The concept
Lost revenue recovery is a ratemaking mechanism designed to remove the disincentive utilities have to reducing sales through energy efficiency programs. Because residential and small commercial ratemaking typically places a large portion of recovery in the volumetric ($/kWh) energy charge, lost revenues can lead to under recovery of a utility’s commission approved revenue requirement. This is seen as one of the primary roadblocks preventing utilities from engaging in aggressive energy efficiency programs with their consumers. Lost revenue recovery allows the utility to recoup declines in sales attributable to measurable and verifiable energy efficiency programs.
Program Cost Recovery and Performance Incentive Options
SOURCE: http://www.epa.gov/statelocalclimate/documents/pdf/background121307.pdf
Background
The cost of an energy efficiency program can be divided into three parts: program costs, opportunity costs and lost revenues. The program carries implementation costs: advertising, marketing, personnel, etc. Opportunity costs are the other ventures that could have been funded if the money had not been allocated to energy efficiency programs. For instance, more dollars might have been available for capital expenditures – plant and line upgrades, for instance – if the money had not been spent on energy efficiency programming instead. And lost revenues are the sales that would have come from customer consumption if the utility had not implemented the energy efficiency program to help the customer reduce usage.
Typically, program costs are easily identifiable and recoverable. For a utility, recovery of opportunity costs means placing investments in energy efficiency on a level playing field with investments in supply-side resources, with an opportunity to earn a fair rate of return.
The third category, lost revenue recovery has become one of the most common methods for traditionally regulated states to make utilities whole after they implement energy efficiency programs. One common mechanism for lost revenue recovery is through a tracker or surcharge. The tracker is calculated to recover revenues lost in between rate cases due to measurable and verifiable reductions in usage due to utility sponsored energy efficiency programs
AEP position
AEP is a strong supporter of lost revenue recovery. It makes the utility whole, relative to where it would have stood financially without implementation of the energy efficiency program. It is more targeted than other regulatory approaches (i.e. decoupling or straight fixed variable pricing) and avoids shifting economic and weather related risk from the utility to customers.
Lost revenues are verifiable and non-speculative. Unlike some other alternative regulatory frameworks, lost revenue recovery helps the utility meet its revenue requirements while vigorously pursuing energy efficiency programs without diluting the utility’s potential to improve its revenues in other arenas (such as increased sales resulting from plug-in hybrid electric vehicles. )
Decoupling and LRAM are the two most common mechanisms for recovering lost revenues. Full decoupling completely severs the tie between utility sales and revenues. LRAM determines how much of a utility’s revenues are lost due to the implementation of energy efficiency (EE) programs and allows recovery through a rate adjustment. While both methods eliminate the disincentive to promote EE, LRAM is targeted to only recover revenue losses due to EE programs.
