LBNL-3833E

ERNEST ORLANDO LAWRENCE

BERKELEY NATIONAL LABORATORY

Benefits and Costs of Aggressive Energy 

Efficiency Programs and the Impacts of 

Alternative Sources of Funding: Case 

Study of Massachusetts

Peter Cappers, Andrew Satchwell, Charles Goldman, and Jeff 

Schlegel

Preprint version of paper for conference proceedings,

ACEEE Summer Study, Pacific Grove, CA, Aug. 15-20, 2010

Environmental Energy Technologies Division

August 2010

The work described in this report was funded by the U.S. Department of 

Energy Office of Electricity Delivery and Energy Reliability (OE) - Permitting, 

Siting and Analysis Division under Contract No. DE-AC02-05CH11231.
ii

Disclaimer

This document was prepared as an account of work sponsored by the 

United States Government. While this document is believed to contain 

correct information, neither the United States Government nor any agency 

thereof, nor The Regents of the University of California, nor any of their 

employees, makes any warranty, express or implied, or assumes any legal 

responsibility for the accuracy, completeness, or usefulness of any 

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trademark, manufacturer, or otherwise, does not necessarily constitute or 

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Government or any agency thereof, or The Regents of the University of 

California. The views and opinions of authors expressed herein do not 

necessarily state or reflect those of the United States Government or any 

agency thereof or The Regents of the University of California.

Ernest Orlando Lawrence Berkeley National Laboratory is an equal 

opportunity employer.
iii

Acknowledgments

The work described in this report was funded by the U.S. Department of Energy 

Office of Electricity Delivery and Energy Reliability (OE) - Permitting, Siting and 

Analysis Division under Contract No. DE-AC02-05CH11231.

The authors would like to thank Larry Mansueti (DOE OE) for their support of 

this project. The authors would also like to thank Phil Guidice, Frank Gorke and Mike 

Sherman (Massachusetts DOER) and Tim Wolfe (MA DPU) for their comments and 

feedback on draft work products from this study.
iv

LBNL-3833E

Benefits and Costs of Aggressive Energy Efficiency Programs and 

the Impacts of Alternative Sources of Funding:

Case Study of Massachusetts

Principal Authors

Peter Cappers, Andrew Satchwell, Charles Goldman, and Jeff Schlegel

August 2010

The work described in this report was funded by the U.S. Department of Energy 

Office of Electricity Delivery and Energy Reliability (OE) - Permitting, Siting and 

Analysis Division under Contract No. DE-AC02-05CH11231.
v

Table of Contents

Acknowledgments..............................................................................................................iii

Table of Contents................................................................................................................ v

List of Figures and Tables.................................................................................................. vi

Abstract............................................................................................................................. vii

1. Introduction ................................................................................................................. 8

2. Analysis Approach ...................................................................................................... 9

3. Characterizing the Massachusetts Electricity Market ............................................... 10

3.1 Utility Characterization ........................................................................... 10

3.2 Energy Efficiency Portfolio Characterization ......................................... 11

3.3 Funding Sources of Energy Efficiency ................................................... 13

3.4 Other Business Model Considerations.................................................... 15

4. Analysis Results ........................................................................................................ 16

4.1 Impacts of Aggressive EE Portfolio on Ratepayers................................ 16

4.2 Impact of Aggressive EE Portfolio on Utility Shareholders................... 18

5. Conclusions ............................................................................................................... 20

6. References ................................................................................................................. 22
vi

List of Figures and Tables

Figure 1. Flowchart for Quantitative Analysis of Energy Efficiency Impacts on 

Stakeholders...................................................................................................................... 10

Figure 2. Effect of Energy Efficiency Portfolios on Massachusetts “Super-Utility” Load 

Forecast............................................................................................................................. 12

Figure 3. Relationship of Various Energy Efficiency Funding Sources to Alternative EE 

Program Costs................................................................................................................... 14

Figure 4. Nominal Total Ratepayer Bill Comparison (2009-2020).................................. 17

Figure 5. Nominal All-In Retail Rate Comparison (2009-2020)...................................... 18

Figure 6. Effects of Alternative Efficiency Business Models Components on ROE (2009-

2030) ................................................................................................................................. 19

Figure 7. Effects of Alternative Energy Efficiency Business Model Components on 

Earnings (2009-2030) ....................................................................................................... 20

Table 1. Lifetime Savings, Resource Costs and Benefits of Alternative Energy Efficiency 

Portfolios (2009-2020)...................................................................................................... 13

Table 2. Change in Ratepayer Bills due to Energy Efficiency ($B, 2009-2030 PV relative 

to No New EE Case)......................................................................................................... 17

Table 3. Change in All-In Retail Rates due to Energy Efficiency (¢/kWh, 2009-2030 

average relative to No New EE Case)............................................................................... 18
vii

Abstract

Increased interest by state (and federal) policymakers and regulatory agencies in 

pursuing aggressive energy efficiency efforts could deliver significant utility bill savings 

for customers while having long-term implications for ratepayers (e.g. potential rate 

impacts). Equity and distributional concerns associated with the authorized recovery of 

energy efficiency program costs may necessitate the pursuit of alternative program 

funding approaches. 

In 2008, Massachusetts passed the Green Communities Act which directed its 

energy efficiency (EE) program administrators to obtain all cost-effective EE resources. 

