The Honorable Federico Peiia 

Secretary 

- --- --- -----

United States Department of Energy 

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 of improving the Department ofEnergy's(DOE or Department) 

appliance standards process. At the January 8, 1997, meeting of the Committee, 

several stakeholders suggested that a group of experts 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 of recommendations 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 of the models 

used for the analyses, the use of averaged data, the changing nature of the input 

variables for the models as energy markets become more competitive, and the 

treatment of uncertainties 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~ of national average energy prices with the full 

range of consumer 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 of net 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 of energy price futures for each fuel used in Nlemaking 

economic analyses such as life cycle cost and net present value. With 

stakeholder input, the range of outcomes 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 of the ranges can 

be used to examine the importance of other efficiency standard criteria. 

3) In similar fashion to 2) above, DOE should define a range of primary energy 

conversion factors and associated emissions reductions, based on the 

generation displaced by energy efficiency standards, for each Nlemaking. 

With stakeholder input, the range of outcomes predicted by modeling should 

be weighted to determine the values to be assigned to each standard level. 

Again, the extremes of the 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 of the Department to implement the 

recommendations. We also request that DOE report to the Advisory 

. Committee at each ·or its meetings the progress in implementing the 

recommendations and highlighting any further· need for subcommittee 

. deliberation on these issues. 

It is the consensus of the members of the Advisory Committee that the changes 

recommended above would materially improve the DOE Standards process. Given 

2 

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the broad representation on the Committee, this level of agreement on matters of 

· such importance is significant. The subcommittee wishes to acknowledge the able 

assistance provided by DOE's Office of Codes and Standards, and the forecasting 

section of the Energy Information Administration as it conducted its review and 

analysis. 

Thank you for your consideration of these 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 of America 

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 of Energy 

Florida Department of Community Affairs 

California Energy Commission 
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SUBCOMMlTTEE oa ECONO~C ANALYSIS ISSUES 

· · · · REPOaT AND 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 ~ of the 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 of the models used for the analyses, the 

brclld range and changing nature or the input variables for the models, and the treatment or ~ 

unc:ertainties in the modeling and decision-making processes. 

~veraJ stakeholders suggested that a.sroup of experts be identified. "to review, darify, and 

up:late economic issues as well as to review major IOUJ'CeS of uncertainties in setting priorities. •

1 

In response to that suggestion. volunteers were solicited at the end of the meeting to pursue the 

resolution of these issues. Charlie Stephens of the Oregon Energy Office, Bun K•lisch of the 

Arnerican Gas Association. mid Chuck Foster of the 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 of the group, Burt Kalisch was replaced by Marie 

Krebs as co-chair, .and additional interested stakeholder members have joined in our dehl>erations. · 

An ".'pdated list of active participants is present~ as Attachment A. 

. . 

. Ail tbe June meetin1 or tbe 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 of the lif'e cycJe cost model with commerciaDY 

available statistical enhancements to aDow transparency for itakeJ:tol~ers; 

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·j) ~the 

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u.e of a rangt orilipmbriabtes rather than iWn8e values, and a robust risk' and 

analysis using tbe entire 11J18e or each variable, properly weighted; . . 

A~). the c01TeCt ei-gy pricei to me for the life cycle cost analysis are tbe consuiner'1 prices 

for the. ma1sinaJ energy saved throujb a new efliciency •andant (some of these may be 

commercial IDd/or.industritl prices~~ equipment, or·IOIDC ofit, ii used 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 of the range or outcomes. if applicable; 

Ci) ihe remoVll of fixed 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 or those further deliberatioas. . 

2:. luut!I 

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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 of industry restructuring. the status of utility seneration 

Jilans, relevant regulatory decisions and Jesislation, and a host of other information bearing on the 

issues at band. Those issues are: · ,. 

C:l) E~el'I)' pricina- Tbis ilsue indudes a definition or aacdy what price Is appropriate 

for· the economic analyses. the relationship and relevance or the rasecl and variable 

components Of the price, the variability of price based OIJ time or me, seasonal and 

daily or houri)' nriation ID demand, pricing block and other variabl~ or illtenst, 

and the dearec to which and how aD or the roregolni will change as the structure o~ 

• the eaeiv IDdustrJ moves toward competition at the wholesale and retail levels. 

