The Honorable Federico Peiia Secretary - --- --- -----

United States Department ofEnergy 1000 Independence Avenue Washington, DC 20585 Dear 

### Mr. Secretary: Under its charter, the Advisory Committee on Appliance Energy Efficiency Standards (Committee) is required to deliver to you recommendations it develops in the interest ofimproving the Department ofEnergy's(DOE or Department) appliance standards process. At the January 8, 1997, meeting ofthe Committee, several stakeholders suggested that a group ofexperts be identified, "to review, clarify, and update economic issues 

### a5 well as to review major sources of uncertainties in setting priorities." In response to that suggestion, an Economic Analysis Subcommittee was fonned and tasked with reviewing these issues and preparing a set ofrecommendations for your consideration. The subcommittee examined the analytical methods and tools, the input data, and the assumptions used until now by DOE in its priority setting, life cycle cost, national energy and net present value projections, utility and environmental impact analyses. Stakeholder concerns revolved around the complex nature ofthe models used for the analyses, the use ofaveraged data, the changing nature ofthe input variables for the models as energy markets become more competitive, and the treatment ofuncertainties in the modeling and decision-making processes. At the December 12, 1997, Advisory Committee meeting, the subcommittee presented its report and ·recommendations (attached) and the full Advisory Committee agreed to the following consensus recommendations for your consideration:

l) For its life cycle cost analyses in all future rulemakings, the Department of Energy should replace the**u~** ofnational average energy prices with the full range ofconsumer marginal energy rates (CMER) in the United States. This will improve the analysis and more accurately reflect·the energy costs actually

. borne by individual consumers. The-CMER should be developed for each specific product rulemaking, as there may 'be significant variations based on product end-use applications (e.g., clothes washers versus fluorescent ballasts, residential versus commercial or industrial products, etc.). ·Info.nnation on these prices and a sample methodology for obtaining the CMER have been developed by the ad hoc working group ·and sent to DOE. In the event that CMER infonnation is not available, or until it is available, DOE should use a range ofnet energy rates, calculated by removing all fixed charges and aggregated on a utility-by-utility basis, pursuant to the following formula: (AMAMR -AMAMFC) I (AMAMEC) where AMAMR 

### AMAMFC AMAMEC = Average or median annualized/monthly revenues per consumer = Average or median annualized/monthly fixed charges per consumer c: .Average or median annualized/monthly energy consumption per consumer 2) Based broadly on the scenarios described by the subcommittee, DOE should define a range ofenergy price futures for each fuel used in Nlemaking economic analyses such as life cycle cost and net present value. With stakeholder input, the range ofoutcomes predicted by modeling should be weighted to determine the life cycle costs and the cost effectiveness of individual standard levels. The outcomes near the extremes ofthe ranges can be used to examine the importance ofother efficiency standard criteria. 3) In similar fashion to 2) above, DOE should define a range ofprimary energy conversion factors and associated emissions reductions, based on the generation displaced by energy efficiency standards, for each Nlemaking. With stakeholder input, the range ofoutcomes predicted by modeling should be weighted to determine the values to be assigned to each standard level. Again, the extremes ofthe range may be used to inform policy-making judgement with regard to other efficiency standard criteria. 4) The Committee requests that DOE, after reviewing the recommendations as approved by the full Advisory Committee for Appliance Energy Efficiency Standards, report back to the Advisory Committee within 60 days, in writing, on the ability and inclination ofthe Department to implement the recommendations. We also request that DOE report to the Advisory

. Committee at each ·orits meetings the progress in implementing the

recommendations and highlighting any further· need for subcommittee

. deliberation on these issues. It is the consensus ofthe members ofthe Advisory Committee that the changes recommended above would materially improve the DOE Standards process. Given 2 •the broad representation on the Committee, this level ofagreement on matters of · such importance is significant. The subcommittee wishes to acknowledge the able

assistance provided by DOE's Office ofCodes and Standards, and the forecasting section ofthe Energy Information Administration 

### as it conducted its review and analysis. Thank you for your consideration ofthese recommendations. The Advisory C.ommittee looks forward to DOE's response. ·

Attachment (\cerely,
.

# ~lfV, Dan W. Reiche, Chair Advisory Committee on

Appliance Energy Efficiency Standards

cc: Advisory Committee Members: Dan 

### Barzel Richard Church Mark Cooper Tim Feldman Charles Foster David Goldstein Jane Hardin Martha Hewitt Mark Krebs Ted Leland Joseph Mattingly Steve Nadel David Nemtzow Chuck Samuels Mike Scott Charlie Stephens

. Jim Tait

John Wilson ·Circuit City Plumbing Manufacturers Institute Consumer Federation ofAmerica NEMA EEi NRDC AARP Center for Energy and the Urban Environment Laclede Gas Company · ARI ·GAMA ACEEE Alliance to Save Energy AHAM Home Depot Oregon Department ofEnergy Florida Department ofCommunity Affairs California Energy Commission,. '·



