NARUC Water Committee Feb 2013 MCR

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MCR Performance Solutions, LLC

NARUC Winter Committee Meetings

February 3-6, 2013

Washington, DC

Energy Water Nexus:

Sharing Energy Efficiency and Alternative Ratemaking

NARUC Water Comm ittee

Febru ary 5, 2013


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Proprietary & Confidential

2013 All Rights Reserved

Todays Topics

Energy Water Nexus #1: Energy Efficiency Opportunities for Water Companies

Energy Water Nexus #2: Alternative Ratemaking Mechanisms


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Energy Eff ic iency Oppo rtun it ies for Water Companies


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Qualifying the Opportunity for Water Companies

Energy represents the largest controllable cost of providing water and wastewaterservices (source: U.S. EPA)

Water system energy represents as much as 40% total plant O&M

Wastewater treatment energy represents 25-30% total plant O&M

Electric utilities are under regulatory mandates to demonstrate efficiency gainthrough energy efficiency programs funded via bill surcharges

Energy efficiency low-hanging fruit is evaporating(technology market transformation / federal efficiency standards)

To energy utilities, water and wastewater utilities represent a cost-effective,verifiable, means to achieve their energy efficiency regulatory mandates

Water purveyors should take advantage of the opportunity to reduce operatingcosts, offset required infrastructure costs and recoup bill surcharge funds

Energy Efficient Infrastructure Funding

Energy efficiency programs are either prescriptive ($/light fixture, motor HP, etc.),or performance-based ($/kWh saved or peak kW reduced)

Larger energy utility payouts are for complex projects, where baseline energy usequantifies post-project efficiency gain

Energy Efficiency Opportunities for Water Utilities


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Examples of Energy Efficiency Projects for Water Companies

EE projects result in either prescriptive or performance-based cash payments:

Prescriptive-based EE payments: A motor pumps water uphill tostorage; water company receives a rebate for buying a high-efficiencymotor in place of a standard efficiency motor

Performance-based EE payments: Water company receives cashincentives for moving the tank down the hill

Add i t ional Examp les of More Complex Performance-based EE

A wastewater treatment plant reduceselectric energy consumption 30-50%by implementing automated dissolvedoxygen monitoring/control in aerationtanks along with other associated plantautomation; operator receives cash

incentives based on pre-post-measurement of electric demand usingplant SCADA systems.

A water company must replace asegment of pipeline. The installationof two parallel pipes reduces overallhead-pressure and associated energyrequirements. Utility cash incentives,

based on measured energy savings,offset significant portions of the entireproject.

Capita l imp rovement p lans shou ld be reviewed for

abi l i ty to q ual i fy for ef f ic iency g ain payments.


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Identify Projects Capital improvement plan review Preliminary screening

Establish Energy Utility Project Baseline analytics Savings projections Economic review (energy/water utility)

Project file development and submission Legal and regulatory approval

Project Implementation Site verification Cost documentation Post installation measurement

Final measure submission

Energy Utility Project Review Process incentive payments Evaluator post-inspection

Energy Efficient Infrastructure Funding


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Identify Projects Capital improvement plan review Preliminary screening

Establish Energy Utility Project Baseline analytics Savings projections Economic review (energy/water utility)

Project file development and submission Legal and regulatory approval

Project Implementation Site verification Cost documentation Post installation measurement

Final measure submission

Energy Utility Project Review Process incentive payments Evaluator post-inspection

Energy Efficient Infrastructure Funding (cont inued)

Example:Cost of two 2,000-HP VFD = $529,310

Payback = 6.3 yearsIncentive = $252,540

Cost = 47.7% costPayback = 3.3 years

Reduction in annual energy use = 44%Equivalent to 105,250 13W CFLs


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Jurisdictional Energy Efficiency Opportunities

StateEE

($ million)% UtilityRevenue

ACEEERank

Massachusetts $453.00 5.77% 1

California $1,162.50 3.35% 2

New York $1,073.20 4.69% 3

Oregon $171.80 4.51% 4

Vermont $40.70 5.64% 5

Connecticut $138.30 2.83% 6

Rhode Island $54.20 5.34% 7

Washington $274.90 4.36% 8

Maryland $156.40 2.05% T-9

Minnesota $191.25 3.24% T-9Iowa $99.80 2.55% 11

Arizona $126.10 1.74% 12

Michigan $127.60 1.50% 13

Colorado $64.10 1.28% 14

Illinois $115.70 0.91% 15

Source: American Council for an Energy-Efficient Economy (ACEEE)

2012 State Energy Efficiency Scorecard, MCR Analysis

ACEEEs Top 15 States ACEEEs Bottom 15 States

StateEE


ACEEERank

Kentucky $28.20 0.44% 36

Arkansas $25.20 0.70% 37

Virginia $0.10 0.00% 37

Oklahoma $39.60 0.85% 39

Alabama $10.70 0.13% T-40

South Carolina $16.30 0.23% T-40

Nebraska $16.50 0.71% 42

Louisana $9.00 0.13% 43

Missouri $47.20 0.67% 44

Kansas $9.10 0.25% 45Alaska $0.00 0.00% 46

South Dakota $4.30 0.46% 47

Wyoming $5.40 0.47% 48

West Virginia $0.00 0.00% 49

North Dakota $0.00 0.00% 50


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Jurisdictional Energy Efficiency Opportunities (cont inued)

