Testimony of David F. Ciarlone
Manager, Global Energy Services for Alcoa Inc. and
Past President of the
Industrial Energy Consumers of Pennsylvania
Before the PA House Consumer Affairs Committee
February 25, 2014
Good morning Chairman Godshall, Chairman Daley and members of the House Consumers Affairs
Committee. My name is David Ciarlone. I am the Manager, Global Energy Services for Alcoa Inc. where I
share accountability for managing Alcoa's annual requirement of 45 BCF of natural gas and 2.6 TWH of
non-smelting electricity in North America and where I consult with my colleagues who manage the
balance of Alcoa's global energy spend and shape Alcoa's positions on energy policy.
I am also Past President of the Industrial Energy Consumers of Pennsylvania, a trade organization
formed in 1982 by large energy-intensive industrial customers with one or more plants in Pennsylvania
1
to promote low-cost, reliable electric power. Our 18 members spend more than $1 billion annually on
gas and electricity and we provide more than 41,000 good paying jobs in the Commonwealth.
At various times in the past, I was honored to represent my colleagues in testimony before the
Pennsylvania General Assembly, and in particular this Committee, by highlighting the unique challenges
and opportunities facing Pennsylvania's large industrial employers in the field of energy. I feel both
proud and privileged to appear again before this committee this morning in a similar capacity as we help
identify legislative priorities for the coming year.
IECPA commends the Committee for undertaking a review of the Energy Efficiency and Conservation
(EE&C) elements Act 129. We see an opportunity to address and adjust a few of the things that none of
us could have anticipated six years ago, that are having real consequences now and that, if unaddressed,
will grow worse and cause real harm to industry and job creation in Pennsylvania in the future.
Overview
The substance of my testimony this morning is divided into three parts:
First, I believe it important to put this morning's discussion into their appropriate context with a brief
discussion of the Critical Background that led us to where we are today.
Second I will do my best to address the Committee Questions that were issued along with the notice for
this hearing.
1
Current IECPA membership: Air Liquide Industrial U.S., Air Products and Chemicals, Inc., AK Steel Corporation,
Alcoa Inc., ArcelorMittal USA Inc., Armstrong World Industries, Inc., Benton Foundry, Inc., Carpenter Technology
Corporation, The Dow Chemical Company, East Penn Manufacturing, Ervin Industries, Inc., The Hershey Company,
Knouse Foods Cooperative, Inc., Linde, Merck, Praxair, Inc., The Procter & Gamble Paper Products Company,
Standard Steel.
David F. Ciarlone
February 25, 2014
Finally, I will outline IECPA's position on why allowing large industrial electricity customers flexibility as
to whether they participate in the utility-managed energy efficiency programs is sound and smart public
policy - that is the Affirmative Case for Large Industrial Opt Out.
A.
Critical Background
As in all policy discussions, we in IECPA believe it is useful to start by articulating our five foundation
principles with respect to energy. Specifically, energy must be affordable, energy must be reliable,
energy price must be stable and predictable, and the energy supply chain must be sustainable from the
perspective of both the environment and the health of our suppliers.
When viewed through this prism, several pieces of Act 129 are clearly problems in 2014. I want to stress
that IECPA does not believe it is useful to look back and try to assign blame. The simple and happily
astounding fact is that we live in a world that is very different from the world that produced Act 129. In
2008, the Pennsylvania General Assembly was responding to a true crisis. Since 2008, the Pennsylvania
Public Utility Commission and the utilities have been doing their best to implement a law that truly
belongs in a time capsule.
Prior to 2008, the US was so anxious about natural gas supply that federal legislation 2 was passed to
speed LNG imports; it was a time in which natural gas supply was contracting and prices increasing; it
was a time in which some large industrial customers in Pennsylvania were predicting average annual
electricity prices approaching $85 to $100 per MWH; and it was a time that saw the decline of U.S.
manufacturing to its lowest ebb. As if to make matters more interesting, we closed 2008 with the worse
global financial crisis since 1929.
Since 2008, as we in Pennsylvania well know, the emergence of natural gas from shale has dramatically
increased our national picture of both reserves and production, with the Marcellus leading the way.