### ·•

• 

# --·

.. SUBCOMMlTTEE oa**ECONO~C** ANALYSIS ISSUES

·· · · REPOaTAND**RECOMMENDATION~**

. . &rtlae



### . .A.J>VISORY 

## coMMnTEE rO.. APPLIANCE ENERGY

### EFFi~cr STANDilDS :- 

### l. Bacqtoud Al ,outlined 

### in the subcommittee's 

### June, 1997 preliminary recommendations, at the 

### January Ith, 

### t9S17**~** 

### ofthe 

### Appliance Energy 

### Efliciency Standards Committee (hereinafter referred to 

### as "the 

### Committee•),' 

### leveraJ standards process 

### stakeholders questioned the 

### IDaJysis methods 

### and · 

### data used in the 

### priority..setting, the 

### cost eff'ectiveness, the utility 

### and the 

### environmental bnptct · 1miJyses. 1be

### issues seeme;d 

### to mrolve around the Dltiire ofthe 

### models 

### used for the analyses, the



### brclld range and changing nature

# orthe 

### input variables for the models, 

### and the 

### treatment

# or**~** 

### unc:ertainties in the modeling 

### and decision-making processes.**~veraJ** 

### stakeholders suggested that 

## a.sroup ofexperts be 

### identified. "to 

### review, darify, 

### and up:late 

### economic issues as well as to 

### review major IOUJ'CeS 

### ofuncertainties in setting 

### priorities.• 1 In 

### response to 

### that suggestion. 

### volunteers were solicited at the 

### end 

### ofthe meeting to pursue the 

### resolution ofthese 

### issues. Charlie Stephens ofthe 

### Oregon Energy Office, 

### Bun K•lisch ofthe 

### Arnerican Gas Association. 

## mid Chuck Foster ofthe 

### Edison Eectric 

### Institute volunteered to 

### c:Ocbair 

### a working group, and 

### to gather together interested expert 

### parties to study the 

### issues, 

### resolve ·as 

### many IS 

### poSSl°ble, and report 

### their findings 

### back to the 

### Committee in the 

### form of · re:ommendations. Subsequent to. the 

### formation ofthe 

### group, Burt 

### Kalisch 

### was replaced by

## Marie

Krebs as co-chair, .and 

### additional interested 

### stakeholder members havejoined in 

### our dehl>erations. · An ".'pdated list 

### ofactive participants is**present~** 

## as Attachment A.

. .

.Ail tbe June meetin1 ortbe Advisoey Committee,_tbe subcommittee presented preliminary 

### fi111dinp and recommendatioDL These 

### included:
. ' . · · ·

ll) 

### a recommendation to 

### continue to 

### use the REM model· 

### to establish a base 

### case for product lhipments and 

### energy use, with 

### independent 

### industiy association projections as a cross2) 

### . check and with inputs 

### and 

### assumptions for each 

### rulemaking developed in 

### a stakeholder**~nference;** . 

### Conipletion 

### ora spreadsheet-based 

### version ofthe 

### lif'e cycJe cost model 

## with commerciaDY available statistical enhancements to 

### aDow transparency 

### for**itakeJ:tol~ers;**



## . . 

### ·.J.**·~** 

## ..

. ··
.

# .**~.**



### ·. "------;---.--- .-----

......



### ...Paie2
.


### .

## .. ·j)**~the**

# u.e of

### a rangt 

### orilipmbriabtes rather 

### than iWn8e values, 

### and 

### a robust 

## risk' and**~** analysis using tbe 

### entire 

### 11J18e 

## oreach 

### variable, properly weighted;



## . .

### A~). the 

### c01TeCt 

### ei-gy 

## pricei to 

### me

# forthe life cycle cost analysis 

### are tbe 

### consuiner'1 prices for the.

## ma1sinaJ energy saved 

### throujb a 

### new efliciency 

### •andant (some 

### ofthese may be commercial IDd/or.industritl**prices~~** equipment, or·IOIDC ofit, iiused 

### in a li.1sineu tetdng);
. . . . . . . . . . . 4') 

## ·' . . . . . 

### . 

## Where.hiput value$

# Csudl ai energy prices) vary by

### ~on, .c:Ustoiner 

### class. 

## sason or other 

### identifi8ble cbaracteristic, these 

### variations sbould be 

### camed 

### u fir

### u poSS11>1e into the 

### inaJysis to 

### allow tbe 

### examination ofthe range 

### or

### outcomes. if

### applicable; Ci) 

## ihe remoVll offixed monthly charges &om 

### the revenue streams 

### used (with 

### energy sales) to 

### calculate an approximation oftbe marginal energy 

### price; '7) all pricing 

### principles and**impro~** 

### should**~** 

### applied to 

### natural 

### ps

### u**~** 

### u electricity;
. . .

·:1) the 

### conversion faetor used 

### to convert electric energy 

### 11vings 

### in kilowatt-hours to prinwy fUel savinss in 

### quadrillion Btu shOuld be calculated based OD the 

### seneration 

### displaCed by 

### energy efficiency 

### standardS, and at the current 

### 11,SOO Btu/kWh, 

### is probably too bigh.

· 1be.

### group agreed 

### to c0ntinue

## to work 

### on energy price. and pricing issues, 

### and·on fiu1her



### ndinements 

### to recommendations conceining the 

### conversion factor for calculatins primary 

### energy savings. · · 1'.'bis report is the product orthose further deliberatioas.
. 2:. luut!I 

# ·.--

1lle subcommittee 

## met on two 

### Occasions 

# ance June, 

## reviewins existing 

## DOE and 

### corttractor Jirocedures. 

### Ind.resarching 

### a substantial amount of information and data 

### on energy prices, 

### energy price ltnlctures, the**pr~sress** 

### ofindustry restructuring. the status 

### ofutility 

### seneration Jilans, relevant regulatory 

### decisions and Jesislation, and 

### a host ofother information bearing 

### on 

### the issues at 

### band. Those issues are: · ,. 

### C:l)**E~el'I)'** pricina- Tbis ilsue indudes a definition oraacdy what price 

### Is appropriate for·the economic analyses. the relationship and relevance orthe 

### rasecl and variable components Ofthe price, the variability ofprice based OIJ time orme, seasonal and daily orhouri)' nriation ID demand, pricing block and other**variabl~**

# orilltenst, and the dearec to which and how 

### aD orthe roregolni will change as the structure**o~** • the eaeiv IDdustrJ moves toward competition at the wholesale and retail levels.



# .. • ,:. 

# ..

## .Piae 3· ·.

### O~) 

### .·

# :Eaeru priceL 

## niillRhides a discuuion ofwlaetber

### ~e can aceunteJy determlae 6e maraiaal

## eaeru prices we aeed throuab data aow avaDable, the depee to wbich we 

### can diugrepte prlca acnu tbe countr)' and weiabt them properly for

. ualy1ls, and. the rate and dearee 

## ordWap 

### ID those prices that mipt be apected

· Mtertbe

### 30-year ualysil 

### piriOcl. · . . . . · . ·



### .. fil) c..-venlo1**ra~ri.** 

## BJ Jiaae of

### dais**J~·** die 

### aroup qreecl 

### in 

### prindple tbat 

### the·.

. ceavenloa factor 1bould be baled ·on tbe aeneration displaced by e&eJ'IY eflideacy ·

(see tbe ncommendadoia1 prepared for the June Advisory Committee meetina, p.7, · Item**s.~.b.),** but further discuuion wu needed oai the subject orbow to determlae aactly what would be displaced iD order to make any further ncommendatiom. Also**~ilcuued** were 10me dill'ereat scenarios describing how this 1eaendoa mb mlabt chanae u the electric ladustry restructures, and tbe resultina efl'ect on ceavenioa ntes.**(~)** Future avallabWt)' ordata. A.J. tbe eaav iadllltrf restructures, much orthe data tlaat we ue today for our proceu may become uaavaDable. 1be sroup briefly discussed the need for DOE (EIA) to emure that tbe most critical data for the process remain acca1ible, to the muimummeat possible. 1be subcommittee ii 

# mo tonrardina a methodology for obtaining appropriate pricina, developed by Steve Rolemtock orEEi and endosed u Attachment B, for DOE'• comideration. It ii bued OD data 1•tberia1 done DOW by EIA OD form 161.



