Steven Nadel, Toru Kubo, and Howard Geller

April, 2000

Executive Summary

Utilities have offered energy efficiency and other demand-side management (DSM) programs to their customers for approximately two decades. Utilities have offered these programs for many reasons, including economic development, environmental protection, and to provide energy cost savings to consumers and businesses. In 1994, several states began to restructure their utility industries. In order to prepare for the expected onset of competition, many utilities began cutting discretionary spending, including energy efficiency programs. As a result, utility spending on energy efficiency and other DSM programs declined from a peak of $2.74 billion in 1993 to $1.57 billion in 1998.

While many utilities have cut their discretionary expenditures, some states have recognized that energy efficiency programs provide important benefits to the public, and have established mechanisms to ensure that these programs continue. By far the most common approach has been to establish a public benefit fund (PBF) as part of restructuring. Money for the PBF generally comes from a small surcharge on distribution service. Of the 23 states adopting restructuring legislation or final regulatory orders so far, 18 have made provisions for a PBF of some sort. In addition, Vermont and Wisconsin have established PBFs but have not yet restructured.

Given the many changes taking place regarding utility energy efficiency programs, and given the fact that many states are just now considering whether and how to restructure their utility industries, we thought it would be useful to compare and rank utility energy-efficiency efforts by state, in order to recognize the leaders, and encourage the laggards to improve their programs.

In order to compare utility energy efficiency programs across states, we used data collected from utilities by the U.S. Energy Information Administration (EIA). We allocated each utility's energy efficiency expenditures and savings to each state according to the utility's service area. We used four parameters to score state performance: (1) 1998 energy efficiency expenditures as percentage of utility revenues; (2) 1998 electricity savings as percentage of electricity sales; (3) change in expenditures as a percentage of revenues between 1993 and 1998; and (4) change in savings as percentage of sales between 1993 and 1998. After calculating each of these parameters for all states and the District of Columbia, we assigned "points" to each state based on their relative rating on each parameter. We then weighted each parameter to allow calculation of a total score for each state.

Overall, we found enormous variation among the states in each of the four variables we examined. Energy efficiency expenditures in 1998 range from a high of 1.9 percent of revenues in Massachusetts to a low of nearly zero in Kansas, Nevada, and West Virginia. Nationwide, energy efficiency expenditures were 0.42 percent of revenues on average. The five top states in terms of energy efficiency expenditures as a percent of revenues in 1998 are Massachusetts, Rhode Island, Washington, New Jersey, and Maine.

Electricity savings in 1998 range from a high of 9.2 percent of electricity sales in Washington State (due to nearly two decades of significant activity) to a low of nearly zero in Kansas. The national average was 1.74 percent of electricity sales. The six states that reported at least 4 percent savings as a fraction of sales in 1998 were Washington, Oregon, Wisconsin, Rhode Island, Minnesota, and Vermont.

The change in energy efficiency expenditures from 1993 to 1998 ranged from an increase of more than 1 percent of revenues in New Jersey, which had programs that gradually ramped up over this period, to a decline of more than 5 percent of revenues in Washington State, which had very high expenditures in 1993, but still spent above the national average in 1998. Nationwide, energy efficiency expenditures declined by 0.42 percent of revenues over the 1993-1998 period.

Energy savings over the 1993-1998 period rose the most in Minnesota, increasing by 4.8 percent of electricity sales. Savings increased by more than 2 percent in six states-Minnesota, Oregon, Vermont, Maryland, Washington, and New Jersey. Savings declined in 14 states, including a reported decline of more than 2 percent of electricity sales in Maine and Tennessee. Nationwide, savings increased by 0.24 percent of sales over this period.

State-by-state spending and savings figures are summarized in Table ES-1. Based on this state-by-state data, scores were compiled for each parameter and overall scores tallied.

Table ES-1. State-by-State Spending and Savings on Energy Efficiency Programs between 1993 and 1998

Notes: *Pacific Noncontiguous

Overall, the five states with the highest scores (see Table ES-2) had energy efficiency expenditures in 1998 above 1 percent of revenues (more than double the national average) and savings in 1998 of more than 2.5 percent of electricity sales (substantially above the national average). The five states with the lowest score had 1998 expenditures and savings well below the national average. In addition, expenditures and savings were lower in 1998 than in 1993 in all five states. Scores and ranks for all states are summarized in Figure ES-1(map forthcoming).