Today the national policy discussion on LNG is of export; prices for natural gas and electricity have
declined dramatically and, notwithstanding the infrastructure-driven spikes of a few weeks ago, have
remained much more stable and predictable; and we openly discuss a renaissance in manufacturing. All
parties agree that the shale gas boom has caused a paradigm shift in public policy discussions on energy
and on our broader economy. Clearly, parts of Act 129 are stuck in an outdated paradigm.
Unfortunately, clinging to outdated paradigms in this and other areas is not merely quaint: it is adding to
Pennsylvania's serious challenges. How else do we account for the paradox of a state cited by the US
Energy Information Agency (US EIA) as being the fastest-growing natural gas-producing state 3 lag far
behind other less well-positioned states in creation of new manufacturing jobs? According to the
National Manufacturing Association (NAM), Pennsylvania is only 15th of the top 20 states in
4
manufacturing job creation between 2009 and 2013 •
Those of us who watch energy prices closely are quite familiar with one dominant cause of this paradox.
Pennsylvania's industrial electricity rates are among the least competitive in the nation. As reported by
2
Energy Policy Act of 2005
"Pennsylvania is Fastest-Growing Natural Gas-Producing State", US Energy Information Agency, December 17,
2013
4
"Top US States for New Manufacturing Jobs", CNBC, June 25, 2013. According to NAM data Michigan, the leading
state, created 88.l thousand between December 2009 and March 2013 compared to only 11.4 thousand in PA
3
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David F. Ciarlone
February 25, 2014
the US EIA, in 2012, Pennsylvania ranked 36th of the lower 48 states and the District of Columbia in
5
average annual electricity rates paid by industrial customers . This fact more than any other highlights
why it is important to re-examine parts of Act 129. The cost recovery riders that Act 129 adds to these
already high industrial rates pose a real threat to manufacturing growth in the Commonwealth.
To many of us in the industrial community, we find the threat posed by these riders doubly ironic. We
regard the advocates of energy efficiency and conservation as embodied by Act 129 as relative new
comers. IECPA member companies, like Alcoa, have been working hard at implementing energy
efficiency for many years. Many of us have formal energy efficiency programs that date to the 1990' s or
earlier. This makes sense . We operate large, energy-intensive production processes and we are
exposed to fierce global trade. To us, energy efficiency is not the latest trend; it is a way of life - in fact
a key to survival. Alcoa articulated its updated energy efficiency goals in 2005 - three years before Act
129. Like many other industrials, we set aggressive goals and we dedicate the resources needed to
achieve them. In fact, because our energy efficiency programs are mature, they are not suited to the
assumptions inherent in Act 129. There are few remaining energy efficiency initiatives that are cost
effective. Hence, our investments in the initiatives that remain are large and infrequent, and usually
separated by years at a time. There is a structural mismatch between our operations and the cost
recovery mechanisms of Act 129. Stated bluntly, the EE&C programs of Act 129 do not provide
industrial customers with any expertise that we can use or any funding that we can reasonably obtain,
but they do impose a cost that will continue to push Pennsylvania's industrial electricity rates higher
than our competition .
B.
Committee Questions
In organizing this hearing, the Committee asked that we focus the core of our testimony on answers to
four questions. We will provide our answers from the perspective of an industrial customer.
1.
The costs incurred to implement EE&C plans and to meet the required reductions in overall and
peak demand contained in Act 129.
$3.00
The cost to implement these EE&C programs, as imposed on
industrials, varies widely by utility. Figure 1 provides
examples of the 2014 Act 129 EE&C costs on a per MWH
basis for four utilities, based upon a 70% Load Factor Large
Commercial/Industrial Consumer, Duquesne : HVPS Rate; PPL:
LPS; and PECO : HT
,,---==------~
$2.50
$2.00
$1.50
$1.00
$0.50
$0.00
Duq. MetEd
Light
PPL
PECO
Figure 1
5
Form EIA-861, US Energy Information Agency, December 13, 2013. 2012 was last full year of data reported .
3of11
David F. Ciarlone
February 25, 2014
The impact of
these costs is
better seen in the
pie charts provided
in the next two
figures. Figure 2
shows the power
costs, before taxes
and supplier profit
for an industrial
customer behind
Duquesne Light. Of
the $51 per MWH
total, the cost for
PA Act 129 is $2.07
per MWH, or 4% of
the total cost. This
compares to the
Duquesne Light 2014 wholesale Power cost
:1t1(lle$119 UQnl ft:>Q,131!!9
Cost.