This goal has translated into achieving annual electric energy savings equivalent to a 

2.4% reduction in retail sales from energy efficiency programs in 2012. Representatives 

of electricity consumer groups supported the new portfolio of EE programs (and the 

projected bill savings) but raised concerns about the potential rate impacts associated 

with achieving such aggressive EE goals, leading policymakers to seek out alternative 

funding sources which can potentially mitigate these effects. Utility administrators have 

also raised concerns about under-recovery of fixed costs when aggressive energy 

efficiency programs are pursued and have proposed ratemaking policies (e.g. decoupling) 

and business models that better align the utility’s financial interests with the state’s 

energy efficiency public policy goals. Quantifying these concerns and identifying ways 

they can be addressed are crucial steps in gaining the support of major stakeholder groups 

- lessons that can apply to other states looking to significantly increase savings targets 

that can be achieved from their own ratepayer-funded energy efficiency programs.

We use a pro-forma utility financial model to quantify the bill and rate impacts on 

electricity customers when very aggressive annual energy efficiency savings goals

(~2.4%) are achieved over the long-term and also assess the impact of different cost 

recovery approaches that integrate alternative revenue sources. We also analyze 

alternative lost fixed cost recovery approaches to better understand how to mitigate the 

erosion of utility shareholder returns in states that have adopted (and achieved) very 

aggressive savings targets.
8

1. Introduction

Regulators and legislators in many states are increasingly interested in pursuing 

aggressive energy efficiency (EE) savings as a means to offset the potentially higher costs and 

environmental impacts associated with many new generation resources and mitigate the effects 

of climate change. Ratepayer-funded EE programs are a common means of delivering these 

savings. Currently 31 states have legislative or regulatory policies in place that identify the need 

to assess the cost-effectiveness and/or pursue ratepayer-funded EE programs; although as of 

2007, reductions in electricity sales due to ratepayer-funded EE programs were modest (less than 

or equal to 0.1%) in 11 of these states (Eldridge et al. 2009). There are ample business reasons 

why a regulated utility would eschew EE efforts (Jensen 2007). Thus, states are increasingly 

adopting policies that set explicit savings goals for utilities through legislative or regulatory 

requirements and/or attempt to align the utility’s business and financial interests with broader 

public policy objectives that support energy efficiency. For example, eleven states have adopted 

an energy efficiency resource standard (EERS) within the last three years (Barbose et al. 2009).

This study examines (1) the customer bill and rate impacts, and (2) the shareholder 

earnings and return on equity (ROE) impacts when a state decides to significantly expand its 

ratepayer-funded EE programs. We model our analysis based on the Massachusetts Green 

Communities Act (GCA) (Mass. Gen. Laws ch. 25, § 21, 2008), which directed its EE program 

administrators (PAs) to achieve all cost-effective energy efficiency. The final PA compliance 

filings to the Massachusetts Department of Public Utilities (DPU) indicated the programs would 

produce annual electric energy savings equivalent to a 2.4% reduction in retail sales in 2012, 

among the most aggressive energy efficiency targets in the nation.1

We characterize and model a Massachusetts “super-utility”, an entity that reflects the 

aggregate characteristics of the Commonwealth’s seven major electric operating companies 

(EOCs) to report aggregate ratepayer and shareholder impacts. We analyze two EE portfolios: 

(1) a “business-as-usual” (BAU) EE scenario where an approximate 0.9% annual savings goal is 

maintained through 2020; and (2) an Aggressive (Agg.) EE scenario with a 2.4% annual savings 

goal representing proposed savings levels that the DPU has ruled comply with the “all costeffective energy efficiency provisions” of the Massachusetts Green Communities Act. Our 

Aggressive EE portfolio is based on program offerings that have been approved by the 

Massachusetts DPU in the PAs’ most recent energy efficiency plans (2010-2012).

 Our study builds on PA and 

DPU analyses that evaluated the short-term rate and bill impacts during the term of the approved 

three-year EE program budgets. We provide a long-term assessment of impacts on ratepayers 

and shareholders as we examine energy efficiency programs that achieve these savings reduction 

targets (2.4% per year) through 2020 with impacts over a 22-year time-horizon (2009-2030) to 

fully capture the benefits over the installed measures’ useful lifetimes.

2

We focus the analysis on ratepayer concerns, specifically cost-recovery issues and their 

impact on ratepayers under the Aggressive EE portfolio relative to our BAU case with the 

inclusion of additional revenue sources that can mitigate rate and bill impacts. We isolate the 

 1 The Massachusetts energy savings goals were developed and proposed initially by the Energy Efficiency Advisory 

Council, a legislatively-appointed advisory body overseeing energy efficiency programs in the state. 2 Commonwealth of Massachusetts Department of Public Utilities. Docket Nos. 09-116 through 09-120. January 28, 

2010.
9

marginal rate and bill impacts of each of three different alternative revenue sources: Regional 

Greenhouse Gas Initiative (RGGI) auction revenues, ISO-New England (ISO-NE) Forward 

Capacity Market (FCM) auction revenues, and other funding sources including the use of outside 

capital for financing. We also include an analysis of utility shareholder concerns, assessing 

effects on earnings and ROE under the Aggressive EE portfolio relative to the BAU case. The 

shareholder impact analysis compares a straight full decoupling mechanism with a k-factor to a 

lost-base revenue mechanism to isolate the marginal impacts of alternative lost-fixed cost 

recovery approaches in the pursuit of the Aggressive EE savings goals.