StateEE


ACEEERank

Massachusetts $453.00 5.77% 1

California $1,162.50 3.35% 2

New York $1,073.20 4.69% 3

Oregon $171.80 4.51% 4

Vermont $40.70 5.64% 5

Connecticut $138.30 2.83% 6

Rhode Island $54.20 5.34% 7

Washington $274.90 4.36% 8

Maryland $156.40 2.05% T-9

Minnesota $191.25 3.24% T-9Iowa $99.80 2.55% 11

Arizona $126.10 1.74% 12

Michigan $127.60 1.50% 13

Colorado $64.10 1.28% 14

Illinois $115.70 0.91% 15

Source: American Council for an Energy-Efficient Economy (ACEEE)

2012 State Energy Efficiency Scorecard, MCR Analysis

StateEE


ACEEERank

Kentucky $28.20 0.44% 36

Arkansas $25.20 0.70% 37

Virginia $0.10 0.00% 37

Oklahoma $39.60 0.85% 39

Alabama $10.70 0.13% T-40

South Carolina $16.30 0.23% T-40

Nebraska $16.50 0.71% 42

Louisana $9.00 0.13% 43

Missouri $47.20 0.67% 44

Kansas $9.10 0.25% 45Alaska $0.00 0.00% 46

South Dakota $4.30 0.46% 47

Wyoming $5.40 0.47% 48

West Virginia $0.00 0.00% 49

North Dakota $0.00 0.00% 50

ACEEEs Top 15 States ACEEEs Bottom 15 States

TOTAL SPEND OF $5.9 BILLION


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Alternat ive Ratemaking Mechanism s


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Markets changed

Customer growth: slowed or declined Use-per-customer trends: slowed or declined

Costs of service changed

Costs were rising more quickly than rates

Certain costs escalated dramatically (outside of management control)

Existing infrastructure (often fully depreciated) required substantialrepair/replacement, with no associated incremental revenues

Traditional volumetric ratemaking did NOT change (attempting to recoversubstantially increasing fixed costs through variable rates)

Results of volumetric rates, increased costs and sluggish markets include:

Frequent and contentious rate cases became common

Few, if any, regulated distribution companies earned authorized returns

What Happened to Natural Gas LDCs?

Water Companies

Sound familiar?


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New ratemaking approaches seek to improve on traditional ratemaking

Provide realistic opportunities to earn authorized rates of return

Make smaller, more frequent rate adjustments

Avoid the time and expense of litigation

Enable timely rate changes in response to changes in costs and revenues

Adjust for differences between projected and actual results

Recover infrastructure replacement costs between rate cases

Align customers and investors interests within public policy initiatives, such aswater conservation and improved efficiencies

Provide safeguards for customers, regulators and rate case participants through: Revenue stability and rate stability

Increased transparency of financial and operational information

More accurate cost recovery mechanisms and/or true ups through periodicreporting

Alternative Ratemaking Objectives


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Options may include some combination of:

Straight fixed variable (SFV) rates Specific-issue trackers

Partial/full decoupling

Rate stabilization

Comprehensive trackers

Optimal alternative mechanism is found at the intersection of what will addressthe customers needs, what addresses the utilitys needs and what isconsistent with state regulatory policy

Consequently, solutions may vary:

From jurisdiction to jurisdiction

From industry to industry And perhaps, even from company to company within the same industry,

within the same jurisdiction

One Mechanism Does Not Fit All Requirements


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Selected Regulated States Alternative Rate Mechanisms

Gas Electric Both

State DecouplingStraight Fixed

Variable

Infrastructure

Replacement

Program

Rate StabilizationMulti-year Rate

Plans

Cap Ex

Trackers

Alabama

Arizona

Arkansas

California

Colorado

Connecticut

Delaware

Florida

Georgia

Hawaii

Idaho

Illinois

Indiana

Iowa

Kansas


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Declining Use per Customer is Driving Action in the Industry

Explore national trends

Develop a common understanding of the current situation in each state inwhich you do business

Develop a set of guidelines and a recommended approach

Identify specific jurisdictions that are candidates for the initial pursuit

Review the menu of options available to your utility

Determine the regulatory climate for alternative rate mechanisms

The optimal alternative mechanism is found at the intersection of

what will address the customers needs, what addresses the

utilitys needs and what is consistent with state regulatory policy.


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Contact Information

Cindy Menhorn Tom [email protected] [email protected]: 724.244.5333 Tel: 530.676.2401

MCR PERFORMANCE SOLUTIONSwww.mcr-group.com

MCR Performance Solutions is committed to the energyindustry. We have years of experience and expertiseassisting clients in numerous areas, including:Electric/Natural Gas Regulatory Services; EnergyEfficiency; Strategic and Capital Planning; EnterpriseRisk Management; Financial Forecasting; FinancialManagement; Nuclear Asset Management; andTechnical Services.

155 N. Pfingsten RoadSuite 155Deerfield, IL 60015Tel: 847-562-0066

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NARUC Water Committee Feb 2013 MCR

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