Energy Efficiency:
Lost Revenues and Financial Incentives
Lost revenue recovery and financial incentives are not new or unique to Senate Bill 412. Thirty-two
(32) states allow utilities to recover lost revenues and thirty (30) state programs provide financial
incentives. Energy efficiency programs for Indiana consumers, approved by the Indiana Utility
Regulatory Commission (IURC), have previously included recovery of lost revenues and financial
incentives.
What Are Lost Revenues?
When a utility implements energy efficiency programs for its customers, those programs result in the
utility’s customers using less electricity which, in turn, reduces the utility’s revenues. These are called
“lost revenues.”
Lost revenues are not all of the revenues that the utility doesn’t receive due to reduced customer usage.
Rather, they reflect only the portion needed to cover the utility’s existing fixed costs – power plants,
transmission lines, and distribution systems -- necessary to serve customers. Fixed costs are utility
investments that do not change when customer usage is reduced. Costs that do change – such as fuel,
wholesale power purchases – are not considered lost revenues and are not eligible for recovery.
How Are Lost Revenues Determined and Recovered?
A utility cannot automatically claim and recover lost revenues. The utility must provide (and the IURC
must review and approve) an independent third party’s evaluation, measurement, and verification of
the impacts from the utility’s energy efficiency programs, to assure the calculation of lost revenues is
accurate. All interested parties have the opportunity to participate in IURC proceedings. Upon approval,
costs are recovered through a tracker until the utility’s next rate case.
Projections of Lost Revenues.
Indiana’s five investor owned electric companies project that their new 2015 energy efficiency programs
will produce about $2.7M in lost revenues on average in 2015, while saving approximately 1% of energy,
with an average program budget of $18M per utility in 2015.
In succeeding years, lost revenues are reduced when the useful life of a measure is reached but they
also continue to grow since the utility is continuing to install additional measures. A cap on lost
revenues is not good policy because lost revenues do not disappear if a utility has a robust energy
efficiency program.
What are Financial Incentives?
Thirty (30) states allow for financial incentives in their energy efficiency programs. Like lost revenue
recovery, previously approved IURC energy efficiency programs have included financial incentives.
Financial incentives serve to make energy efficiency activities comparable to the return on investment a
utility might earn by investing in a power plant.
In SB 412, incentives can take various forms including allowing a utility a rate of return its energy
efficiency investments, a sliding scale return related to performance, or a “shared savings” incentive.
The IURC must review and approve incentives and all interested parties have an opportunity to
participate in IURC proceedings on this issue.
3/16/2015