The remainder of the paper discusses the study approach (including the utility financial 

characterization, EE portfolios, and ratepayer and shareholder impact scenarios), presents 

analysis results, and concludes with key findings and policy discussion.

2. Analysis Approach

We used a pro-forma, spreadsheet-based financial model adapted from a tool (Benefits 

Calculator) constructed to support the National Action Plan for Energy Efficiency (Cappers et al. 

2009a). This model builds on previous work on shareholder incentives (Cappers et al. 2009b,

2009c) by including additional sources of revenue to fund energy efficiency programs. The 

major steps in our analysis are depicted in Figure 1. Two main inputs are required: (1) a 

characterization of the utility which includes its initial financial and physical market position, a 

forecast of the utility’s future sales, peak demand, and resource strategy and estimated costs to 

meet projected growth; and (2) a characterization of the EE portfolio – projected electricity and 

demand savings, costs and useful lifetime of a portfolio of energy efficiency programs that the 

utility is planning or considering to implement during the analysis period.3 The Benefits 

Calculator also estimates total resource costs and benefits of the EE portfolio using a forecast of 

avoided capacity and energy costs. The Benefits Calculator uses inputs provided in the Utility 

Characterization to produce a base case that does not include any new energy efficiency

programs (No New EE) as well as alternative scenarios that include different energy efficiency 

resource savings levels, various treatments of EE funding sources, and alternative EE business 

models (With EE).

 3 Our analysis does not include the effects of demand response programs.
10

Figure 1. Flowchart for Quantitative Analysis of Energy Efficiency Impacts on 

Stakeholders

3. Characterizing the Massachusetts Electricity Market

3.1 Utility Characterization

We reviewed the physical and financial characteristics of all major electric operating 

companies (EOCs) in Massachusetts: Boston Edison, Cambridge Electric, Commonwealth Electric, 

Fitchburg Gas & Electric, Massachusetts Electric, Nantucket Electric, and Western Massachusetts 

Electric. To construct the financial representation of each EOC, we used historic FERC Form 1 and 

most recent general rate case data to construct a relationship between the growth in peak demand and 

growth in costs which was used to develop a long-range cost forecast for 2009 to 2030. Based on 

this assessment, we combined the individual utility characteristics to construct a single Massachusetts 

“super-utility”, which would serve as the basis for our analysis. 

The Massachusetts “super-utility” has first-year (2009) annual retail sales of ~46,000 

GWh and an initial peak demand of ~11,900 MW, which are inclusive of the impacts from 

historical energy efficiency programs. Going forward, in the base case, we assume that the 

Massachusetts “super-utility” does not offer any new energy efficiency programs.

4

 4 The ISO New England (ISO-NE) derives load and peak demand forecasts that do not directly account for future 

energy efficiency efforts but likely do include impacts from historical energy efficiency programs. For this reason 

and to more accurately capture the marginal effects of different levels of energy efficiency on stakeholders’ financial 

positions, we have not included the effects from any new energy efficiency programs that might be offered by the 

Massachusetts Program Administrators (PAs), a.k.a. EOCs, in this “No New EE” case. 

 Sales are 

forecasted to grow at a compound annual rate of 1.2%, while peak demand is expected to 

Utility Characterization

EE Portfolio 

Characterization

Model Inputs

No New EE

With EE

Scenario Analysis

Utility Shareholder 

Metrics

Model Outputs

Utility Ratepayer 

Metrics

EE Business Model

EE Program Cost 

Recovery

Lost Fixed Cost 

Recovery

Shareholder 

Incentive

Resource Costs

EE Costs & 

Benefits

Resource Benefits
11

increase at a slightly faster rate of 1.3% per year. The “super-utility” has ~2.6 million customers 

in 2009 and expects very modest customer account growth of 0.3% per year. Massachusetts 

restructured its electric industry in 1997 by fully deregulating supply service from delivery, thereby 

eliminating the EOCs’ ability to build, own and earn a return on generation assets under cost-ofservice regulation (Mass. Gen. Laws ch. 164, § 1A, 1997). The EOCs procure half of the basic 

service residential and commercial customers’ power supply for a twelve month term through 

semi-annual competitive solicitations5; changes in commodity costs are passed through to 

ratepayers. Increases in non-fuel expenses are reflected in retail rates after the DPU has issued 

an order in a general rate case or other regulatory filing. With sales and peak demand growing at 

1.2% and 1.3% per year, respectively, and customer growth expected to be modest (0.3% 

annually), revenue growth between rate cases is not anticipated to keep pace with the 1.9% 

annual growth in non-fuel expenses. Thus, the “super-utility” is unable to achieve its authorized 

ROE of 10.98%. Without a decoupling mechanism to mitigate the revenue erosion between rate 

cases in the “No New EE” scenario, the utility files a rate case triennially (i.e., every third year) 

to reduce the detrimental impact on shareholder returns.

6

3.2 Energy Efficiency Portfolio Characterization

The Commonwealth of Massachusetts has a rich history of pursuing energy efficiency, 

and has recently set energy savings goals among the most ambitious in the country. We have 

constructed two EE portfolios to capture these alternative savings and spending scenarios that 

start offering programs in 2009 and end in 2020 (see Figure 2). 

