Empirical Assessment of Shareholder Incentive Mechanisms Designs under Aggressive Savings Goals: Case Study of a Kansas “Super-Utility”

Achieving significant reductions in retail electric sales is becoming a priority for policymakers in many states and is echoed at the federal level with the introduction of legislation to establish a national energy efficiency resource standard. Yet, as the National Action Plan on Energy Efficiency (NAPEE) pointed out, many utilities continue to shy away from seriously expanding their energy efficiency program offerings because they claim there is insufficient profit motivation, or even a financial disincentive, when compared to supply-side investments. In response to an information request from the Kansas Corporation Commission staff, we conducted a financial analysis to assess the utility business case in Kansas for pursuing more aggressive energy efficiency that complies with recent state legislation. Kansas' utilities are vertically integrated and don't face retail competition. With historically low retail rates and modest experience with energy efficiency, the achievement of rapid and substantial sales reductions from energy efficiency will require a viable utility business model. Using a conglomerate of the three largest utilities in Kansas, we quantitatively illustrate the tradeoff between ratepayer and shareholder interests when a 1% reduction in incremental sales is achieved through energy efficiency both with and without the impact of future carbon regulation. We then assess if the utility can be compensated in a manner that produces a sufficient business case but leaves an adequate amount of net resource benefits for ratepayers at a cost that is not overly burdensome. Finally, we show how several common shareholder incentive mechanisms would be designed to achieve this balance.