BEFORE THE

**UNITED STATES SENATE**

# COMMITTEE ON ENERGY AND NATURAL RESOURCES

# TESTIMONY OF THE HONORABLE JAMES Y. KERR, II

**COMMISSIONER, NORTH CAROLINA PUBLIC UTILITIES COMMISSION**

**ON BEHALF OF THE**

**NATIONAL ASSOCIATION OF REGULATORY UTILITY COMMISSIONERS**

# ON

**"S. 1115, Energy Efficiency Promotion Act of 2007"**

**April 23, 2007**

**National Association of**

**Regulatory Utility Commissioners**

**1101 Vermont Ave, N.W., Suite 200**

**Washington, D.C. 20005**

**Telephone (202) 898-2200, Facsimile (202) 898-2213**

**Internet Home Page http://www.naruc.org**

Good Afternoon Mr. Chairman, Ranking Member Domenici, and Members of the
Committee.

My name is Jim Kerr. I am a Commissioner on the North Carolina Utilities
Commission and I also serve as the President of the National Association
of Regulatory Utility Commissioners (NARUC). I am testifying today on
behalf of NARUC and I greatly appreciate the opportunity to appear
before you today. The issues that you are addressing here are very
important to NARUC's membership and my State, and I am grateful to have
this opportunity to present our views on energy efficiency and, in
particular, your legislation, Mr. Chairman.

I would like to summarize my testimony and have my full statement
entered into the record.

NARUC is a quasi-governmental, non-profit organization founded in 1889.
Its membership includes the State public utility commissions serving all
States and territories. Our mission is to serve the public interest by
improving the quality and effectiveness of public utility regulation.
Our members regulate the retail rates and services of electric, gas,
water, and telephone utilities. Indeed, we are obligated by law to
ensure that the establishment and maintenance of such utility services
as may be required by the public convenience and necessity, and that
such services are provided under rates\--subject to terms and conditions
of service\--that are just, reasonable, and non-discriminatory.

I would like to discuss, in detail, efforts at the State level for
implementing energy efficiency programs and, Mr. Chairman, the
legislation you and Ranking Member Domenici introduced last week.

Since 1973, energy use in the United States has increased by 33%, but we
now use half as much energy per dollar of economic activity as we did
then.  To run today's economy without the energy efficiency improvements
that have taken place since 1973, we would need 43 percent more energy
supplies than we currently use---more energy than we currently generate
from any single supply source like nuclear, gas, coal, or
renewables.[^1]

Clearly, energy efficiency is already playing a considerable role in
meeting our country's growing demand, but the potential for an even
greater savings remains.

A 2000 study estimated that energy efficiency policies and programs
could cost-effectively reduce U.S. demand for electricity by 24 percent
and demand for natural gas by 12 percent by 2020.[^2]  This is about
half of the current projected increase in electricity and natural gas
demand. In short, energy efficiency has grown in acceptance from being
considered "nice thing to do for society" to becoming more recognized as
a real resource; some even call it "the fifth fuel."

For the record, NARUC has consistently supported and encouraged State
energy efficiency policies and it is our belief that energy efficiency
programs can, in some instances, be the quickest, cheapest, and cleanest
energy resource. If broadly adopted, energy efficiency programs can have
many far-reaching societal benefits, including:

-   Economic: Reduced energy intensity provides competitive advantages
    and frees financial resources for investment in non-energy goods and
    services;

-   Environmental: Saving energy reduces air pollution, the degradation
    of natural resources, risks to public health, and the threat of
    global climate change;

-   Infrastructure: Lower demand lessens constraints and congestion on
    the electric transmission and distribution systems; and,

-   Security: Energy efficiency can lessen our vulnerability to events
    that cut off energy supplies.

NARUC members have seen the benefits and are responding by exploring
aggressive investments in energy efficiency as a resource. NARUC itself
passed a resolution in 2005 encouraging States and other policymakers to
review their existing rate designs to determine if they encourage energy
conservation and energy efficiency so as to moderate natural gas demand
and reduce upward pressure on natural gas prices.