The first energy efficiency portfolio represents a “business-as-usual” (BAU) case as if the 

Commonwealth had not passed the GCA but simply continued on its pre-existing path of 

capturing energy efficiency savings of ~350 GWh/year on a nominal 2009 budget of $135M.7

Table 

 

Over the 12 year time horizon the EE programs are offered, total energy savings of 40,737 GWh 

are achieved in this scenario which provide $4.1B (PV) in net resource benefits between 2009 

and 2030 (see 1).8

The second portfolio, “Aggressive EE”, represents savings and expenditure levels based 

on energy efficiency programs contained in the recently approved three-year plans filed by each 

 Program administration and measure costs are assumed to grow at a 

nominal annual rate of 2.5%.

 5 EOCs procure basic service electricity supply for industrial customers on a quarterly basis. 6 Rate case filings are assumed to use a historic test year. Generally there is a six-month lag between the time a 

general rate case is filed and the time the DPU issues an order; however, our financial model is only able to

accommodate full years. Based on discussions with staff at the Massachusetts Department of Energy Resources 

(DOER), we have chosen to not include any lag between the filing and implementation of rates. 

7 The year 2009 was actually a transition year towards the aggressive savings goals required under Massachusetts’ 

Green Communities Act that was passed in 2008. Our BAU EE scenario attempts to represent expected levels of EE 

absent the passage of the GCA and at program budget levels constrained by system benefits charge funds assumed 

to be available that year ($135M). 

8 In the calculation of resource benefits, we are not including any non-electric benefits (e.g., water savings, avoided 

alternative fuel savings, etc.) but are including avoided cost of energy, avoided cost generation capacity, avoided 

cost of T&D capacity, and the Demand Response Induced Price Effect (DRIPE). Avoided cost forecasts were taken 

from Hornby et al. (2009), which show avoided energy costs starting at ~$60/MWh in 2009 and growing annually at 

a nominal rate of 7.5%. With respect to resource costs, we are not including the shareholder incentive or the lost 

fixed cost recovery mechanism. 
12

of the Massachusetts PAs in compliance with the GCA.9

In both portfolios, ~70% of electric savings comes from commercial and industrial EE 

programs and 30% from residential EE programs. In Massachusetts, savings from residential 

lighting programs are decreasing due in large part to federal lighting standards. Other “nonlighting” residential opportunities are somewhat limited given the climate and penetration of 

non-electric based heating, ventilation, and air-conditioning systems.

 At the end of the three-year period 

(2012), the EE programs will have ramped up to provide annual energy savings of ~1,100 GWh 

in 2012, equivalent to ~2.4% of retail electricity sales, at a nominal total resource cost of $714M. 

This absolute savings level is assumed to be continued through 2020, producing total lifetime 

energy savings of 115,255 GWh, with administrative and measure costs rising by 2.5% annually, 

resulting in a total resource cost of $4.9B (PV) and generating net resource benefits of $11.2B 

(PV).

10 Customer cost 

contributions account for ~17% of incremental measure costs in the residential and low-income 

programs, and ~40% of incremental measure costs in the commercial and industrial programs.

Figure 2. Effect of Energy Efficiency Portfolios on Massachusetts “Super-Utility” 

Load Forecast

 9 For purposes of this analysis and using the approach of the “MA super-utility,” the energy efficiency program 

administrators and electric operating companies are synonymous, and thus the terms will be used interchangeably.

10 Our EE portfolios are consistent with the GCA compliance filings of the Massachusetts PA and include programs 

that are “fuel neutral” and achieve reductions and financial benefits associated with fuels other than electricity (e.g., 

oil, natural gas). This analysis, however, only addresses the electric impacts (costs and benefits) from these EE 

programs.

40,000

42,000

44,000

46,000

48,000

50,000

52,000

54,000

56,000

58,000

60,000

Annual Retail Sales (GWh)

No New EE BAU EE

EE Programs Offered by Agg. EE Massachusetts Program 

Administrators
13

Table 1. Lifetime Savings, Resource Costs and Benefits of Alternative Energy 

Efficiency Portfolios (2009-2020)

3.3 Funding Sources of Energy Efficiency

We model two methods for directly recovering authorized EE program expenditures from 

ratepayers, which are loosely based on the way Massachusetts has historically funded energy 

efficiency programs (see Figure 3). First, a systems benefit charge (SBC) of 3 mills/kWh 

(nominal) is assessed to all ratepayers’ consumption.11

Implementing the Aggressive EE portfolio will result in a significant increase in program 

costs - from ~$140M/year under the BAU EE scenario in 2012 to $523M/year under the 

Aggressive EE scenario. In an attempt to alleviate some of the customer rate and bill impacts 

caused by this nearly four-fold increase in costs, Massachusetts regulators and policymakers 

have identified three alternative revenue sources that could be used to reduce the share of costs 

borne by electricity consumers (see 

 This generates ~$134M in 2009 and 

serves as the budget for our BAU EE portfolio in that year. A second charge, Energy Efficiency 

Surcharge (EES), is assessed to nearly all ratepayers but varies from year-to-year in order to 

ensure that authorized EE program expenditures are completely recovered by the program 

administrators in years where the energy efficiency program budgets exceed the revenues 

collected under the SBC. 