### . 

# . J.. Recommendatiom 

### !Ji. For its 

### life cycle cost 

### analyses in 

### all future rulemakings, the Department 

### ofEnergy, and its ·**co~or:s.** 

### should replace the 

### use ofnational average energy prices and replace**~em** 

### ··with die range 

### 9fconsumer nmginaJ 

### energy rates 

### (CMER) in the 

### United States. This will



### iinprove the 

### analysis and 

### more 

### accUrately 

## refleCt the 

### energy costs 

### actually borne by individual colisumers. The 

### CMER should be 

### developed for each specific. product rulemaking. u there may be lignificant variations based 

### on product end-use 

### applications (e.g., dothes 

### washers versus fluorescent ballasts. residential versus industrial products, etc.).

. ' 

### Information on these 

### ·prices and 

### a sample methodology for obtaining the 

### CMER have been developed by 

### the ad 

### hoc working group 

### and sent to**~E.** 

### ·

. . 

### In

### the event 

### that CMER infof:m&tion

### ·is not 

### available, or until it is 

### available, DOE should
. use a 

## ranae**o~net** 

### energy rates, 

### calculated by 

### removing 

### aD fixed charges and agregated
· on 

### a utility-by-utnity 

### basis, pursuant 

### to the 

### following formula:

.,--w· ---------- - .......**-~**... ·-··- - ------------------**~----**

I I·
. 

# ., . ..
......

.,, . 

# ,. . . . . 

## ' t i '**·~·**



### . , .

. ... .• .. \.



### .. 

# ..**(~-~tAMAMEC)** where • - " AMAMll**•Avena~** or nwfi•n amnllliztd!montbly 

### mauesper consumer .AMAMFC
. • Averase or 

### medi•n 1nm111ized/monthly fixed charges 

## per**~mumer** ·· 

### AMAMEC**~** Avenge or median amwilized/lilontbly energy consumption 

### per. .

. coDaUNI'
. .



## . . .**-~UL** 

# B.sec! broadJy**·~ ~** **~os**

## dCscn"bed by the

### subco~~**~E** should.

### define a range of

### eaeigy price futures fbr each 

### fiaeJ used in rulemaki"I economic analyses. With ltlkeholder input, the 

## mnse 

## oroutcomes predicted by modeling should be weighted to •



### . determine the life cycle costs and the cost 

### eff'ectiveness ofindMdUaJ standard 

### levels. The · outcomes near the exbemes 

### ofthe 

## ruses can be used to examine the importance.ofother

. e:Biciency standard criteria.
.. .**:J~** 

### .**~** similar fashion to#2**abo~** DOE lhould define a range ofprimary rnerJY 

### conversion

&ctors and usociate4 emissions reductions fbr each rulemaking. With stakeholder input, the 

### range ofoutcomes predicted by 

### modeling should be 

### weighted 

## tO determine the values. 

### to be 

### usigned to each 

### standard level. Again. the 

### extremes ofthe range may be 

### used to 

### · inform policy-makingjudgement with regard to other 

### efficiency. 

### standard_criteria. 

### :U Tbe 

### subcommittee requests that DOE. after reviewing the 

### reoommeDdations es approved · by the 

### fWl Advisory Committee for Appliance 

### Energy Efficiency Standards, report back to



### . the Advisory Committee within 60 

### days, in 

### writing. 

### on the 

### ability and 

### inclination ofthe Department to implement the recommendations. We also 

## sussest that DOE report to the · ·Advisory 

### Committee at each ofits meetings 

### the progress in implementing the recommendations and highlipting any fiarther need for 

### subcommittee**dcb~on** on 

### these issues
.

·

# ...

. 4.. ..Meetings Nleetings were held 

### in the Washington. DC area oD July 

### 24th and oD Septnnber 26th. 

### Both meetings were comprised ofthe SEJDe 

### aaenda. "and the iroup did its best to make.progress in dtM!oping substantive recommendations. 

# ne minutes and attendulce 

### listsfor these meetings are attached IS Attachments C and**D~**

### Di&Qs.sio~ in 

## the" first

### ~were more 

### genml. ISthe group attempted to 

### understa:Dd and "4=scn°be 

### tbe changing 

### business and 

### regulatory 

### em'iroaJDent that the 

### energy industry 

### may face IS it n:structures. The 

### chaqges that 

### arc 

### r.ow underway will Lf!cct 

### both the way a:lel'IY·is priced 

### and die prices themselvei. The group awiewed • 

### substantial 

# amount of**electri~** 

### utility 

## Pricins data provided by Steve Rosenstock ofEEI. and Id**~** 

### leC'>nd meeting. .Ome similar data 

### for natural sasutilities**provid~** by 

### Kirstie Kummer of

### AGA 

### By the 

### end of

### the first meeting. there seemed .tct be 

### consensus**o~ ~~of** **~Consumer** Marginb'I 

### Energy**Rat~·** 

### (CMER) for determining

. . 

# . 

# -· .·

•

# -·

' 

### . 

# . . . .



# . · 

# . . Pages



### . the monetary effects 

## mimpioW.a appliance 

### IDd equipment efficiency**&om~** 

### consumer'•

perspective.
. . .• .

..