~·114. 2'()
Total Rate: $51.00lmlMl
(No Tax or Supplier Profit Included)
PJM A11tll<111 S•nl.tb ,
~2.00 . .fl(
5?(1]
\
;>01.i PA t.d 1?!1(".n<;I
4'lt
Tansn1;s1on :;(5.84. 1• 'll
l.'iholcodc EnaQt (Duq
Zoro1, fl2.!12 6~'!\
Wern
lb~ :
fl'l'MEX t:r.l.11) MulwtCe:ar, Duq
zo,c, 7 •24
rraurt.is!!:ic.n: ltlq.rllJ!. f\ale .ki'V2ll13
Cap110ty::
r.JM ~" Auctba
rn~s, 2fl~"
1
201.JJal~
s
PA A;d 129Cost Ss~• enCusba-iei 10~ wic f.ctar
PJ N Au"1-ll•t &"1 ·.il'-~ · tft" t .11lUi1l
1,;f .!! .00'11.1\1111
""iw'
~~·Na~I!
0.lf-l:i!'!tl~
Enerat: 20'-3&istng hlo11tit1 Mcffsillt Rlt•
L y1l
C111~11l
HV'Plt r.1iffFAl'!.I M1.•t1U1ly a, .. YW'
total regulated
Figure 2
distribution cost for
Duquesne of $1.14 per MWH, or 2% of the total cost. That is, for this industrial customer in the
Duquesne system, PA Act 129 costs twice as much as all other charges from the regulated utility.
Figure 3 shows
that, for a 20 MW
PPL industrial
customer, the cost
for PA Act 129 is
$2.63 per MWH, or
4% of the $59.92
per MWH total. In
this case, the EE&C
charges under PA
Act 129 constitute
almost the entirety
of utility charges.
collected from this
customer by PPL.
PPL Utllltles 2014 WholeS&le Power Cost
PP
I.tilt~
~o
PJl.1
.AncHI~
RP.£11::rP.t1l.nd
10. CNo
3erlices
$2.)0 3'1!.
Total Rate: $59.92/IJl\l\ni
(No Tax or Suppller Profit Included)
l
2014FA Act 12! Cost. S2 (J
4.,.,
'Ihde• ~·
Enel]jy (PP_
Zonet S37 02. 63%
Figure 3
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David F. Ciarlone
February 25, 2014
Figure 4 shows
how the cost of
$2,000,000
PA Act 129 varies
$1,800,000
for PPL industrial
$1,&00,000
customers of
$1,400,000
different size.
$1,200,000 ("
These are the
$1,000,000 ~
total three-year
$800,000 - -------~--·
costs of EE&C
$600,000 cost recovery
$400,000
charges based
$200,000
upon the 2014
$0
rates. These
1MW
10MW
20MW
30MW
4011W
estimates
indicate that
typical industrial
Figure 4
customers could
pay a total cost of $1 Million or $2 Million or more over the next three years into a program that is
unable to return any tangible benefit.
1-----~~~~~~-~-====-~~
Finally, Figure 5
shows just how
$1,000,000
random these
$900,000
Act 129 EE&C
$800,000
charges can be
$700,000 - utility by utility
$600,000
for 20 MW
$500,000 '
industrial
$400,000 ·'
customers
$300,000 across the state.
As in Figure 4,
$200,000 these estimates
$100,000
are for the total
$0
three-year costs
of EE&C cost
recovery charges
Figures
based upon 2014
rates. While the industrial customer behind PECO appears to be free of any EE&C charges, this is
due to an anomaly in the data: PECO's EE&C charges for industrial customers in 2014 reflect a credit
due to past over-collections. This is yet another unanticipated but quite real impact of these
charges on industrial customers. Not only do they vary wildly among the different utilities, overcollections or under-collections and the consequent changes in the cost recovery riders from the
utilities to make these charges very difficult to ~diet.
These examples demonstrate the difficulty industrial customers face in trying to provide a simple
statement of the "costs incurred to implement EE&C plans", but it seems fair for industrial
customers to estimate these charges as approximately 4% of their total electricity spend.
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David F. Ciarlone
February 25, 2014
Going forward, however, this 4% must be viewed as a floor. As future utility EE&C plans attempt to
maintain or increase their goals, and as each additional increment of energy efficiency attainment is
more expensive to achieve than the last, these costs can only be expected to grow. Because these
EE&C plans in Pennsylvania are only five or six years old, we can see clues of our future in other
states. In states where both the individual industrial EE&C plans and the utility EE&C plans have
been in place for several years the cost paid by industrial customers to implement their EE&C
programs is as much as 6% of their total electricity spend or more.