Additionally, NARUC was heavily involved in the drafting of the Energy
Department's recent report on State and Regional Policies that Promote
Energy Efficiency Programs Carried Out by Electric and Gas Utilities.
The report, mandated by Section 139 of the Energy Policy Act of 2005,
offers a list of recommendations for States, industry groups, and other
stakeholders to consider when implementing energy efficiency programs.
The report also summarized State energy efficiency activities.

We have also been active in our efforts to promote Advanced Metering
Infrastructure (AMI) throughout the country. AMI is a system that
records customer consumption of electricity on an hourly or even more
recurring basis and provides dynamic pricing that can afford consumers
the opportunity to better manage their energy intake. The NARUC Board of
Directors at our Winter Committee Meetings in February approved a
resolution that offered recommendations for States that are facilitating
cost-effective AMI technologies.

My home State of North Carolina is actively engaged in pursuing energy
efficiency programs. For instance, my fellow commissioner Jimmy Ervin
and I participated in the recent North Carolina Summit on Energy
Efficiency. The Summit served as a venue for North Carolina policymakers
and stakeholders to share information and best practices for
implementing energy efficiency programs, and also discuss initiatives
for raising awareness and developing a broad coalition of support for
related initiatives.

Also, NARUC and many member States, along with federal regulators and a
sizeable number of industry representatives, are participating in the
National Action Plan for Energy Efficiency. This Action Plan is a
multi-year, multi-sector effort aimed at creating a national commitment
to energy efficiency. I will go into more details about the Action Plan
later in my testimony.

Coinciding with the National Action Plan's activities is an effort by
the North American Energy Standards Board to establish a multi-year
process that aims to measure savings from energy efficiency programs.
NAESB held a meeting earlier this month on this issue and the National
Action Plan will help facilitate this project.

Before I go into more detail about the National Action Plan, I would
like to discuss the important legislation you, Mr. Chairman, and Ranking
Member Domenici introduced last week. NARUC would like to commend you
both for your leadership in moving energy efficiency policy to the
forefront of the nation's energy policy debate by introducing the
bipartisan legislation, S. 1115, and holding this hearing.

We believe that this bill is a generally positive step and there are
many provisions in S. 1115 that NARUC can support. I will limit my
comments today to address those provisions we believe are most pertinent
to our member commissions.

**[Title II -- Expediting New Energy Efficiency Standards]{.underline}**

NARUC is supportive of the proposals and policies included in Title II,
to the extent that they are intended to permit State action and
standards that go beyond those contemplated in this Title.
Cost-effective and technically feasible energy efficiency standards are
an important tool for achieving energy savings, improving environmental
quality, and reducing energy bills and prices for consumers. NARUC has
always supported meaningful energy efficiency standards at the national
level and, during the debate over the Energy Policy Act of 2005, we
urged Congress to enact cost-effective standards that would result in
the greatest energy savings. Additionally, NARUC has supported the
upgrading of National Efficiency Standards while encouraging and
supporting State efforts on standards to maximize energy efficiency.

While NARUC believes that appliance standards are indeed a highly
effective way to improve end-user efficiency, we have also supported
improvements in system efficiency for delivering electricity through
transmission and distribution networks. By ensuring that fewer losses
occur in the transmission and distribution of electricity to appliances,
we have the opportunity to ensure that electricity is delivered and used
in the most efficient manner possible. In fact, NARUC this past February
passed a resolution supporting new distribution transformer efficiency
standards that are being developed in concert with the electric power
industry and the energy efficiency advocacy community.

**[Title IV -- Setting Energy Efficiency Goals]{.underline}**

NARUC is highly supportive of the provisions found in sections 402 and
403 of Title IV, as these goals coincide with NARUC's efforts as part of
the above-referenced National Action Plan on Energy Efficiency. Again, I
will go into more detail about this project later in my testimony.

**[Title V -- Promoting Federal Leadership in Energy Efficiency and
Renewable Energy]{.underline}**

While NARUC agrees that the federal government must "get its own house
in order" to play a leading and productive role in this endeavor, we do
have a question regarding language in section 503 (d) (4) (C). Is it the
intent of this language to permit federal government facilities, beyond
the Power Marketing Administrations, to sell electricity in both
wholesale and retail markets, without regard to federal and State
regulations? If so, we would be rather troubled by this provision and we
would suggest that the language be clarified by noting that the
government sales would be subject to all applicable State and federal
law and regulation.