# . n1ere WU also 

### extemive .dumuiOD ofmcdywhat types 

### of

## electrlC pneratiOD would be
.



### . . 6sp1-ced by 

### et;Bciency**~** in tbe 

### years 

### ahead
.. For the 

### subcommittee's purposes, this 

### ·· question ii

### taken 

### io nlerto what 

### fbels and 

### teclmologies this displaced 

### generation would have · ued;**~** at what dideDcy, 

### tlJana into 

## accoum both 

### fiael 

### cOnversion C:fliciency and 

### tnnsmission ·ad distribution losses.**Of~ ~these**  

### questio.ns then 

### allows DOE to 

## cJetennine**~**

. tyJ>es 

### ·and amounts 

### o(pollutants 

### avoided by 

### these 

### lame efficiency**~·**


### · By the second 

### meeting, tbe

### general hmework of the 

### energy environment had been**~lisbed** W1:1l enough 

### for discussion. and the group 

### was left to develop specific recommendations as to .·

.bow 

### DOE and its 

### contractors should adjust the current 

### methods ofdete:nnining and using 

### energy prilces 

### and primary energy convenion rates to compute 

### life cycle costs, 

### consumer cost eftectiveness, 

### and the level 

### ofprimary energy 

### uvings. Rather 

### than trying 

### to determine 

### a linsJe energy price 

### or set 

### ofprices 

### for use in analyses, the group 

### agreed to recommend a prOcedure 

### or 

### pn>CeSS to use in 

### obtaining the correct pricing and 

### range of

### C:nergy prices to use 

### in the analyses 

### conneeted 

### With any specific rulemaking. Inherent in this 

### recommendation will be the necessity · 

### for DOE to bound the 

### po1S1°ble 

### outcomes of

### the analysis by 

### defining the 

### extremes ofthe 

### range. ' -



# .. Fo,r energy prices, this amounts to defining the shape and slope 

### ofthe Consumer Marsina) 

### Energy Rite aitve**over~** time 

## peri<>4 ofthe 

### analysis at band, 

### Usually 

### 30 years. 

## Havins bounded a 

### given vairiable's distnDution. a midpoint may then be 

### defined or a •most likely• 

## curve can be 

### developed
. with 

### a range 

### ofpositive and 

### negative 

### variance &om that 

### over time. In 

### similar fashion.**~** extremes 

### ·ofprimary energy 

### conversion &ctor (Btu/kWh) declirie 

### iates were disaissed.**Ev~ne** 

### concurred that the likelihood 

### ofan overall riM 

### in the conversion factor over tilne is slim 

### to none; this outcome. and the extra 

### costs that it 

### would 

### impoie. are increasing1y co1!l5idered 

### economically nn•cceptable and 

### unsustainable 

### in a

### competitive environment. The grc>up 

### thC:fl**·~** 

### to inclu.d' 

## '1 its 

### three 

### difrerent futures variables that might help 

### define the



### .**~1aversion** 

### factor fa:nBe, leaving it to 

### DOE or its 

### contractors to 

### compute the numerical trends that



### result fi'om**~odeling** 

### those futures. 

### While there could obviously be

# many more than three futures, 

### tbei 

### subcommittee intends that these would fall within 

### this range.

. 

### . . 

### .**~** 

## . .. 

## ..·1**~**

c .. 

# . t

;_. 

# ..

.•

. 

# . P1ae6 

# s. Analysis 

### laaes.**~** 

### -· .



# . . 

### . . The 

### IUbcomzDittee**~** 

### able 

## tO quir.kJy 

# asr-ee that 

### the 

### Consumer Mai'ginal Energy 

### Rate · . ·(CMER)**~d** 

### be used 

### for life cyde cost and cost 

### etrectiveness 

### anaJyses. Tbis rate is 

### the · . ·price paid (oruved) by 

### an indivicluaJ 

### comumeffor 

### the last unit ofenergy 

### used**(or•~),** 

## · · meanins kilowatt-hour Of'

### electricity, therm of

### natural 

### ps, pDoil of

### propane,**~-** 

### ID 

### a . . tiered 

### rate**~em,** this**ii~·**

### price for the**~"block"** 

### orenergy 

### that**co~** 

### use each



### . month. Some of

### these 

### charges may 

### be leUODIDy adjusted, 

### or time-of-day dependent, 

### u in time-of-use rate lb'Uctures. But 

### aside 

### &om the monthly 

### per-unit energy chqes, 

### consumer bills-contain 

### fixed monthly charges for 

### service (billing. 

### customer 

### service, 

### meter reading. 

### access to 

### the grid, etc.), state and local taxes, 

### .assessments, and the 

### like.**Comm~** bills may also 

### contain demand · Charges. DOE bas traditionally calculated 

### the price ofelectricity for use in these analyses



### ai a customer-weighted average of

### revenues divided by energy 

### sold to those 

### customers. · Because 

### the 

### revenues iDclude 

### fixed 

### chargCs, the 

## resuJtins prices are not truly a**~**

I.

. 

### . .

As 

### a first step, the 

### group agreed 

### that these fixed c:barges 

### should be removed 

### &om revenue**befo~** 

### dividing by 

### sales. Ideally, 

### this should be done for each utility 

### and 

### its customers, and 

### the distn"bution 

### thus obtained used directly in the 

### analyses in accOrdance with the · · 

### subcommittee's earlier recommendations. 

### Steve·llo.enstock ofEEI 

### and Kirstie Kummer orAGA 

### provided revenue, price and customer 

### count data 

### for 

### a large number .of

### utilities. While publicly owned electric μtllities 

### were underreprelented in 

### this data, the 

## fesuhs ieemed quite 

### robust. For 

### the electric 

### Utilities, the fixed charge t;action of

### revenue ranged 

### &om 3% 

### to 23%, with 

### a customer weighted average amount orabout 7% 

### percent. For

. natural 

### psutilities, the range WU 

### O'" to 37%, with I 

### customer weighted averaae ofabout

JS 

### percent.. But again, 

### ·ideally, this exercise should 

### be conducted for each 

### utility to 

### build a · · distnl>ution ·for anilysis: 

### For 

### the electric 

### data. this would result in an appropriate.relative weight for publicly 

### owned 

### And investor-owned μtilities. 

# nae dat8 should take into account 

### time-of-use. seasonal and class 

### rates where .these 

### apply, properly weisJrted. ID the 

### longer nm, 

### DOE should gather data 

## cm the 

### CMEll's for 

### each utility'

### a

### me structure, and the 

### customer counts 

### for which each CMER 

### applies for weighting. This then 

### becomes 

### • more refined**~stribution** 

### or

### prices to 

### be used. 

### for analyses.
. . 

### These CODcepti are especiaDy 

### important as 

### energy 

### markets_move towai-d I 

## more competitive structure. Many analysts 

### believe that 

### electric industry restructuring 

### may lead 

# -··

,.