2.
The benefits realized through these programs.
The benefits realized through these programs are limited to those customers able to obtain a rebate
or credit linked to some energy efficiency initiative. In our experience with these rebates, the
qualification criteria is so elusive, the size is so small in comparison to the size of the projects to
which they are matched and their actual payment so difficult to obtain that they provide no
encouragement for new EE&C investment. In other words, these programs occasionally yield a
small offset to an investment that would have been made anyway.
Hence, we regard the benefits realized through these programs to be negligible.
3.
How the percentage incremental reduction required of each EDC for overall and/or peak load
was/is determined for implementation purposes
As demonstrated above, this process unfolds on a utility-by-utility basis. While these processes are
tracked by some individual members, they are not processes in which IECPA engages directly.
However, IECPA will note that as long as the effectiveness of these programs is measured using a
Total Resource Cost (TRC) test - a test that does not account for the differences among and
between the different customer classes - there will continue to be a mask over the ineffectiveness
of these programs for industrial customers.
4.
Suggestions/comments for improvement of the EE&C and demand response provisions of Act 129.
IECPA believes that Pennsylvania's industrial customers should have the right to Opt Out of their
utility-managed energy efficiency program. This is a right already enjoyed by industrial customers in
several other competing states. There are a variety of ways to implement this flexibility and we look
forward to engaging with this Committee and other stakeholders in designing an industrial Opt Out
that fits Pennsylvania.
C.
Affirmative Case for Large Industrial Opt Out
The affirmative case for allowing large industrial customers to Opt Out of the utility managed energy
efficiency program rests upon eight truths:
1.
Large industrial customers like Alcoa and other IECPA Members support and live
energy efficiency.
2.
We dedicate resources to energy efficiency and we do a very good job on it.
3.
Energy Efficiency potential studies routinely overstate remaining opportunities for
industrials.
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David F. Ciarlone
February 25, 2014
4.
The benefits of the energy efficiency programs accrue primarily to the participants,
not to the nonparticipants.
5.
Energy efficiency cost recovery charges harm the competitive market position of the
large industrials forced to pay them, as well as the state mandating them.
6.
Utility managed energy efficiency programs are unable to help typical large
industrial customer.
7.
Allowing an Opt Out would not reduce the degree of energy efficiency attainment
realized by large industrials within the state.
8.
Opt Outs, like those contemplated by IECPA, are common among states with energy
efficiency resource standards: 10 of 25 states have them.
I will now develop and explain each of these truths, in turn .
Large industrial customers like Alcoa and other IECPA Members support and live energy efficiency. It
is a priority for us. We not only 'walk the talk', as a matter of survival, we have evolved such that energy
efficiency is in our DNA. This is simply because we must! All input costs, including energy, are
continuously challenged. We have invested in on-going programs and expertise to continuously drive
our energy consumption cost lower. We are so serious about energy efficiency, in fact, that in many
cases, energy-intensity metrics are included in variable compensation formula for many managers.
Large Industrials do a very good job on energy efficiency. I invite anyone to go through the list of IECPA
Members, starting with Alcoa, and check the sustainability pages of our websites. I am confident that
you would find that we set ambitious long-term goals; that we dedicate the resources needed to achieve
these goals; and that most of these programs are either on or ahead of schedule. In a separate, recent
survey of large industrials, 85% of the 71 respondents reported that they set explicit energy efficiency
goals
6
.
Again, this is only because our customers and stakeholders demand nothing less. One study
after another shows that we have done a much better job than other customer classes of harvesting the
energy efficiency opportunities available to us. This is why there are fewer remaining cost effective
opportunities to achieve additional energy efficiency gains than in the other customer classes, and part
of why the entire premise of a state-mandated, utility-managed energy efficiency programs is flawed.