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O~) .· :Eaeru priceL nii llRhides a discuuion of wlaetber ~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 or dWap ID those prices that mipt be apected 

· Mter tbe 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 or bow 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)' or data. A.J. tbe eaav iadllltrf restructures, much or the 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 muimum meat possible. 1be subcommittee ii 

mo tonrardina a methodology for obtaining appropriate pricina, developed by 

Steve Rolemtock or EEi 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 of Energy, and its 

· co~or:s. should replace the use of national average energy prices and replace ~em 

· ·with die range 9f consumer 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 maues per 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 or outcomes 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 of the ruses can be used to examine the importance.of other 

. e:Biciency standard criteria. .. . 

:J~ . ~ similar fashion to #2 abo~ DOE lhould define a range of primary rnerJY conversion 

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

the range of outcomes predicted by modeling should be weighted tO determine the values. 

to be usigned to each standard level. Again. the extremes of the range may be used to 

· inform policy-making judgement 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 of the 

Department to implement the recommendations. We also sussest that DOE report to the 

· ·Advisory Committee at each of its 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 of the SEJDe aaenda. "and the iroup did its best to make.progress in 

dtM!oping substantive recommendations. ne minutes and attendulce lists for these meetings are 

attached IS Attachments C and D~ 

Di&Qs.sio~ in the" first ~were more genml. IS the 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 

sas utilities 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 

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Pages 

. the monetary effects mimpioW.a appliance IDd equipment efficiency &om~ consumer'• 

perspective. . . . • . 

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. n1ere WU also extemive .dumuiOD of mcdy what 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 nler to 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 of dete:nnining and using energy 

prilces and primary energy convenion rates to compute life cycle costs, consumer cost 

eftectiveness, and the level of primary energy uvings. Rather than trying to determine a linsJe 

energy price or set of prices 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 of the range. ' -

.. 

Fo,r energy prices, this amounts to defining the shape and slope of the Consumer Marsina) Energy 

Rite aitve over~ time peri<>4 of the 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 of positive and negative variance &om that over time. 

In similar fashion. ~ extremes ·of primary energy conversion &ctor (Btu/kWh) declirie iates were 

disaissed. Ev~ne concurred that the likelihood of an 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. . . . . 

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P1ae6 

s. Analysis laaes. ~ -· . 

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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 (or uved) by an indivicluaJ comumef for the last unit of energy 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" or energy 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 of electricity for use in these analyses 

ai a customer-weighted average of revenues divided by energy sold to those customers. 

· I. Because the revenues iDclude fixed chargCs, the resuJtins prices are not truly a ~ 

. . . 

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 

or AGA 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 or about 7% percent. For 

. natural ps utilities, the range WU O'" to 37%, with I customer weighted averaae of about 

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 

-·· ,. 

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~ • break-up of the 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 or a customer's monthly bill. At . . . 

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the ume time, tbe per~ 'brJD' dlarges may decline, u they will come to reflect mostly 

tbe eosts or generation and tnnwiuion. As the CMER is projected into the fUture, tbm, 

the lower end or the range may wen reflect this kind or dwtge. · . · . -

ne group •.be, briefly discussed the availability ot price 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. ad may 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 of primary 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~ of the 

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 or energy 

industry restructuring, this typically. and realisticaDy, meant the power plants not built as a . 

resuJt of a slowing in the growth of demand due to increased efficiency. One could even 

review the integrated resource plans of utilities to determine eucdy wbat kinds of 

pneration·~ would be deferred. · 

In the future, the competitive environment will push the nwtet towlrd the economic 

dispatch of generation resources, based on the price of the 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 of a resource, or no'9 is its variable cost of production, 

including at least a measurable return on investment. These costs are comprised mostly 

of fuel 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 ·. · 

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be decCM1n1issioned .... written down or'written ofru ltl'IDded, on a schedule determined 

by regulatOa. Consequently, neitba' of these twO types of generation (hydro or 

competitive nuclear) will be displaced by ~cielicy improvemeqts. and IO~~ to. 