Figure 3). 

 11 In reality, Massachusetts’ SBC is set at 2.5 mills/kWh. To simplify the analysis, and to facilitate a direct analytical 

comparison in this paper between SBC-only funding and the use of alternative revenue sources, we increased the 

SBC to 3 mills/kWh to fully accommodate and fully fund, with the SBC alone, the budget required to achieve the 

BAU EE savings level. 

Peak 

Energy 

(GWh)

Off-Peak 

Energy 

(GWh)

Total 

Energy 

(GWh)

Peak 

Demand 

(MW) Benefits Costs 

Net 

Benefits

Program 

Admin.

Measure 

Incentive

Participant 

Measure 

Total 

Resource 

Cost

BAU EE 12,221 28,516 40,737 603 $5.6 $1.5 $4.1 12.7 24.7 12.4 49.9

Agg. EE 34,577 80,679 115,255 1,604 $16.1 $4.9 $11.2 12.6 30.9 15.9 59.4

Portfolio Lifetime Savings Total Resource ($B, PV)

2015 Program Year Costs 

($/Lifetime MWh)
14

Figure 3. Relationship of Various Energy Efficiency Funding Sources to Alternative 

EE Program Costs

Regional Greenhouse Gas Initiative (RGGI). RGGI is a cap-and-trade carbon emissions 

reduction program with participation by ten Northeast states including Massachusetts. The 

RGGI program caps regional carbon emissions at 1990 historic levels in 2014 and reduces to 

10% below this level in 2018. Massachusetts has its own state emissions budget12 and suppliers 

must procure these allotments to cover their carbon emissions. Given the electric supply 

procurement system in Massachusetts, it is likely that suppliers will pass through these higher 

supply costs as a result of RGGI directly to ratepayers. The Green Communities Act directed 

that at least 80% of the revenue generated by Massachusetts’ sale of its RGGI allotments will go 

to the program administrators to reduce ratepayers’ share of authorized energy efficiency 

program budgets.

Forward Capacity Market (FCM). The ISO-NE FCM is a wholesale capacity market covering 

six New England states which allows various types of demand-side and supply-side resources to 

participate as qualified capacity providers. ISO-NE projects three-years forward the reliability 

needs of the regional power system and conducts a single auction to procure 100% of the

capacity requirement to meet these needs. Energy efficiency is able to directly participate in the 

auctions as a resource and is paid the FCM auction-clearing price for providing capacity. The 

Massachusetts PAs determine their own bidding strategy of energy efficiency resources and 

receive direct payments from ISO-NE. The Massachusetts DPU has directed the PAs to directly 

apply these payments to energy efficiency program costs in order to reduce ratepayers’ share. In 

addition to having a direct financial benefit, energy efficiency can also indirectly influence future 

system needs, with a one-year lag in the case of the ISO-NE FCM, because of timing when the 

capacity obligation is set and when the impacts of energy efficiency on peak demand levels 

inure. 

 12 Budgeted allotments are detailed in 310 CMR 7.70 5(a).

EE 

Program 

Costs

Direct 

Ratepayer 

Funding

Systems 

Benefits Charge 

(Fixed)

Energy 

Efficiency 

Surcharge 

(Variable)

Alternative 

Revenue 

Sources

Regional 

Greenhouse 

Gas Initiative 

Revenue

ISO-NE 

Forward 

Capacity Market 

Revenues

Other Funding 

Sources

Agg. EE 

Scenario 

Only
15

Other funding sources. Massachusetts PAs have committed to the pursuit of securing other 

funding sources and have explored acquiring new sources of outside capital for financing options 

to reduce the financial barriers to customer investments in energy efficiency. Two types of other 

funding are planned: other program funding and other capital for financing. Thus, other program 

funding sources serve as an implicit reduction in costs to ratepayers if utilized. Sources of other 

funding may include federal stimulus, energy, or climate funds, foundation support, and market 

sources of capital for financing.

13

3.4 Other Business Model Considerations

The pursuit of aggressive EE goals will require a viable business model from the 

perspective of utility shareholders. Such a business model would address the following issues: 

recovery of prudently incurred program costs, possible under-recovery of fixed cost between rate 

cases due to reduced sales from energy efficiency, and development of a shareholder incentive 

that provides an opportunity for energy efficiency to become a “profit center” for the 

administrator. The discussion above focused on how the PA recovers authorized EE program 

costs, and below we address the latter two issues.

The Green Communities Act provides for performance incentive payments to the PA for 

success in meeting or exceeding goals (Mass. Gen. Laws ch. 25, § 21(b)(2), 2008). The recently 

enacted Massachusetts shareholder incentive mechanism is comprised of three components: (1) a 

savings mechanism, which is based on the total benefits achieved; (2) a value mechanism, which 

is based on the net benefits achieved; and (3) performance metrics, which direct PA efforts into 

specific areas or to address specific issues (e.g., low-income, community initiatives, other 

funding sources, expanded financing). In its final decision, the Massachusetts Department of 

Public Utilities (DPU) established a total statewide incentive pool that approximately equals 3% 

(on an after-tax basis, or about 5% pre-tax) of each PA’s energy efficiency budget, which is 

provided to the PA upon meeting or exceeding the goals stipulated in the three components listed 

above. 