**[Title VI -- Assisting State and Local Governments in Energy
Efficiency]{.underline}**

NARUC strongly supports the provisions found in sections 601 and 602,
and has indeed benefited, as have many of our members, from the programs
included in these sections.

The U.S. Department of Energy's Weatherization Assistance Program has
served more than 5.7 million low-income families and is one of the most
effective energy efficiency programs in the United States. Low-income
families spend 16 percent of their annual income on energy, compared
with 5 percent for other households, and the typical Weatherization
recipient is a single mother with two children earning \$8,000 per year.
According to DOE, families who have their homes weatherized will
generally save between \$300 and \$400 each year on energy bills
allowing them a better opportunity to pay their future energy bills.
Families who do not receive Weatherization services must make hard
choices between heating and cooling their homes and other necessities,
such as food, clothing and medicine.

Additionally, NARUC has benefited from direct support from the State
Energy Programs. In 2004, for example, we received funding and technical
assistance from the DOE to develop Model Interconnection Standards &
Procedures. These standards provide a clear and consistent process for
interconnecting new generating units to the transmission grid. Moreover,
NARUC members have benefited from interaction with State Energy Offices
and Air Quality Agencies through projects undertaken between 2000 and
2003 that linked these key State government sectors on energy and air
quality issues.

NARUC is generally supportive of section 603 and technical assistance
provided in section 604, though we note that the decoupling issue is
retail by nature and is clearly under State jurisdiction. We recognize
that the best approach toward promoting energy efficiency programs for
any utility, State, or region may likely depend on local issues,
preferences, and conditions. By placing decoupling language under the
Public Utility Regulatory Policies Act of 1978, a State may move forward
if it is in their best interest and the technical assistance will help
where many commissions are currently overburdened with implementation of
the Energy Policy Act of 2005.

NARUC has begun exploring rate designs that align utility returns with
the delivery of energy efficiency. In August 2006 NARUC began an ongoing
dialogue with State agencies regarding design types and lessons learned
from different approaches. NARUC is developing additional research on
aligning rate designs with demand-side resources, and this summer will
release a brief for Consumer Advocates on Decoupling, and participate in
developing the National Action Plan Leadership Group's guidebook on the
topic.

I would now like to take this opportunity to discuss the National Action
Plan for Energy Efficiency in some detail. As stated above, the National
Action Plan aims to create a sustainable, aggressive national commitment
to energy efficiency from all sectors, including gas and electric
utilities, State and federal utility regulators, and partner
organizations. We believe that this commitment could save Americans
billions of dollars on energy bills over the next 10 to 15 years,
contribute to energy security, and improve our environment.

The Action Plan was developed by more than 50 leading organizations
representing a very diverse set of perspectives. It is a multi-year
collaborative and includes participation from the Department of Energy,
the Environmental Protection Agency, State regulators, industry, and
consumer groups. NARUC is one of two founding partners and our First
Vice President, Commissioner Marsha Smith of Idaho, is the State
Co-Chair of the Action Plan Leadership Group. Jim Rogers of Duke Energy
is the Industry Co-Chair. These organizations have pledged to take
specific steps to make the Action Plan a reality.

The Action Plan itself was released in July 2006 during the annual NARUC
Summer Meetings. This document made five recommendations to energy
policymakers:

1\. Recognize energy efficiency as high-priority resource;

 

2\. Make strong, long-term commitments to implement cost-effective
energy efficiency as a resource;

 

3\.  Broadly communicate benefits of, and opportunities for, energy
efficiency;

 

4\. Promote sufficient, timely, stable program funding where
cost-effective; and,

 

5\. Review, adopt policies to align utility incentives with delivery of
energy efficiency, and modify rate practices to promote energy
efficiency investments.

