Why is Idaho Power Paying Its Customers?

Lynne Kiesling

KP readers know the answer to that question: reducing peak demand, load shifting across time, better capacity utilization. But there’s a bit more to it, as you can see in the New York Times article on Idaho Power’s rebates to their customers for reducing their irrigation during peak hours, as well as allowing for direct load control cycling of air conditioners. First, although I am glad to see such “programs” in a largely agricultural and rural customer base, the “energy efficiency program” focus of their strategy shows very little innovative thinking, and does not go far enough; there is no concept of dynamic pricing here, or even of time-of-use pricing, so the retail choices available to customers are not novel or innovative at all. In particular, note this passage:

“It’s clearly iconic in terms of a utility that’s turned the corner,” says Tom Eckman, the manager of conservation resources with the Northwest Power and Conservation Council, a planning group created by Congress. “They have gone from pretty much ground zero to a fairly aggressive program level.”

The company’s efforts are especially striking given that the push for energy efficiency is generally associated with coastal states like California and Massachusetts, not with a state whose electric rates are among the lowest in the country.

But the concept has rung true for Idaho’s farmers, anglers and snowbirds — outdoor types who have helped keep the state nearly free of coal plants. They have been largely receptive to the utility’s arguments that it is cheaper to save energy than to build new power plants.

While these “programs” make economic sense for the reasons we’ve discussed here frequently, note how embedded the entire concept of “energy efficiency programs” is in the traditional business model and culture of the regulated utility. This “energy efficiency program” framing of the retail space is what I would call a top-down sledgehammer approach. There is no concept of dynamic pricing here; this is just an implementation of direct load control (customer gives utility right to control devices, like air conditioner), so I don’t see it as being as innovative as Eckman does in his quote.

Second, the way such programs are being implemented in this industry are still embedded in the regulatory, cost recovery model, consequently with no concept of the fact that reducing costs and increasing sustainability is a way for companies like Idaho Power to increase their profits. You can see this from the fact that the regulators and Idaho Power still view energy efficiency as a cost center, a “program” that will reduce their revenue, so as a regulated firm they have to be paid to do that. The way Idaho Power is implementing this is under a regulatory mandate from the state PUC, and they are charging a monthly “energy efficiency fee” to their customers. This fee is intended to defray some of the revenue loss that might occur when they pay customers to reduce peak demand … but isn’t that reduction supposed to help Idaho Power reduce costs, so why charge customers for it? Welcome to the incongruous world of the incentives facing the regulated utility!

So, for better and for worse, this article gives you some insights into the current, evolving state of play in the electricity industry, and particularly the perverse embedded incentives for cost recovery and risk aversion that are a direct consequence of the economic regulation of electricity distribution companies and their government-granted monopoly in the retail market.

3 thoughts on “Why is Idaho Power Paying Its Customers?

  1. Well said, Lynne. The most sadly ironic part is on the 2nd page, when they describe how Idaho Power used to pay customers to convert their gas pumps to electric, and is now getting paid by the customers (through their surcharge) to dispatch those pumps off during the peak.

    As you say, only in the world of regulated utilities do increased expenses provide a revenue stream to offset capital investment while energy conservation is a cost that must be borne by the ratepayer…

  2. I’m not defending the regulatory cost-recovery model, but I do understand it. What Idaho Power is doing can make sense in that context, although we’d have to look at some numbers to know for sure.

    As we all know, the marginal rate for electricity in most regulated utilities is not equal to marginal cost. Especially for residential customers, the marginal rate is usually a one-part combination of fixed and variable costs, while marginal cost is purely variable in the short-term. On-peak marginal variable cost might be higher than the marginal rate,but there is certainly no guarantee of that relationship. To the extent that the lost revenue is greater than the avoided cost, the utility will lose margin that it needs to cover fixed cost. The programs are usually designed to avoid this loss of margin, so that the net cost avoided by customers approximates the cost actually avoided by the customers within the current time frame. The programs should produce some net savings for customers in the short-term, but things don’t always work the way utilities and regulators expect.

    The true benefits of a peak reduction program are usually future benefits that arise from avoided construction of new capacity. The utility doesn’t have to be compensated for cost it never incurs, so consumers should benefit in the long term.

    Again, I’m not defending the regulatory cost-recovery model here, just pointing out: In the regulatory model, utilities do get to recover cost prudently incurred.

  3. I don’t mind the cost recovery programs so much because political expedience requires them. In a perfect world it wouldn’t be so, but regulatory capture often requires “bribes” to utilities to get even the most basic improvements implemented.

    Still, I agree with Lynne that the lack of time-of-use or dynamic pricing is a bummer. IMO, This is the real low-hanging fruit and it’s being left on the tree.

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