# -·**~** 

### • break-up ofthe 

### traditional utilities into generation (unregulated), transmission -: (federaDy regulated) and disfril>'{lion (state 

### regulated) components. 

### If this occurs, fixed
· monthly 

### charges may rise to more approp"-tely reflect the 

### fixed ponion of distnl>ution**~ties'** costs, 

### and thus come to**com~** 

### a larger share ora customer's monthly bill. At

. 

### . .



### .·**~.. ~**  .

.·. 

# . .

.,



### . 

### . ..



### .... ·. 

## the umetime, tbe**per~** 

### 'brJD' dlarges may decline, 

### u they 

### will come to 

### reflect mostly tbe eosts

# orgeneration 

### and tnnwiuion. As 

### the CMER is projected into the fUture, tbm, 

### the lower 

### end

# orthe 

### range may

# wen reflect this 

### kind or

### dwtge. · . ·


### . - 

# ne group

## •.be, briefly 

### discussed the availability

## otprice and 

### mitomer count data going 

### fbrward in 

### time.**If~** 

### when residential f!1*1Y**~become** 

### more c:ompetitive, IUdi data may 

### be harder ·to 

### obtaili. admay fluctuate 

### iUbstantially over short periods.**~E** · .**~want** to 

### take**~ IOO~**  to protect its ability.to gather such 

### ·inf'ormation,**~** 

## besin

· .contempJatins 

### how to deiJ 

### with the e:lf'ects**of·~** 

### mstomers. ID tome cues, ·



### Cf)Dfidentiality**~** 

### may 

### be needed to 

### obtain data 

### that is coming 

### to 

### be considered proprietary and competitively 

### lmlitive. •



### .ti. · 

### Coavenloa Padon Since this 

### concept 

### is used to 

### comptite the amount 

### ofprimary energy 

### saved per kilowatt-



### . bour saved through the 

### imposition or.

### new standard, the 

### subcommittee 

### agreed before the



### last Advisory 'Committee meeting that 

### this factor should based OD the**eflici~** 

### ofthe 

### generation resources displaced by 

### a 

### new siandard (see the recommendations prepared. 

### for the 

### June Advisory Committee meeting, 

### p.7, item S.4.b.). 

### Before the 

### advent 

# orenergy 

### industry restructuring, this 

### typically. and 

### realisticaDy, meant the 

### power plants 

### not built 

### as a . resuJt 

### ofa slowing in the growth 

### ofdemand due to 

### increased 

### efficiency. 

### One could even 

### review the integrated 

### resource plans ofutilities to determine eucdy

### wbat kinds 

### of**pneration·~** would be 

### deferred. · 

### In the future, the 

### competitive environment 

### will push the 

### nwtet

## towlrd the 

### economic 

### dispatch ofgeneration resources, based 

### on the 

### price 

### ofthe po'Wel' 

### off'ered for each 

### plant. The least 

### expensive 

### will be 

### on line continuously and 

### the most expensive resources 

### will be



### . ·dispatched -at 

### the margin. 01,1 

### an as-needed 

### basis. To the 

### extent that supply 

### exceeds**d~d,** these latter**~ces** may not nm at all. -The factor that will fig\ire most· · ·**pr~tJy** 

### in the dispatch 

### ofa resource, or no'9 is its 

### variable cost ofproduction,

including at 

### least 

### a measurable return 

### on investment. These 

### costs are comprised mostly 

### offuel and.maintenance apenses. 

### ID 

### other words, 

### a fully 

### depreciated plant with 

### low fuel 

### and maintenance costs will be 

### very**competitive~** There 

### are many older coal-fired 

### plants in , this 

### category.**A~** new 

### plant with 

### higher fuel**co~** 

### and high maintenance costs · could 

### become a stranded asset 

### for the 

### owner, as it might 

### infi'equently or never 

### be dispatched. Examples might be newer coal 

### plants bu.ming "dirty" coal 

### or older single · cycle oD- or

### gas-fired turbines.

Some

# planis _;cb u 

## bYdroelectric faCilities almost 

## always

# ba\re low variable Costs of production. 

### and so 

### will always 

### be on tine. Nuclear 

### plant$ will 

### fall intO 

### one of

### two · . ·categories

- competitive or not competitive. 

### If they're competitive, they 

### will always be 

### ·on line, as 

### these plants 

### a.re only marginally**dispatchable~** 

### If they're 

## iaot competitive_ 

### they will ·. ·



## -. 

# -\ . 

## .. .

... 

## .. ·' ·

### .

. . 

### be 

### decCM1n1issioned
....

# written down or'written ofrultl'IDded, on a schedule 

### determined by 

### regulatOa. Consequently, 

### neitba' ofthese twO types ofgeneration (hydro or competitive nuclear) will be displaced by**~cielicy** improvemeqts. and**IO~~** to.**~ce** 