NARUC members have made commitments to implementing the Action Plan's
recommendations. For example, the State of Arkansas issued "Resource
Planning Guidelines" and ordered their jurisdictional utilities to begin
implementing cost-effective energy efficiency programs. California,
meanwhile, issued a Memorandum of Understanding demonstrating the
State's commitment to develop, promote, and implement the Action Plan's
recommendations. Nearly all of the State's energy stakeholders signed
the MOU, including the Governor, the State's PUC, the California Energy
Commission, and most of the State's investor-owned and publicly-owned
utilities. Also, Iowa's Utilities Board specifically endorsed the Action
Plan's recommendations as well, as did State regulators in Connecticut,
Florida, Hawaii, Kansas, Minnesota, New England, New Jersey, New York,
Ohio, Oregon, Utah, Vermont, Washington, and the Southeast.

This year, the National Action Plan Leadership Group is taking a
grass-roots approach, working with regulators across the country to
implement the recommendations. Currently, the Leadership Group is
working on a number of projects, including communications plans,
promotional strategies, regulatory solutions to reduce impediments, and
ways to encourage utility participation. Also, the participants are
developing guidances on how energy efficiency opportunities can be
captured through energy resource planning and procurement processes,
changes in building codes, as well as in rates, utility incentives,
planning, and cost-benefit studies. In addition, the participants are
also developing Evaluation Guides to account for energy and cost savings
from energy efficiency.

For the next year and beyond, the National Action Plan participants will
study methods to align utility incentives with the best levels of
cost-effective energy efficiency programs and will develop a set of
metrics that can demonstrate the actual success of their commitments to
energy efficiency.

As you can see, Mr. Chairman and Ranking Member Domenici, State
regulators are already embracing energy efficiency as a critical
resource to meet growing demand. But we have only started to tap into
the great potential energy efficiency holds and this hearing and
legislation are both very timely and appropriate. We very much
appreciate your attention and thank you for the opportunity to share our
views on S.1115. The NARUC membership is committed to working with you
and this Committee as this legislation moves forward.

**ATTACHMENTS**

***Resolution to Remove Regulatory Barriers To the Broad Implementation
of Advanced Metering Infrastructure***

**WHEREAS**, The Energy Policy Act of 2005 amended the State ratemaking
provisions of the Public Utilities Regulatory Policies Act of 1978
(PURPA) to require every State regulatory commission to consider and
determine whether to adopt a new standard with regard to advanced
metering infrastructure (AMI); *and*

**WHEREAS**, Advanced metering, as defined by Federal Energy Regulatory
Commission (FERC), refers to a metering system that records customer
consumption hourly or more frequently and that provides daily or more
frequent transmittal of measurements over a communication network to a
central collection point; *and*

**WHEREAS**, The implementation of dynamic pricing, which is facilitated
by AMI, can afford consumers the opportunity to better manage their
energy consumption and electricity costs through the practice of demand
response strategies; *and*

**WHEREAS**, Effective price-responsive demand requires not only
deployment of AMI to a material portion of a utility's load, but also
implementation of dynamic price structures that reveal to consumers the
value of controlling their consumption at specific times; *and*

 

**WHEREAS**, AMI deployment offers numerous potential benefits to
consumers, both participants and non-participants, including:

-   greater customer control over consumption and electric bills;

-   improved metering accuracy and customer service;

-   potential for reduced prices during peak periods for all consumers;

-   reduced price volatility;

-   reduced outage duration; and,

-   expedited service initiation and restoration; *and*

**WHEREAS**, The use of AMI may afford significant utility operational
cost savings and other benefits, including:

-   automation of meter reading;

-   outage detection;

-   remote connection/disconnection;

-   reduced energy theft;

-   improved outage restoration;

-   improved load research;

-   more optimal transformer sizing;

-   reduced demand during times of system stress;

-   decreased T&D system congestion; and,

-   reduced reliance on inefficient peaking generators; *and*

**WHEREAS**, Sound AMI planning and deployment requires the
identification and consideration of tangible and intangible costs and
benefits to a utility system and its customers; *and*

**WHEREAS**, Cost-effective AMI may be a critical component of the
intelligent grid of the future that will provide many benefits to
utilities and consumers; *and*

**WHEREAS**, It is important that AMI allow the free and unimpeded flow
and exchange of data and communications to empower the greatest range of
technology and customer options to be deployed; *and*

