The Council’s 5th Power Plan conservation targets are comprised of measures that were found to be cost effective if the electric system paid all the costs. Council plan conservation targets are based on availability of conservation that passes this Total Resource Cost (TRC) test. Since its first Plan the Council has interpreted the Act definition of cost-effectiveness as requiring comparison of the economics of alternative resources considering all costs and benefits to determine cost-effectiveness of conservation compared to generating resources. Bonneville has indicated that in its Post 2006 conservation programs it will not provide funding for measures that were not identified as cost-effective in the Council’s 5th Plan. This policy is consistent with the Act, the Council plan and with regional utility conservation efforts over the last 20 years. This policy does not however, limit utility investments in conservation or other resources that the Council did not find to be cost-effective.
The practical impact of Bonneville’s proposed application of cost-effectiveness for conservation programs is to limit the scope of the conservation measures that can be installed under Bonneville’s Conservation and Renewable Resources Rate Discount Program (C&RD). The original purpose of the C&RD program was to encourage utilities to "re-engage" conservation efforts that had lapsed or to maintain their conservation infrastructure. As part of the effort to initiate the rate discount program in 2001-2006, Bonneville did not require that measures installed through C&RD be cost-effective. The proposal to fund only cost-effective conservation eliminates some of the measures that many utilities had been installing under the original C&RD program. As a result, there has been significant utility resistance to implementing this "cost-effectiveness" limit. Some utilities are also concerned that by restricting the list of measures that are eligible for rate discount credits they will not be able to acquire sufficient savings in their service territories to obtain all of the rate credits they are eligible for and thus end up paying Bonneville more money.
In order to continue to secure savings from measures that do not pass the Council’s cost-effectiveness screen, some utilities are asserting that Bonneville and the Council’s should adopt an alternative Total Resource Cost definition of cost-effectiveness used by the Council. These utilities assert that this definition and approach to determining whether a measure is cost-effective is too broad because it counts "all costs and benefits" not just those paid for or received by the power system. They argue that a conservation measure’s cost-effectiveness should be based on a "Utility Cost Test" (UCT). That is, only those costs paid by utility rate revenues and only those benefits the power system receives in the form of electricity savings should be considered in the analysis. Using the UCT, a measure is cost-effective if the present value of the administrative cost and financial incentives paid by utilities are less than present value of the avoided cost of alternative electricity resources avoided by the measure.
The remainder of this memo discusses some of the major issues and implications associated with altering the Council’s approach to determining the cost-effectiveness of conservation savings. Accompany this memo are several reference documents. Attachment A is a paper that provides an overview of the five major approaches that have been used to determine the cost-effectiveness of conservation investments across the country. Attachment A also summarizes the Northwest and California state utility regulatory commission and legislative policies regarding the issue of how to determine cost-effectiveness of conservation resources.