The shareholder incentive mechanism in Massachusetts does not appear to be a major 

point of contention between PA and their regulators, so we have chosen not to model alternative 

versions. Instead, we assume the PAs meet the savings targets and component goals, thereby 

allowing them to fully collect 3% (after-tax) of aggregate program expenditures provided to 

them under the shareholder incentive mechanism.

Given the magnitude of the energy efficiency savings being proposed in Massachusetts, 

revenue erosion between rate cases will likely become a major concern for utilities in the 

achievement of these goals. All Massachusetts PAs currently have a Lost Base Revenue (LBR)

mechanism, which in our analysis values the reduction in sales from the three prior years’ EE 

programs at the existing non-fuel retail rate. This approach to dealing with the under-recovery of 

fixed-costs was deemed by policymakers in the GCA to potentially be insufficient when such 

aggressive savings levels are achieved, so legislators directed the DPU to allow PAs to propose 

 13 Another policy mechanism beyond the use of alternative revenue and other funding sources to reduce ratepayer 

bill impacts is the amortization of authorized program costs. Although not explicitly considered by the 

Massachusetts DPU, it is a policy tool that may be considered in some states in the future, but not in this analysis.
16

comprehensive decoupling mechanisms. To date, the DPU has approved a decoupling 

mechanism for only one electric utility; other utilities have proposed different forms of 

decoupling which will likely be ruled on by the DPU in the near future.14

We are interested in assessing the impacts on ratepayers and shareholders when different 

methods for recovering authorized fixed costs are employed. To be consistent with the 

progression of approaches used in Massachusetts, we first apply a LBR mechanism in both the 

BAU and Aggressive EE cases, similar in design to that which the Massachusetts PAs use 

currently; limit recovery to the first 3 years after a measure is installed or the next rate case, 

which ever happens first. Then, only in the case of the Aggressive EE portfolio do we apply a 

straight sales-based decoupling (Dec.) mechanism with a k-factor (i.e., net inflation adjustment 

factor) to account for cost growth between rate cases. The k-factor is designed to allow the 

super-utility, when implementing the Aggressive EE portfolio, to remove the effect of any 

reduction in the recovery of fixed costs directly caused by the reduction in revenue from lesser 

retail sales. This makes the PA financially indifferent between the pursuit of the aggressive EE 

goals or lack thereof (No New EE) and may also provide an opportunity for additional earnings 

from energy efficiency as part of a comprehensive EE business model (i.e. decoupling combined 

with a shareholder incentive).

 

4. Analysis Results

We focused our analysis effort on assessing the impacts of implementing an Aggressive 

EE portfolio, relative to the BAU EE portfolio, on customers’ bills and rates and on utility 

earnings and ROE. We identified several alternative revenue sources that could be used to 

reduce ratepayers’ share of EE utility program costs. We then focused on developing a more 

robust EE business model by applying a decoupling mechanism when the utility achieves the 

Aggressive EE savings goals to assess the degree to which it will improve the financial outlook 

for shareholders and at what cost to ratepayers.

4.1 Impacts of Aggressive EE Portfolio on Ratepayers

The energy efficiency efforts undertaken by our Massachusetts “super-utility” provide 

significant net resource benefits: $4.1B (PV) for the BAU EE portfolio and $11.2B (PV) for the 

Aggressive EE portfolio (see Table 1). The two portfolios also have substantial bill savings and 

rate impacts over both the short and long-term.15

Figure 

 Implementing the BAU EE portfolio would 

decrease ratepayer bills, in relation to the No New EE case, by an average of $240M a year 

between 2009 and 2020, when EE programs are administered. Aggregate customer bills decrease 

by $560M per year on average, under the Aggressive EE portfolio compared to the No New EE 

case) (see 4). However, note that ratepayers as a whole do not immediately begin to see 

bill savings, but do so within a relatively short period of time: three years (i.e., 2011) under the 

BAU No EE portfolio and three to four years (i.e., 2011-2012) for the Aggressive EE portfolio. 

This occurs because the utility cost savings associated with these energy efficiency portfolios

 14 Commonwealth of Massachusetts Department of Public Utilities. Docket No. 09-39. November 30, 2009. 15 The Benefits Calculator model used to perform this analysis only provides aggregate ratepayer effects that cannot 

be broken out by participants or non-participants in the administered EE programs.
17

take time to develop and inure to ratepayers (based on the timing of general rate case filings) and 

are offset by annual EE program expenditures that ratepayers must cover. In addition, the costs 

of the energy efficiency programs are expensed during each program year, and the energy 

savings and other benefits accrue over the lifetimes of the measures. Thus, in this situation, a 

short-term analysis might not fully capture the bill reductions that would occur and inure to 

consumers as a whole, depending upon the time horizon chosen. 

From a long-term perspective (2009-2030), ratepayers as a whole would experience bill 

savings from the BAU EE portfolio equal to $3.5B (PV) or 3.3%, while the Aggressive EE 

portfolio generates $9.1B (PV) or 8.7% reduction in aggregate bills (without the application of 

additional EE revenue sources), relative to the No New EE case (see Table 2). The bill savings in 

our analysis account for and are net of any rate increases necessary to fund the increased energy 

efficiency. Applying revenues from ISO-NE Forward Capacity Market would further reduce 

aggregate ratepayer bills over the 22 year analysis period by ~$210M (PV), revenues from the 

auction of RGGI allotments would provide $340M (PV) reduction in bills, and the use of Other 

Funding Sources would reduce the costs to ratepayers by an additional $660M (PV). If all three 

additional revenue sources are applied, ratepayers would see their bills reduced by an additional 

~$1.2B (PV), resulting in a 9.8% or $10.35B (PV) savings to ratepayers relative to the case if 

Massachusetts regulators ordered all new energy efficiency programs to cease being offered and 

~$6.9B or 6.7% in savings from achieving the Aggressive EE goals instead of the BAU EE goals 

(see Table 2).