**WHEREAS**, The deployment of cost-effective AMI technology may require
the removal and disposition of existing meters that are not fully
depreciated and may require replacement of, or significant
modification to, existing meter reading, communications, and
customer billing and information infrastructure;* and*

**WHEREAS**, Regulated utilities may be discouraged from pursuing demand
response opportunities by the prospect of diminished sales and revenues;
*now, therefore, be it*

**RESOLVED**, That the Board of Directors of the National Association of
Regulatory Utility Commissioners, convened at its February 2007 Winter
Meetings in Washington, D.C., recommends that commissions seeking to
facilitate deployment of cost-effective AMI technologies consider the
following regulatory options:

-   pursue an AMI business case analysis, in conjunction with each
    regulated utility, in order to identify an optimal, cost-effective
    strategy for deployment of AMI that takes into account both tangible
    and intangible benefits;

-   adopt ratemaking policies that provide utilities with appropriate
    incentives for reliance upon demand-side resources;

-   provide for timely cost recovery of prudently incurred AMI
    expenditures, including accelerated recovery of investment in
    existing metering infrastructure, in order to provide cash flow to
    help finance new AMI deployment; and,

-   provide depreciation lives for AMI that take into account the speed
    and nature of change in metering technology; *and be it further*

**RESOLVED**, That the Federal tax code with regard to depreciable lives
for AMI investments should be amended to reflect the speed and nature of
change in metering technology; *and be it further*

**RESOLVED**, That NARUC supports movement toward an appropriate level
of open architecture and interoperability of AMI to enable
cost-effective investments, avoid obsolescence, and increase innovations
in technology products.

\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_

*Sponsored by the Committee on Energy Resources and Environment*

*Adopted by NARUC Board of Directors February 21, 2007*

***Resolution on Distribution Transformers Energy Conservation
Standards***

**WHEREAS**, The investor-owned and public power utilities represented
by the Edison Electric Institute (EEI) and the American Public Power
Association (APPA), and the energy efficiency advocacy community,
represented by Natural Resources Defense Council, the American Council
for an Energy-Efficient Economy, the Alliance to Save Energy, Northeast
Energy Efficiency Partnerships and the Appliance Standards Awareness
Project have agreed to jointly recommend new national standards for
distribution transformers; *and*

**WHEREAS**, Cost-effective and technically feasible energy efficiency
standards are an important tool for achieving energy savings, improving
environmental quality, and reducing energy bills and prices for
consumers; *and*

**WHEREAS**, The recommended joint standards will ensure the highest
technologically achievable energy savings that are economically
justified; *now, therefore, be it*

**RESOLVED**, That the Board of Directors of the National Association of
Regulatory Utility Commissioners, convened at its February 2007 Winter
Meetings in Washington, D.C., endorses the tiered approach to the
efficiency standards agreed to by the Edison Electric Institute (EEI)
and the American Public Power Association (APPA), and the energy
efficiency advocacy community, represented by Natural Resources Defense
Council, the American Council for an Energy-Efficient Economy, the
Alliance to Save Energy, Northeast Energy Efficiency Partnerships and
the Appliance Standards Awareness Project.

\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_

*Sponsored by the Committee on Energy Resources and Environment*

*Adopted by NARUC Board of Directors February 21, 2007*

***Resolution on Energy Efficiency and Innovative Rate Design***

**WHEREAS,** The National Association of Regulatory Utility
Commissioners (NARUC), at its July 2003 Summer Meetings, adopted a
*Resolution on State Commission Responses to the Natural Gas Supply
Situation* that encouraged State and Federal regulatory commissions to
review the incentives for existing gas and electric utility programs
designed to promote and aggressively implement cost-effective
conservation, energy efficiency, weatherization, and demand response;
*and*

**WHEREAS**, The NARUC at its November 2003 annual convention, adopted a
*Resolution Adopting Natural Gas Information "Toolkit,"* which
encouraged the NARUC Natural Gas Task Force to review the findings and
recommendations of the September 23, 2003 report by the National
Petroleum Council on *Balancing Natural Gas Policy -- Fueling the
Demands of a Growing Economy* and its recommendations for improving and
promoting energy efficiency and conservation initiatives; *and*