### avenge beat rates 

### iiiri'elevant. to

### this dismssion.

·. Tbe problem then

### ~mes predicting whit generation

### ~willbe 

## dilplaced 

## .,Y
· dciiency pins 

### &om a 

## De!i standard.. and 

### once that**is~** 

### caJcnl•ting**~** avoided 

### emissions from these

# plants. ·This raises**the~** 

### diflicult let of

### questions considered 

### bY the 

### mbC.ommittee •

## whit**~** 

## energy fbture will**loo~** like, in 

## .n. ofits**rel~** 

### &ceti
.. ·. •. 

### c.. DeFuture: 

### Eaeru Prices, Coavenloa 

### Facton aad Emluiom 

# . . After 

### reviewing 

### as much 

### information u it 

## couid digest OD the topic, 

### the subcommittee

.concluded· that the most constructive way to make a recommendation in this 

### critical area would be to help DOE define the 

### fUtures that would establish the 

### bigli and low bounds of 

### eDqy price,**conv~on ~or,**  and emission trends for the analysis period. As the Advisory 

### Conimitiee reviews this section, it should keep 

### in mind 

## tlaai we 

### are primarify disaJssing the 

### ruidential**~r** '1 

### marginal retail energyprl«. Each word in this term is important, u it defines the energy rate prescn"bed 

### in federal legislation for the purpose ofconducting the economic analyses for 

## appliance standards. The exception is 

### in the case 

### ofcommercialfmdustriaJ products, such as fluorescent lamp ballasts 

### 0r rooftop 

### Iiiconditioning. where 

### commercialand

### industrial marginal 

### energy prices would also need tobe used for these 

## "eonswDers." In 

### competitive energy markets, at the 

### wholesale or retail 

### level, a range of

### prices and conversion factors for estimating 

### primary energy savings and emissions would be best delivered**~om** a production cost model. Such a model for the national market does not yet. exist,**but~**

# m.**~Y** done the type ofanalysis needed in its work in preparing its recent 

### i-eport on electricity pricing in competitive markets.2 Chapter 2 ofthis report . explains the modeling process and usumptions 

### Used. Most important, on pages 17 and 18, 

### the actual 

### iterative modeling 

### steps to determine 

### prices, and which plants will be OD :line, are described. These are accomplished by the National Energy Modeling System

(NEMS) for each ofthe 13 North American Electric Reliability Council (NERC) regions, IDd the results are then 1gregatedto the national level. This kind ofmodeling,**~** assμmptions that &teach ofthe firture scenarios descn"bed 

### belOw, might provide the shape
. IDd slope ofthe**~SY** price, conversion &ctor and emissions**~that** DOE needs for



### . rulemalcing going out 30 years into the firture.



### - With that**co~** 

### in 

### miDd, tl)e subcommittee tried.to envision how the**~** fbture 

# _,

# ________________

· 2 &ClrlcltyPri«1 hia

### Com~li~ EnviroMltnl: Mfll'flnalCoiiPricing

### o/Gt~rallo~ SaW:a and ·**~~**Slatlll

### o/ '(JISJJt;.1 (DOF.IEIA-061'). f.mrgy lafanuticxrAdminislratioa.**~** 1997..
. .



### . · 

# -·

..

# ..

,,

### .



# .. .. 

### ... . . 

# . •. P1p9.

. 

# . might 

### unfold 

## for a

# -...c nd."wont" case, 

### depending OD

## your point**or~.** and what 

### could be considaed amidcDe cue 

### between these 

### two. Most members contend**~** the probability 

## ora general**~** 

### price .increase 

### is W:ry 

### small, though there is ID



### .**.WO~** 

### or environmeml1 tufbturc that 

## miaht 

## sive rile to 

### IUCb. •. . One orthe

## .Dost

# fecaii rrftrences available is the

### pimoUsly cited EIA report OD • competitive 

### electricity 

### prirJni.1

.This report provides 

### invaluable insights 

### iDto ·ID energy**industry~** that 

### evolves into a competitive structure;though the authots are 

### carefW to

point out OD 

### p.85 that 

### the report

### does not 

### address how 

### different 

### c/a.s.ses 

## ormstomers will 

### .&re.in a competitive arviJ:omnent
. .Rather, this is 

### EIA'• preliminary 

### analysis 

## orwbat might · 

### be**~ed** to happen to ll\lerage ucS 

## marg;nare1ectridty costs anc1 

### priees 

## throuah 2015, 

### based OD what is known today. Tbe 

### authors use tbe 

### term**"a~e** 

### costs" to refer to the total cost GrprOduction. induding a return on 

### investment**equal~** a producer's CC$t of capital, dMded by ales to ultimate consumers. Marginal costs are the operatinl 

### and

. maintenance costs 

## orlb; last plant needed to supply the immediate demand for electricity.

These limeterms 

### can be 

### applied to natural gas utilities and markets 

### u well. The most
. important 

## thins to note here, 

### though. is that 

### even if

### a sPecific report 

### doesn't provide the 

### answers needed 

### for efficiency standard 

## tulemakin& the modeling capability 

### for that purpose has 

### been demonstrated. The 

### uncertainties outlined below will 

### affect the shape and 

### slope 

## orDOE'• energy 

### price change 

### Curves, 

### bUt a let 

### orc:urves can be generated
.



### . The report 

### does draw 

### some conclusions. But 

### when it projects that 

### retail 

### eleCtricity 

### prices

could be B-15 

### percent lower within 

### two years 

### offWl 

### competition at the wbolesate level,

.there are caveats. It is assumed there 

### will be an absence 

### ormarket power, implying IUflicient 

### competition to deliver true marginal pricing and prevent 

### oligopolistic control. And 

### it is 

### assumed that 

### Competition begins 

### in earnest 

### in 1998, implying 

### higher prices lasting 

### longer if

### competition is delayed. But 

### for our 

### purposes, there is 

### no certainty yet about .when 

### competition will be introduced 

### into the 

### overall U.S. electricity and naturaJ·gas

.markets, ·or the extent 

### to**wbi~** 

### it will entail .wholesale or retail 

### competition, for 

### which · customers, or**wheth~** competition will occur simultaneously 

### in all markets, ·or state by



### ·ltate. And perhaps 

### most important. the analysis doesn't account 

### for the treatment 

### of :stranded 

### assets,·which if

### recovered in the early years at fUll value, could result in very 

# little early price reduction. even with 

### competition.

The EIA's ·imwal energy**~tlooks** (the 

### most recent is AE01998) 

### do separately forecast 

### individual sector prices. 

### Some 1997 data 

### fi'om this series 

### was supplied to the



### .IUbcommittee at its 

### July meeting. In this comparison 

### oractual 1996**lverag~** electricity prices and those 

### predicted by EIA'1 AE097 

### forcast, industrial rates are shown 

### to have

.

### ~ by. 

### 7 perceni.

# while

# duriDa tbe 

### same period, 

### commercial rates 

## declined by 

### 6



### ..

. 

### . . . 

### -

## - . . .......... .:



## • "'"

# .. .. .**~; ----------~------~~-** 

. 

