouldn’t say who – to have the legislation considered in the upcoming session.
Natural Gas
To lower energy use, one program the PSC approved allows gas utilities to adjust their rates to compensate for lost revenue from customers using less gas.
The natural gas industry in Arkansas had watched as customers used less gas over the last couple of years. (See list, Page 23.) Customers weren’t using as much gas because of the higher price of natural gas, more efficient appliances and conservation measures, said Arkansas Western Gas spokesman Marshall Moody.
Arkansas Western, like all gas utilities, passes the cost of the gas itself directly to its customers.
“We get paid for moving natural gas and the vehicle that we use is pipelines,” Moody said.
Moody said Arkansas Western has helped customers with energy- saving tips.
“It’s the right thing to do,” he said.
But when customers use less natural gas, it hurts the company financially.
In 2007, only Arkansas Western among the gas utilities operating in Arkansas saw its assessable revenue rise from 2006. And its revenue increased only 1.3 percent to $174.5 million.
CenterPoint Energy’s assessable revenue was off 5.6 percent in 2007 from the previous year, and Arkansas Oklahoma Gas Co. of Fort Smith saw its revenue slip 0.7 percent during the same period.
Arkansas Western proposed that it could recover lost revenue resulting from the reduced use of natural gas by being allowed by the PSC to raise rates if revenue for non-natural gas charges falls below $57.7 million.
The shortfall, however, has to be as a result of the lower revenue from its residential and small-business sectors, said Ricky Gunter, vice president of rates and regulation for Arkansas Western. Otherwise, to adjust the rate, Arkansas Western would have to go before the state PSC, a process that could take up to 14 months with no guarantee of getting the rate increased, he said.
The first year of the three-year program, which is called Trial Billing Determinate Adjustment, started Aug. 1, 2007, and ended July 31. Arkansas Western Gas is now analyzing the natural gas use numbers to determine if the rates will need to be adjusted. If the rates do rise, they will go into effect in January 2009, Gunter said.
“This is designed to allow utility companies to promote energy efficiency and not be harmed by the reduction in the volume,” Gunter said.
Gunter said the residential and small-business customers still should see a lower bill even if the rates have to rise to cover the revenue shortfall.
“The customer still benefits, because they use less gas, which is the largest component of their bill,” he said. “The customers still could benefit and the utilities would not be harmed.”Entergy Arkansas
Entergy Arkansas, meanwhile, has ripped a page out of Woodruff Electric Cooperative Corp.’s playbook on how to reduce energy costs.
Woodruff County, which is one of Arkansas’ 17 nonprofit electric cooperatives, found that if it monitors demand for energy and places automatic controls to reduce energy use during those peak demand times, both it and the customer save money.
For the cooperatives, wholesale rates for the year are based on peak demand. When the utilities can control the demand during the summer – when demand is at its highest – they can save money throughout the year.
The electric cooperatives are owned by their customers, so it’s always in the cooperatives’ interest to keep a lid on the rates, said Doug White, vice president of system services for the Electric Cooperatives of Arkansas.
“We’ve got a built-in incentive to operate as efficiently as we can versus just saying spin the meter so we can make money,” White said. “We don’t do that.”
Entergy Arkansas’ Castleberry said the utility talked to Woodruff Electric about its demand-side management program, which is when the utility, rather than the customer, reduces demand during the peak periods.
In June, Entergy Arkansas signed up about 60 farmers in Hazen who have irrigation systems for a pilot program to control energy use. Entergy now has the ability to turn the irrigation systems for the farmers on and off for up three hours a day every weekday.
The start-up cost for the program was $81,000.
In exchange for controlling the systems, Entergy will give the farmers a discount of up to 30 percent on their electric bills.
“We’re testing the program now with hopes of learning how to deploy it on a greater scale in the near future,” Castleberry said. He said Entergy would analyze the results this fall and then decide if it will expand the program.
So far the results have been promising, he said. “We’re hopeful that we’re able to expand it to a greater number of meters next summer,” Castleberry said.
Entergy Arkansas has 2,000 irrigation wells in its service area.
“It’s a big opportunity,” Castleberry said. “And we think a big benefit for our customers.”
Castleberry said both sides benefit because Entergy avoids having to acquire high-cost energy during the peak times and it sidesteps the possibility of having to build or buy a new power plant as a result of the high demands.
In April, Entergy Arkansas expects to file with the PSC more plans to reduce energy use.
Global Warming Commission
The Global Warming Commission was created during the 2007 meeting of the General Assembly to set a “global warming pollution reduction goal,” according to the commission’s Web site.
Smith, the co-chair of the commission, said the commission is studying ways to persuade utilities to offer alternative sources of renewable energy to customers.
Other study areas include tax incentives for utilities to cuts costs; however, the question then becomes how to pay for those, he said.
The utilities also don’t want to be strapped with unfunded mandates from the commission.
“They want to have cost recovery on anything they’re required to do,” Smith said. “They are open to a lot of suggestions, and they are open to incentive-based programs, provided that it doesn’t cost them anything.”
He said the report is due to Gov. Mike Beebe on Oct. 31 and will go to the General Assembly next year for action.
“We haven’t settled on anything yet,” Smith said.
Copyright Arkansas Business Aug 11, 2008
(c) 2008 Arkansas Business. Provided by ProQuest LLC. All rights Reserved.
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