Energy Efficiency potential studies routinely overstate remaining opportunities for industrials. This is
because they emerge from a regulated mind set. Most of these studies are based upon the assertion
that a project is 'cost effective' if the ration of the net present value (NPV) of the future benefits to the
present cost is greater than 1.0. This is a perfectly fine theory. The difficulty arises in how the ratio is
determined. While the present cost is usually easy to know, there are serious problems with the
assumptions used to estimate the NPV of the benefits. First, they estimate the net benefit in each of the
first 15 years of the project's life. This is, obviously, a perilous endeavor. Not only do the estimates of
these future benefits depend upon underlying assumptions of system performance and production
schedule (which, itself, depends upon assumptions on sales and costs of materials, labor etc. .. ), they are
highly sensitive to the energy price forecasts used. If there was anything more uncertain than a
6
"Annual Industrial Energy Efficiency Survey" Industrial Energy Consumers of America {IECA), January 2013 .
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David F. Ciarlone
February 25, 2014
prediction of energy price 10 or 15 years into the future, I haven't seen it. However, even if we stipulate
that we agree on the future flow of benefits, the conversion of these annual benefits into a net present
value is rendered entirely fictitious by the discount rates used. That is, the interest rate or cost of
money used to estimate today's value of a stream 'pay backs' in the future. Depending upon the
particular test being used, this discount rate could be the weighted average cost of capital for the utility,
typically 7% to 9%, or the estimated cost of funds to the 'society', typically 4% or 5%. These rates are
not only lower than the return that commissions usually allow those same utilities, say 9% to 11%, they
are much lower than a comparable cost of money that would be used by an industrial for a similar
capital project (12% to 15% to 20% or higher).
In passing, I will simply note that the problem of overstated expectations is actually bigger than an
unrealistic discount rate. The simplistic ratio test has no way to account for the real limitations
confronted by a large industrial operation that must manage: limitations on cash; limitations on capacity
for new debt; access to time and space for implementation in the production facility; access to
specialized engineering expertise; and long-term production commitments to customers.
Using these low discount rates, and ignoring the other constraints, grossly over-states the NPV of the
future benefits, and hence the ratio used to judge the cost-effectiveness of the project. This, in turn,
results in utilities moving forward with plans and budgets that include initiatives that could never be
approved by the industrial customers paying for them through the cost recovery riders. In other words,
these programs encourage energy efficiency investment in a far less prudent manner than industrials
would for themselves. This is counterproductive on two counts. Not only do these plans encourage the
utilities to be very generous with our money, this generosity has the result of distorting and bidding up
the price of energy efficiency measures we pursue on our own. This is one reason why it makes sense to
differentiate large industrials from customers for whom the energy efficiency projects are still less
complex, shorter lived, smaller in scale and not subject to the pressures of global competition or the
demands of global investors.
Primary benefit of the EE programs goes to the participants, not to the nonparticipants. This is the
consistent finding of most, if not all, of the usual studies performed on utility-managed energy efficiency
programs. In other words, these programs benefit those who are able to qualify projects and receive
rebates or credits in excess of the riders they pay into the program, while the rest of us simply pay for
the benefits enjoyed by others, and try to mitigate those costs by picking up whatever scraps we can. In
the case of large industrials with mature energy efficiency programs, these beneficiaries include not only
those customers who have not been as proactive in their energy efficiency programs, but also our
competitors. This is contrary to even the simplest notion of fairness.
Energy efficiency cost recovery charges harm the competitive market position of the large industrials
forced to pay them, as well as the state mandating them. Typically, the three largest variable costs for
large industrials are raw materials, labor and energy. Furthermore, according to a recent survey,
7
electricity constitutes over 63% of the energy procurement cost of large industrials . Consequently,
7
"Annual Industrial Energy Efficiency Survey" Industrial Energy Consumers of America (IECA), January 2013
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David F. Ciarlone
February 25, 2014
small changes in electricity rates translate into large changes in the cost of production. In 2012, energy
efficiency cost recovery charges for many large industrial customers in Pennsylvania represented more
than 4% of their total electricity spend. If the PA Public Utility Commission raises these energy efficiency
targets in future phases, these costs can only be expected to increase. Moreover, because each
incremental gain in energy efficiency will be more difficult and more expensive to achieve, the
escalation in these energy efficiency cost recovery riders will NOT be linear.