Table ES-2. Highest and Lowest Ranked States

Top Ten (in order)	Bottom Ten (in order)
1. Washington 2. New Jersey 3. Rhode Island 4. Massachusetts 5. Minnesota 6. Oregon 7. Iowa 8. Wisconsin 9. Hawaii 10. Vermont	51. West Virginia 50. Alabama 49. Nevada 48. Tennessee 47. Arizona 46. Michigan 45. Pennsylvania 44. Georgia 43. Nebraska 42. Kansas

California, often considered a leading state in energy efficiency efforts, surprisingly does not appear among the top ten states but instead is ranked 17th. This is in large part due to the fact that California utilities underspent their energy efficiency budgets in 1998. Also, California reported less electricity savings as a fraction of total sales in 1998 than in 1993. So even a state like California, one of the first states to adopt a PBF to maintain utility energy efficiency programs, has room to improve.

Electric utilities cut their spending on end-use energy efficiency programs by nearly 50 percent between 1993 and 1998. But while these programs have been dramatically scaled back, utility energy efficiency programs are by no means "dead" or "dying." Almost $1 billion was spent on utility energy efficiency programs in 1998, and programs are expanding in a few states.

There always has been great diversity among states in terms of commitment to utility energy efficiency programs. The top states dedicated 1 to 2 percent of utility revenues to energy efficiency programs in 1998. Not surprising, energy savings correlates very closely with energy efficiency program spending. The top states were achieving electricity savings equivalent to 3 percent or more of total sales as of 1998. Of the top ten states that have restructured, all have adopted a PBF, indicating the importance of a PBF for continuing energy efficiency programs in a restructured environment. The top states tended to be concentrated geographically in the Northeast, Upper Midwest, and West Coast. On the other hand, large sections of the Southeast, Midwest, South-Central, and Southwest regions demonstrated minimal commitment to utility efficiency programs in recent years.

If all states and utilities had achieved the level of savings of the top five states, national electricity consumption in 1998 would have been reduced by about 200 billion kilowatt-hours (kWh)-enough electricity to serve all the power needs of 18 million households, or stated differently, enough electricity to run all the refrigerators and freezers in the nation. But instead of saving 200 billion kWh, the actual savings from utility energy efficiency programs in 1998 was only about 56 billion kWh.

What are some states sacrificing by operating minimal utility energy efficiency programs? First, they are maintaining energy waste and higher energy bills for their consumers and businesses. Second, emissions from power plants are higher than they need be, contributing towards environmental and health problems. Third, they may be compromising electric system reliability. Utility energy efficiency programs often cut peak demand, thereby postponing costly investments in new power plants as well as transmission and distribution system upgrades, and improving power system reliability.

We urge state policymakers outside the regions where utility efficiency programs have been maintained to adopt PBFs and greatly expand their efficiency programs. This will provide broad benefits through energy bill savings, lower pollutant emissions, and greater system reliability. And it will increase equity among states (e.g., air quality and power system reliability will improve if all states-not just those in the Northeast, upper Midwest, and Pacific Coast-operate robust energy efficiency programs).

In order to encourage additional states to adopt public benefit programs, we urge federal policymakers to establish a federal public benefits trust fund, along the lines of the public benefits trust fund included in the Clinton Administration's federal restructuring proposal. The federal trust fund would provide matching funds to states for eligible public benefits expenditures. To be specific, we recommend an electricity sales surcharge of $0.002/kWh, identical to proposals included in Senator Jeffords' (S. 1369) and Rep. Pallone's (H.R. 2569) utility restructuring bills, and twice as large as the trust fund included in the Administration's proposal.

This policy would encourage many states to expand their energy efficiency programs, without penalizing those states already making a major commitment. Decisions about program design and administration would be left up to state policymakers. We have previously estimated that a strong federal public benefit trust fund of this magnitude could result in about 340 billion kWh of electricity savings and 104 million metric tons (MMT) of carbon emissions reductions by 2010, about 750 billion kWh of savings and 207 MMT of carbon reductions by 2020, and about $130 billion in net economic benefits in consumers through 2020.

Strong end-use energy efficiency programs are one important element that can lead to greater efficiency (both energy and economic efficiency) and environmental improvement in the utility sector. But they are not the only element. Complementary initiatives should be taken to increase efficiency and reduce pollution from power supply, specifically initiatives to (1) remove or reduce the barriers limiting the adoption of combined heat and power systems, and (2) apply tighter emissions standards to older coal-fired power plants.

The activities of the leading states profiled in this report indicate what states can do. Now is the time for other states to learn from the leading states, and expand utility and public benefit energy efficiency programs so that their citizens, businesses, and environment can better take advantage of the many benefits these programs bri

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32 pp., 2000, $12.00, U004