**WHEREAS,** The NARUC at its 2004 Summer Meetings, adopted a
*Resolution on Gas and Electric Energy Efficiency* encouraging State
commissions and other policy makers to support expansion of energy
efficiency programs, including consumer education, weatherization, and
energy efficiency and to address regulatory incentives to inefficient
use of gas and electricity; *and*

**WHEREAS**, These NARUC initiatives were prompted by the substantial
increases in the price of natural gas in wholesale markets during the
2000-2003 period when compared to the more moderate prices that
prevailed throughout the 1990s; *and*

**WHEREAS**, The wholesale natural gas prices of the last five years
largely reflect the fact that the demand by consumers for natural gas
has been growing steadily while, for a variety of reasons, the supply of
natural gas has had difficulty keeping pace, leading to a situation
where natural gas demand and supply are narrowly in balance and where
even modest increases in demand produce sharp increases in price; *and*

**WHEREAS**, Hurricanes Katrina and Rita, in addition to damaging the
States of Alabama, Mississippi, Louisiana, and Texas, significantly
damaged the nation's onshore and offshore energy infrastructure,
resulting in significant interruption in the production and delivery of
both oil and natural gas in the Gulf Coast area; *and*

**WHEREAS**, The confluence of a tight balance of natural gas supply and
demand and these natural disasters has driven natural gas prices in
wholesale markets to unprecedented levels; *and*

**WHEREAS**, The present high and unprecedented level of natural gas
prices are imposing significant burdens on the nation's natural gas
consumers, whether residential, commercial, or industrial, and will
likely be injurious to the nation's economy as a whole; *and*

**WHEREAS**, The recently enacted Energy Policy Act of 2005 contains a
number of provisions aimed at encouraging further natural gas production
in order to bring down prices for consumers, but these actions, together
with any further action on energy issues by Congress, are unlikely to
bring forth additional supplies of natural gas in the short term; *and*

**WHEREAS**, Energy conservation and energy efficiency are, in the short
term, the actions most likely to reduce upward pressure on natural gas
prices and to assist in bringing energy prices down, to the benefit of
all natural gas consumers; *and*

**WHEREAS**, Innovative rate designs including "energy efficient
tariffs" and "decoupling tariffs" (such as those employed by Northwest
Natural Gas in Oregon, Baltimore Gas & Electric and Washington Gas in
Maryland, Southwest Gas in California, and Piedmont Natural Gas in North
Carolina), "fixed-variable" rates (such as that employed by Northern
States Power in North Dakota, and Atlanta Gas Light in Georgia), other
options (such as that approved in Oklahoma for Oklahoma Natural Gas),
and other innovative proposals and programs may assist, especially in
the short term, in promoting energy efficiency and energy conservation
and slowing the rate of demand growth of natural gas; *and*

**WHEREAS**, Current forms of rate design may tend to create a
misalignment between the interests of natural gas utilities and their
customers; *now therefore be it*

**RESOLVED**, That the National Association of Regulatory Utility
Commissioners (NARUC), convened in its November 2005 Annual Convention
in Indian Wells, California, encourages State commissions and other
policy makers to review the rate designs they have previously approved
to determine whether they should be reconsidered in order to implement
innovative rate designs that will encourage energy conservation and
energy efficiency that will assist in moderating natural gas demand and
reducing upward pressure on natural gas prices; *and be it further*

**RESOLVED**, That NARUC recognizes that the best approach toward
promoting energy efficiency programs for any utility, State, or region
may likely depend on local issues, preferences, and conditions.

*\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_*

*Sponsored by the Committee on Gas*

*Recommended by the NARUC Board of Directors November 15, 2005 *

*Adopted by the NARUC November 16, 2005 *

[^1]: Department of Energy, "State and Regional Policies that Promote
    Energy Efficiency Programs Carried Out by Electric and Gas Utilities

[^2]: Interlaboratory Working Group, "Scenarios for a Clean Energy
    Future," Oak Ridge National Laboratory, Lawrence Berkeley National
    Laboratory