Significant energy efficiency cost recovery charges would re-position Pennsylvania in the state ranking of
industrial electricity costs, which will impact future expansion and retention decisions. In 2012 8,
according to data from the US Energy Information Administration (EIA), Pennsylvania had the 36th
lowest average industrial electricity rate among the lower 48 states. However, if Pennsylvania's average
rates increased, as energy efficiency targets are increased, Pennsylvania's rank average industrial rates
falls further down the rankings. I want to be very clear that I am NOT saying that high energy efficiency
goals will drive existing industry out of the Pennsylvania, but I want to be equally clear that if high
energy efficiency goals are allowed to add significant unrecoverable costs to large industrial customers,
growth in manufacturing and growth in manufacturing jobs will happen somewhere else .
Utility managed energy efficiency programs are unable to help typical large industrial customers. As
noted above, large industrials already understand the value of energy efficiency and we are already
well-motivated to set goals and dedicate resources, including specialized expertise, to driving down our
energy intensity. The energy efficiency generalists that can be very helpful to smaller manufacturing
operations simply do not have the ability to add value to analogous problems when they are part of
larger, more complex production systems. Over the years, as our energy efficiency programs have
matured, we have often had the experience of attractive opportunities proposed by these utilitysponsored generalists, only to have the projects prove unfeasible due to one factor or another that was
not appreciated in the initial assessment. This is why we have cultivated our own internal and external
cadre of energy efficiency experts who understand how our operations work.
In addition to the gap in sufficiently specialized expertise, the utility managed programs also fail the
large industrials from a financial perspective. Because our energy efficiency programs are mature, the
capital that is available for us to invest yields a much higher return on core productivity improvement
projects than it could generate in an energy efficiency project. This reality was identified by large
industrials as the biggest obstacle to increasing energy efficiency spending for both large and small
capital dependent projects9 • Especially since the financial crisis of 2008, companies are extremely
careful in expending cash and in incurring new debt. As a consequence, large industrials require short
pay-back periods before funding any project not justified by safety or regulation. In a recent survey of
71 large industrials, over 87% reported a required payback period of three years or less and 44%
10
reported a required payback period of two years or less .
The requirement for these short payback periods is consistent with the higher cost of money described
above. These constitute the other reason why utility managed programs are ill-suited to large
industrials. Specifically, these programs are designed to provide rebates to make implementation of
8
US DOE Energy Information Agency Form 861, Released December 12, 2013.
"Annual Industrial Energy Efficiency Survey" Industrial Energy Consumers of America (IECA), January 2013 .
10
"Annual Industrial Energy Efficiency Survey" Industrial Energy Consumers of America (IECA), January 2013.
9
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David F. Ciarlone
February 25, 2014
new energy efficiency projects possible. However, because these programs are designed and costjustified with unrealistically low discount rates, the rebates that they are designed to award are far too
small to make an energy efficiency project feasible for a large industrial, unless it was already feasible.
Conversely, if these programs were in fact designed to award rebates of sufficient size to implement a
large number of energy efficiency projects at large industrial facilities that would not have otherwise
been funded, the costs for these utility programs and the energy efficiency cost recovery riders would
grow beyond any reasonable size. The simple truth is that these programs cannot close the financial gap
between expectation and implementation for large industrials. As a consequence, large industrial
customers pay ever increasing energy efficiency cost recovery riders with no real expectation of
benefitting from the program or recouping the bulk of their contributions.
Allowing an Opt Out would not reduce the degree of energy efficiency attainment realized by large
industrials within the state. As the entirety of the foregoing discussion illustrates, large industrial
customers are already doing all that is within their ability to achieve greater energy efficiency in their
operations. It is, therefore, not likely that industrial customers who are allowed to Opt Out would stop
implementing energy efficiency projects as aggressively as their existing constraints allow. In fact, if
some customers are allowed to Opt Out of their utility-managed energy efficiency programs, the funds
not paid into these energy efficiency programs - and contributed to energy efficiency projects that
benefit others - would be invested in productivity improvement projects within their facilities, some of
which would be energy efficiency projects. This likelihood was acknowledged during the cross
examination of an expert witness testifying in opposition to an Opt Out in an Energy Efficiency Plan Case
recently litigated before the Iowa Utilities Board. When asked whether he thought industrial companies
would stop pursuing energy efficiency if they were allowed to Opt Out, Environmental Intervenor
Witness Geoffrey Crandall admitted: "I would think not. I mean I would think a well-run company is
obviously always trying to lower their operating costs .... So, yes, they should be doing that right along,
11
yes, on their own ."