### .**~~·** 

### ·:-. Pap 10
. .,



# . ..

·.

.. 

### . . . . . . 

# Percent.· and raidentimfttes.dedined 

### l7y 5 

### percent.. The Alrol998 data 

### suggests a · colrtinnation of this disparity 

### between sectors. Tbe 

### EIA acknowledges in its --Eectricity Prices in 

### a .C-Olnpetitive EnvirOmnent" report that 

### these early 

### declines are likely 

### due to the initial 

### 1t1Ses of

### compedtion. tbe 

### anticipation 

### Ofcoq>etition. and resuJator-mandated

..

conditions' of

### inergers. Some analysts 

### AJJeCt little in the 

### way of**long-~erm** 

### real price · . declines for residential customers.

### under the 

### conditions now developing**~** tbe**~.** lbsent

# some lignifiCant**~es** in 

### the fesulatory 

### or lepJ .environment. 

### Odla's**~** 

### ·.



## . misested

# pnces is 

### much IS 20% 

### lower in "tbe long nm.



### Most analysts 

### do expect. though, that early 

### price c:banses 

### will**bing~** 

### to a patdegree 

### on bow the 

### recovery ofUtilities' ltrlnded costs 

### ind benefits are dealt with 

### by resuJators, and 

### on**~** timetable. Tbe 

### sooner and 

### faster, and the 

### smaller portion o(· ltrlnded 

### costs are · written 

### doWn or recovered, 

### or a combination ofaD ofthese, the 

### sooner the 

### price impacts ·. of 

### these plants will disappear 

### &om the market. If'

### a larger stranded uset 

### recover)' takes place 

### over a longer period, and 

### these plants are dispatched 

### u.

### pan ofthe market'• 

### power

. reSources in the 

### meantime. then**pri~** will 

### take longer to &II. 

### Almost all of the 

### regulatory decisions on stranded costs thus &r

### have been 

### quite**g~** 

### to 

### utilitiei and their tbareholders, so many analysts feel we 

### are following the 

### latter path. Jn the 

### long nm.·tbe 

### price ofelectricity will 

### depend on the 

### price offUels, which 

### more and more often is 

### assumed to mean natural gas. And the 

### price ofnatural gas is 

### assumed to be dictated 

### Jarsely by supply and demand relationships. which 

### can chanse. The 

### imposition of · a

### carbon tax or the removal 

### ofenergy 

### indusuy production and 

### distn"bution subsidies 

### c:ouJd**leri~** 

### aff'ect these relationships u they 

### are today. ·



## .. 

# . 6. Scenario Futures
.



## .·

'J'.he gr0up 

### discussed**~** various elements that 

### could affect energy 

### price cbange:S and genei-ation 

### dliciency in the firture. 

### and here we··auempt to cbaracteri7.e three 

### scenarios that 

### the subcommittee believes define the 

### ranges ofrelevant 

### assumptions for DOE 

### rulemaking

. ana!)'ses. 