~ce avenge beat rates ii iri'elevant. to this dismssion. 

· . Tbe problem then ~mes predicting whit generation ~will be 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. of its rel~ &ceti .. 

·. •. 

c.. De Future: 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 energy prl«. Each word 

in this term is important, u it defines the energy rate prescn"bed in federal legislation for 

the purpose of conducting the economic analyses for appliance standards. The exception 

is in the case of commercialfmdustriaJ products, such as fluorescent lamp ballasts 0r 

rooftop Iii conditioning. where commercial and industrial marginal energy prices would 

also need to be 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 of analysis needed in its work in preparing its 

recent i-eport on electricity pricing in competitive markets. 2 Chapter 2 of this 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 of the 13 North American Electric Reliability Council (NERC) regions, 

IDd the results are then 1gregated to the national level. This kind of modeling, ~ 

assμmptions that &teach of the firture scenarios descn"bed belOw, might provide the shape . 

IDd slope of the ~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&Clrlclty Pri«1 hi a Com~li~ EnviroMltnl: Mfll'flnal Coii Pricing o/Gt~rallo~ SaW:a and · 

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

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. . might unfold for a -...c nd."wont" case, depending OD your point or~. and what 

could be considaed a midcDe cue between these two. Most members contend ~ the 

probability or a general ~ price .increase is W:ry small, though there is ID 

. .WO~ or environmeml1 tu fbturc 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 or mstomers will 

.&re.in a competitive arviJ:omnent . .Rather, this is EIA'• preliminary analysis orwbat might · 

be ~ed to happen to ll\lerage ucS marg;nar e1ectridty 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 or lb; last plant needed to supply the immediate demand for electricity. 

These lime terms 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 of fWl competition at the wbolesate level, 

. there are caveats. It is assumed there will be an absence or market 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 or actual 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 

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Percent.· and raidentimfttes.dedined l7y 5 percent .. The Alrol 998 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 Of coq>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 pat degree on 

bow the recovery of Utilities' 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 of aD of these, 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 of the 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 of electricity will depend on the price offUels, which more and 

more often is assumed to mean natural gas. And the price of natural gas is assumed to be 

dictated Jarsely by supply and demand relationships. which can chanse. The imposition of 

· a carbon tax or the removal of energy indusuy production and distn"bution subsidies c:ouJd 

leri~ aff'ect these relationships u they are today. · .. 

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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 of relevant 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 "Market Evolves" 

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-year period .. The .~est. .captive custo~ may fail to attract 

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~ •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 •lmfial to tbe ~· Renewable generation iCsources 

llowly pin market lbue. imrketed ~ "sreen power" with a prelQium ~ce. There ~.no 

carbon tax. or a wrj small one, nor any other tax oa fbels. and enqy industry JUbsidies 

... nmain largely in place. Tbe .debate a.ver cfimate dlange. and whose~ it is to. 

"5P0nd continues without lisnificant resolution· for It least I 0 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 or natural 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!" 

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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 or power 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" 

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': 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 · · ps emiUioni. Fnt, exploration and production Cost subsidies for fossil fbels are pbased 

;: . out over a $-7 year period. A carbon. or limilar, tax ii imposed, increasing over~ .· · 

~ · · .Dalysis period until it bas a liP.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 deuer ones 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 of fossil-fueled 

. pneration technologies to be DDJdl more competitive, and they begin to provide an ever-

. larger share or the market's aena ation capacity. So COa emissions decline sisnificantly, 

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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 or scenario 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 of aidl filtures, and should 

co1ltinue to do so, ·based on the scenarios presented here. Note that there may be an infinite 

awnber. of firture 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. 

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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 or competition has already begun to place quite a bit of information in 

· ·the: .. proprietary~ category: And some marketing mefhocls ~ packages doud, if not 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 or chanses being 

DnJ>Osed on the availability or relevant information. IDd take steps to protect its 1ccas where ·. 

nec:euary. Allowances for confidentiality may be needed. • · 

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