Even opponents of Opt Out admit that large industrial customers will work to keep their plants running
in an energy efficient manner. This is why, once all facts are thoroughly considered, more energy
efficiency can be attained in Pennsylvania by allowing some customers to pursue projects on their own .
Opt Outs, like that contemplated by IECPA, are common among states with energy efficiency resource
standards: 10 of 25 states have them. According to the American Council for an Energy Efficient
Economy (ACEEE), as of July 2013, "twenty-five states have enacted long-term (+3 years), binding energy
savings targets, or Energy Efficiency Resource Standards (EERS)"
12
.
These twenty-five do not include:
Delaware, where the EERS were pending: Florida where ACEEE believes the program is insufficiently
funded; Utah or Virginia, where the standards are voluntary; or Connecticut, which EERS targets were
ended in 2010 13 . In other words, fully 25 other states have not seen fit to adopt measures like those in
current Pennsylvania law. Clearly, IECPA is raising a discussion about energy efficiency in Pennsylvania
that is right in the mainstream of energy policy discussion in the country. This honest view of context is
important.
11
"Brief of the Iowa Customers for Energy Efficiency" IUB Docket No. EEP-2012-0002, September 18, 2013, p 22
"State Energy Efficiency Resource Standards" American Council for an Energy-Efficient Economy Policy Brief, July
2013
13
ibid
12
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David F. Ciarlone
February 25, 2014
Allowing large industrial customers to Opt Out of their utility managed energy efficiency programs
represents policy that has already proven successful in other states. The ten states that currently have
an Opt Out provision for their industrial customers are: Kentucky; Louisiana; Maine; Minnesota;
Missouri; North Carolina; Oklahoma; South Carolina; Texas and Virginia. Following are some interesting
notes about six of these ten states:
•
•
•
Minnesota is ranked 9th in the country in the ACE EE 2012 State Energy Efficiency Scorecard 14 .
Oklahoma and South Carolina are ranked as Most Improved in the ACEEE 2012 State Energy
15
Efficiency Scorecard .
Louisiana, North Carolina and Kentucky are among the top six manufacturing states, as reported
by 24/7 in a review of the 10 states where manufacturing represented the largest total share of
the state economy16 .
As in other areas, the Opt Out proposed by IECPA would place Pennsylvania squarely at the center of
discussion of state-level energy policy in the US.
In closing it is important to provide some historical context. When PA Act 129 was passed in 2008 the
atmosphere was "all hands on deck!" The transition into the PA Choice Act of 1996 was about to be
completed, rate caps were expiring, and, due to anticipated shortages of natural gas and booming
demand, projected electricity rates were skyrocketing to unimaginable heights. Maryland had just
experienced 72% rate increases because of deregulation, which contributed to the closing of Alcoa's
smelting operations in Frederick MD, and there were marches on the statehouse in Illinois as a result of
the 50% rate increase that resulted when cost based rates were replaced with market pricing.
Thankfully, those times are in the past, but that was the climate when the energy efficiency and
advanced energy provisions of PA Act 129 were enacted.
Since 2008, the utility world, in fact the entire world, has changed. All of Pennsylvania's electric utilities
are free of their rate caps. They are wires-only companies with no generation ownership entirely reliant
upon PJM and federally regulated markets to provide generation. Moreover, a global recession
destroyed industrial demand, and a shale gas boom dramatically dropped natural gas and other energy
prices, at least for the foreseeable future. It makes sense to revisit and adjust some of the more heroic
measures enacted under the extreme circumstances of 2008. A large industrial Opt Out is just such a
common sense adjustment. While some might claim such modest adjustments to the energy efficiency
provisions of existing law will no longer delay the construction of new power plants and cause
consumers to ultimately pay more, they are living in the past. With Pennsylvania's electric utilities no
longer in the power plant business, it no longer makes sense for state government to dictate how much
energy consumers should use (energy efficiency) or what kind of generation consumers should be
required to buy (advanced energy).
I thank the committee for your kind attention and consideration of my testimony and I would be happy
to answer any questions you may have.
14
"The 2012 State Energy Efficiency Scorecard", American Council for and Energy-Efficient Economy, October 2012
"The 2012 State Energy Efficiency Scorecard", American Council for and Energy-Efficient Economy, October 2012
16
"10 States Where Manufacturing Still Matters", Hess, Alexander E.M., Sauter, Michael B., and Frohlich,
Thomas C., 24/7 Wall St, USA Today, August 10, 2013
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