Figure 4. Nominal Total Ratepayer Bill Comparison (2009-2020)

Table 2. Change in Ratepayer Bills due to Energy Efficiency ($B, 2009-2030 PV 

relative to No New EE Case)

Customer rate impacts from energy efficiency show the opposite trend from bills with 

substantial increases in rates as savings levels rise; these rate impacts are modestly offset by 

alternative EE revenue sources. If no new energy efficiency programs are implemented, all-in 

8.0

8.5

9.0

9.5

10.0

10.5

11.0

11.5

12.0

2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

Collected Revenue ($B, 

Nominal)

No New EE BAU EE

Agg. EE Agg. EE w/ FCM

Agg. EE w/ FCM & RGGI Agg. EE w/ FCM & RGGI & Other

Base SI LBR Subtotal FCM RGGI Other Total

BAU EE -3.81 0.05 0.26 -3.50 -3.50

Agg. EE -10.02 0.17 0.71 -9.15 -0.21 -0.34 -0.66 -10.35

EE Business Model Alternative Revenue Sources
18

20

22

24

26

28

30

32

34

36

2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

All-In Retail Rates (¢/kWh)

No New EE BAU EE

Agg. EE Agg. EE w/ FCM

Agg. EE w/ FCM & RGGI Agg. EE w/ FCM & RGGI & Other

retail rates increase from 21.4 ¢/kWh in 2009 to 30.2 ¢/kWh in 2020, in nominal terms (see 

Figure 5), a 3.2% per year increase in retail rates. In each year, retail rates under the BAU EE 

portfolio are, on average, ~0.7 ¢/kWh higher than the retail rates under the No New EE scenario 

between 2009 and 2020, and are ~1.1 ¢/kWh higher over the entire 22 year analysis period 

(2009-2030) (see Table 3). If the Aggressive EE portfolio is introduced without any of the 

additional EE revenue sources (i.e., Aggressive EE in Table 3), then annual retail rates will be 

higher overall, by ~3.7 ¢/kWh on average between 2009 and 2030, and will grow more rapidly, 

at a rate of 4.4% during that same time period, as the reduction in sales exceeds the utility cost 

savings from EE.16

Figure 5

 Introducing the additional sources of revenue to offset ratepayers’ share of 

utility EE program costs produces a modest impact on average all-in retail rates (see ), 

dropping them by roughly 0.06 ¢/kWh if either FCM or RGGI revenues are applied respectively 

and by 0.13 ¢/kWh if Other Funding Sources are found (see Table 3). 

Figure 5. Nominal All-In Retail Rate Comparison (2009-2020)

Table 3. Change in All-In Retail Rates due to Energy Efficiency (¢/kWh, 2009-2030 

average relative to No New EE Case)

4.2 Impact of Aggressive EE Portfolio on Utility Shareholders

Utility shareholders are concerned about the impact of aggressive EE programs on their 

earnings and ROE. Without any new energy efficiency programs, the “super-utility” would have 

an average return of 9.17% during the 2009-2030 period, which falls below their authorized level 

of 10.98%, and would report total after-tax earnings of 3.49B (PV) (see Figure 6 and Figure ). 

Under the BAU EE portfolio, the utility’s earnings are reduced by ~$370M (PV) and average 

 16 All-in retail rates are a function of the utility’s revenue requirement in the numerator and sales in the denominator. 

Mathematically, a unit decrease in the numerator will decrease the fraction, ceteris paribus, while a unit decrease in 

the denominator will increase the fraction, ceteris paribus. In this case, both the numerator and denominator are 

being reduced. In percentage terms, sales (denominator) are dropping much faster than the revenue requirement 

(numerator), so retail rates (the fraction) will increase.

Base SI LBR Subtotal FCM RGGI Other Total

BAU EE 1.04 0.01 0.04 1.09 1.09

Agg. EE 3.51 0.03 0.13 3.67 -0.06 -0.06 -0.13 3.43

EE Business Model Alternative Revenue Sources
19

ROE decreases by 92 basis points compared to a situation without any new EE programs. 

However, the implementation of a shareholder incentive (SI) mechanism and lost base revenue 

(LBR) mechanism would increase earnings and ROE by ~$200M (PV) and 54 basis points, 

respectively. If the “super-utility” achieves the savings goals in the Aggressive EE portfolio, 

earnings decrease by ~$1.06B (PV), and ROE drops by over 270 basis points.

17 However, the EE 

business model increases utility earnings by ~$550M (PV) and improves the average ROE by

154 basis points. Implementing our decoupling mechanism (with a k-factor of 1.14%) which 

completely removes the effect on shareholder returns from the reduction in revenue due to lower 

sales, instead of the lost base revenue recovery mechanism, provides ~$970M (PV) in earnings 

and contributes 273 basis points on average to ROE. Thus, combining this decoupling 

mechanism with the MA shareholder incentive provides a business model that improves ROE 

(9.47%) and provides slightly higher overall earnings to utility shareholders ($20M) if they 

achieve the savings goals in the Aggressive EE portfolio. 