### While other acenarios are possible, 

### we chose to focus on those 

### that are most

likely, based 

### on information avaa1able today. Tbe 

### "median" scenario we ref'er to 

### u the •Market 

### Evolves" scenario. 1be 

### market-dominated filture is 

### called "Competition, Now!", and the 

### regulatioHominated scenario is 

### an "Environment Ascendant" 

### one, where 

### carbon**~es** 

### or subSidy removal is 

### a real polSl"bility within.S-10 years. The "MarketEvolves" 

### This scenario 

### is the one playjng itself

### out now. It is·characterized 

### by a staged transition to competitive 

### energy markets. with the largest customers 

## receivins the largest reductions 

### · &om regulated prices, and receiving them early. 

### Strande4 costs are 

### fWly (or 

### nearly fWJy)**~vered ~a**  5- to 

### 10-yearperiod
.. The**.~est.** .captive**custo~** may 

### fail to attract



# ...



# - - 

# -· -·-· 

# -· ,**~-· ~.**  . 

# .

. , 

### .

. ..**~.11**

### ~

# •lnmamt mgnber

### ~ve mpplien, and 

### .0 may 

### be 

### left largely 

### in the 

### lituation they 

### are 

### in today, with only 

### spotty cises 

### ofassrepd?Jl occurring where 

### other market &ctors make 

### it economically 

### attractive. They may M:n continue to 

### M regulated at·the

. 1tate level, 

## tboush this is 

### nOt •lmfialto

### tbe**~·** 

### Renewable generation 

### iCsources

llowly 

### pinmarket 

### lbue. imrketed**~**

# "sreen power" with a 

### prelQium**~ce.** 

### There**~.no** 

### carbon 

### tax. 

## or a

### wrj small one, 

### nor any 

### other tax 

### oa 

### fbels. and enqyindustry 

### JUbsidies



### ...nmain largely 

### in place. 

### Tbe .debate 

### a.ver cfimate dlange. and**whose~** 

### it is to.

"5P0nd 

### continues without 

## lisnificant resolution·for Itleast 

### I0 to 

### 15**~·** 

### Generatio11, transmission and 

### distn"bution teclmologies improve 

### iDcrementally.**Over~** 

### generation, 

### transmission and 

### distribUtion 

### fimctiom are .eparated. 

### Generation is larpJy uliregulated,
. 

### tnnsmiuion is federally 

### regulated, IDd distribution companies· are regulated (to IOIDe 

### ctegree) It

### the state level. Once 

### written down. 

# ieneratins plants with high variable costs are· shut down, with_**cheaper~** more 

### efficient plants coming 

### on line to replace them, 

### ilJ · ICCOrdance 

### with market 

### dictates o(supply, demand; 

### interest rates, and 

### c:apit8J availability.

. Tbe 

### prices 

### ornatural ps 

### and other petroleum-based 

### fuels rise 

### very slowly**~** 

### n:al terms, · with 

### only minor, 

### tempormy excursions fi'om the**price~** 

### we •today. In &ct, most

trends bold u they 

### are today. · 

### • -Competition; Now!"

. . In 

### this scenario there is 

### a rapid move to energy markets 

### that are deregulated 

### down to 

### tbe · retail Jevel, 

### f'or 

### aD customer 

### dasses. Stranded costs are written down quickly, 

### perhaps with 

### only partial 

### recovery, in 2 to 5 years. 

### There are quite a f'ew mergers where 

### large and successfW generation providers buy up 

### those that are financially imperiled by this 

### rapid shift to a market-based system. 

### ·Traditionally vertically 

### integrated utilities quickly dissolve 

### into separate generation, transmission and distnl>ution entities. Generation 

### is unregulated. 

### ·Transmission is regulated by the 

### FERC, ll)d is 

### managed and 

### pricCd .in a non-discriminatory

.f.ashion by 

### an independent grid operator. Only 

### distnbunon companies

# ·.re regulated at the 

### state level, for both 

### electricity and J)ltural 

### ps. Services at the 

### distnbution level**(met~** 

### ·· . billin& 

### cust0mer services, etc.) are fi'eq\lently unbundled. TbCR 

### is no carbon tax, 

### and IUbsidies remain NDy in plaee. 

### Petroletun explorition and 

# recovery technologies eontinue 

### to improve. helping**~o** 

### keep primaiy energy 

### prices flat. Major advances in transportation technologies step in to 

### relieve the growing pressure 

### on fossil 

### fuel demand created by the 

### developing Pacific Rim, 

### and other 

### areas. But·action in 

### reiponse to 

### climate change issues 

### ii

### minimal Merchant plants, 

### some u cogeneration units; 

### prolirerate. 

## the most costly plants 

### on the 

### grid are retired early, and 

### newer,**~ch** 

### more eflicient 

### generation · technologies take their 

### place. Distnl>uted generation 

### grows in its market share, 

### with heat

recovery and dual cycle plants the 

### rule. Fuel 

### cells come on line in 

### increising 

### nwDbers.



# . iaimns the quality 

### and efficiency orpower production substantially, 

### and lowerins T.tD losses.**~** rates stay 

### low, IDd 

### there is adequate 

### .capitll 

### with which to 

### fund the · rebuilding 

### of the 

### generation

## ·in&uttuctUre.
. . · · · · 

# ne-Environment Alceadant"



### .. 

# -,.; -.-

•· ,. . r·. I!: :::.. ,. 

### . -



# ..**~~12.** 

### ': Al 

### the 

## other- eDd of 

### tbe.c:.Te"ia the 

## -P.awomnmt Mcend•nt" 

### mrio
.. 

## In this one, 

## alobal
· ditpate dlanae

# pws into 

### an iaiue the 

### U.S.**~·t** 

## isnore within 

### 2-5 

### years. Pressed by • .**~** other 

### countries that depend 

### on the 

## alobal commons 

## fbr their 

### existence and growth, tbe 

### · U.S. ii

### tor.ced to 

### comider bow to 

### leriousJy reduce. its 

### energy consumption and 

## sreen1oJse

· · psemiUioni. Fnt, exploration and production Cost 

### subsidies for 

### fossil 

### fbels are pbased 

### ;: . out over a 

### $-7 year 

### period. A 

### carbon. or 

### limilar, tax iiimposed, increasing**over~** .· ·**~** 

### · ·.Dalysis period until it 

### bas 

### aliP.ficant impact 

### on fossil fbel prices in 

### the latter 

### years 

### of the



### . . . period. Al**a~** the**~le** COit 

### of**~-fired** 

### aeneration experiences a·lteldy
. . . . · • · increase, forcing the 

### dirtiest plants 

### otrtbe line early, and the 

### deuerones 10-15 years 

### later. 

### Natural 

### ps-fired plants, while not 

### impacted 

### as severely, also 

### apaienc:e COit 

### · increases. 

### Boiler pJants and 

### simple cycle tWbines are the first to 

### go**~line.** 

### Over the long



### term. price iDcreues in tbe 

### market C1U1e 

### renewables and the mOst eflicient offossil-fueled



### . pneration technologies to be DDJdl more 

### competitive, and they begin to provide an ever-



### . larger share

# orthe 

### market's

# aenaation capacity. 

### So 

## COa emissions decline sisnificantly,**-~** . . 

### Wllile the. 

### subcommittee

## by itself'isn't 

### able to put 

### actual 

### prices,

### ~on factors and 

### emissions raties OD 

### curves IUBSested by these 

### three 

### scenarios. we believe this 

### proce°ss 

# orscenario definition may provide the 

### appropriate bases 

### for the 

### rinses orusnmptions to be used in**oo~··** rulemaking analyses. The EIA 

### has 

### shown a capability 

### for modeling ·the 

### efrects ofaidl filtures, 

### and should 

### co1ltinue to do 

### so, ·based 

### on the 

### scenarios presented 

### here. Note that 

### there may be an 

### infinite awnber.

### offirture 

### scenarios. but to the 

### cXtent that the resuJting 

### prices, 

### conversion factors and 

### emissions reductions fall within the 

### range defined by the 

### high and 

### low 

## cases. only 

### probabilities need be assigned to weight the 

### outcomes. We expect 

### that stakeholder groups 

### will help 

### DOE tort 

### tbr.ougb 

### these issues for each rulemaking.

. . The only remaining 

### issue 

### disaJssed briefly by 

### the 

### subcommittee is that 

# orwbether or not 

### DOE and its 

### EIA branch will be.

### able to**~** 

### access to 

### the data 

## and inf'ormatiQn necessary to 

### conduct these**~-.** The 

### advent orcompetition has already begun 

### to place quite a bit 

### ofinformation in · ·the:
..**proprietary~** 

### category: And 

### some marketing 

### mefhocls**~** 

### packages doud, ifnot 

### completely

. obacu.-e, the prices paid for some 

### commodities and services (e.g. reaJ-time pricing). At the very

least, the 

### subcommittee 

### was wwiimous in 

### its 

### concern that 

### DOF.IEIA be aware 

# orchanses being DnJ>Osed 

### on the 

### availability orrelevant 

### information. IDd take steps to protect 

### its 1ccaswhere ·. 

### nec:euary. Allowances 

### for confidentiality may be needed. • ·



### . 

## . ·.

, ; 

# -· ,. ., 

## ,

r • ,.



# ···-··-""·-·----·-··

..._.""'"""·-**-~_.:_**

# _____________