Figure 6. Effects of Alternative Efficiency Business Models Components on ROE 

(2009-2030)

 17 The application of alternative EE revenue sources to reduce ratepayers’ share of utility EE program costs has no 

bearing on the financial standing of shareholders.

9.17%

8.24%

6.45%

6.45%

0.45%

1.25%

2.73%

0.09%

0.29%

0.29%

0.00% 1.00% 2.00% 3.00% 4.00% 5.00% 6.00% 7.00% 8.00% 9.00% 10.00%

No New EE

BAU EE

Agg. EE w/ LBR

Agg. EE w/ Dec.

Achieved After-Tax Return-on-Equity (Ave. 2009-2030) 

Base

LBR

Dec.

SI
20

Figure 7. Effects of Alternative Energy Efficiency Business Model Components on 

Earnings (2009-2030)

The incremental cost of the decoupling mechanism, relative to the lost base revenue 

mechanism, to ratepayers would be ~$830M, on a PV basis during the analysis period, and 

would raise all-in retail rates on average by 1.5 mills/kWh. Even with this added cost, ratepayers 

as a whole would still see aggregate bill savings of $8.9B (PV) between 2009 and 2030 under the 

Aggressive EE portfolio.

 

5. Conclusions

This analysis quantifies the impacts on ratepayers and shareholders when a state like 

Massachusetts pursues alternative energy efficiency goals: ~0.9% of retail sales (BAU EE) 

versus ~2.4% of retail sales (Aggressive EE), through ratepayer-funded programs offered by its 

electric operating companies. We focus on the ability for additional revenue sources to mitigate 

rate and bill impacts on ratepayers when a Massachusetts “super-utility” achieves the Aggressive 

EE savings goal, which provides substantial utility bill savings for customers. We also evaluate 

the ability of a decoupling mechanism to mitigate the financial impact on utility shareholders. 

If Massachusetts successfully implements an Aggressive EE portfolio between 2009 and 

2020, with annual energy savings of ~2.4% of retail sales and net resource benefits of $11.2B 

(PV), customer bills over the lifetime of the installed measures (2009-2030) in aggregate are 

lower by $5.6B (~5.5% lower) compared to continuing on a path of EE prior to passage of the 

GCA (i.e., BAU EE). These bill savings account for and are net of any rate increases necessary 

to fund the increased energy efficiency. These Aggressive EE portfolios are unprecedented and 

as a practical matter mean that nearly all customers would likely participate over this 12 year 

period. However, rates are ~4.7 ¢/kWh higher in 2030 (~10%) under the Aggressive EE 

scenario compared to the BAU EE scenario. If some portion of EE program costs are paid by 

revenues from FCM, RGGI and other funding sources ($1.2B PV or 35% of utility program 

costs), these multiple funding sources have the effect of mitigating 7% of the average annual rate 

impacts of our Aggressive EE portfolio between 2009 and 2030. If these alternative funding 

sources were not utilized, retail rates would have been 6 mills/kWh higher in 2020.

3.49

3.13

2.44

2.44

0.16

0.45

0.97

0.03

0.10

0.10

0.00 0.50 1.00 1.50 2.00 2.50 3.00 3.50 4.00

No New EE

BAU EE

Agg. EE w/ LBR

Agg. EE w/ Dec.

Achieved After-Tax Earnings($B, PV) 

Base

LBR

Dec.

SI
21

Our analysis also suggests that the utility faces significant erosion in earnings and a lower 

ROE as more aggressive energy efficiency programs are implemented. Utility earnings are 

~$330M (PV) lower under the Aggressive EE scenario compared to the BAU EE scenario even 

with shareholder incentives and a lost base revenue mechanism. Our analysis shows that it is 

possible to design a decoupling mechanism with a k-factor (i.e., net inflation factor) of 1.14%

that allows the utility to remove the effect on the utility’s achieved ROE from the lower sales and 

thus reduced recovery of fixed costs (i.e., ROE of 9.67%). With the implementation of a 

decoupling mechanism designed in this fashion with a shareholder incentive that provides the 

super-utility with 3% of program costs on an after-tax basis, shareholder returns would grow by 

68 basis points and earnings would rise by ~$190M (PV) between 2009 and 2030 in comparison 

to the BAU EE scenario. Even if the DPU implements this type of decoupling mechanism, 

aggregate customer bills are still ~$5.4B (PV) lower in relation to what would have occurred 

under the BAU EE scenario.

This study provides some insights for policymakers and regulators interested in pursuing 

very aggressive energy efficiency goals. As states adopt very aggressive energy efficiency policy 

goals, it becomes even more important for utilities to leverage other revenue streams (e.g. third 

party financing, revenues from carbon emission credits) in addition to ratepayer funds in order to 

mitigate potential rate impacts. Because an aggressive energy efficiency portfolio provides 

significant societal benefits in Massachusetts (compared to supply-side alternatives), our results 

also suggest that it is possible for regulators, utilities and other stakeholders to design a business 

model that aligns the financial interests of utility program administrators with the state’s clean 

energy policy goals. 
22

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