[Senate Hearing 111-28]
[From the U.S. Government Publishing Office]



                                                         S. Hrg. 111-28
 
                  ENERGY EFFICIENCY RESOURCE STANDARDS

=======================================================================


                                HEARING

                               before the

                              COMMITTEE ON
                      ENERGY AND NATURAL RESOURCES
                          UNITED STATES SENATE

                     ONE HUNDRED ELEVENTH CONGRESS

                             FIRST SESSION

                                   TO

 RECEIVE TESTIMONY ON ENERGY EFFICIENCY RESOURCE STANDARDS, INCLUDING 
BILL S. 548, A BILL TO AMEND THE PUBLIC UTILITY REGULATORY POLICIES ACT 
OF 1978 TO ESTABLISH A FEDERAL ENERGY EFFICIENCY RESOURCE STANDARD FOR 
RETAIL ELECTRICITY AND NATURAL GAS DISTRIBUTORS, AND FOR OTHER PURPOSES

                               __________

                             APRIL 22, 2009


                       Printed for the use of the
               Committee on Energy and Natural Resources




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               COMMITTEE ON ENERGY AND NATURAL RESOURCES

                  JEFF BINGAMAN, New Mexico, Chairman

BYRON L. DORGAN, North Dakota        LISA MURKOWSKI, Alaska
RON WYDEN, Oregon                    RICHARD BURR, North Carolina
TIM JOHNSON, South Dakota            JOHN BARRASSO, Wyoming
MARY L. LANDRIEU, Louisiana          SAM BROWNBACK, Kansas
MARIA CANTWELL, Washington           JAMES E. RISCH, Idaho
ROBERT MENENDEZ, New Jersey          JOHN McCAIN, Arizona
BLANCHE L. LINCOLN, Arkansas         ROBERT F. BENNETT, Utah
BERNARD SANDERS, Vermont             JIM BUNNING, Kentucky
EVAN BAYH, Indiana                   JEFF SESSIONS, Alabama
DEBBIE STABENOW, Michigan            BOB CORKER, Tennessee
MARK UDALL, Colorado
JEANNE SHAHEEN, New Hampshire

                    Robert M. Simon, Staff Director
                      Sam E. Fowler, Chief Counsel
               McKie Campbell, Republican Staff Director
               Karen K. Billups, Republican Chief Counsel


                            C O N T E N T S

                              ----------                              

                               STATEMENTS

                                                                   Page

Bingaman, Hon. Jeff, U.S. Senator From New Mexico................     1
Centolella, Paul A., Commissioner, Public Utilities Commission of 
  Ohio, Columbus, OH.............................................     9
Hoffman, Patricia, Acting Deputy Assistant Secretary, Office of 
  Electricity Delivery and Energy Reliability, Department of 
  Energy.........................................................     5
Manning, David J., Executive Vice President, External Affairs, 
  National Grid, Brooklyn, NY....................................    16
Nadel, Steven, Executive Director, ACEEE.........................    28
Schumer, Hon. Charles E., U.S. Senator From New York.............     2
Skains, Thomas E., Chairman, Chief Executive Officer and 
  President, Piedmont Natural Gas Company, Charlotte, NC.........    21
Wells, Rich, Vice President, Energy, The Dow Chemical Company, 
  Midland, MI....................................................    43

                                APPENDIX

Responses to additional questions................................    57


                  ENERGY EFFICIENCY RESOURCE STANDARDS

                              ----------                              


                       WEDNESDAY, APRIL 22, 2009

                                       U.S. Senate,
                 Committee on Energy and Natural Resources,
                                                    Washington, DC.
    The committee met, pursuant to notice, at 10:00 a.m. in 
room SD-366, Dirksen Senate Building, Hon. Jeff Bingaman, 
chairman, presiding.

OPENING STATEMENT OF HON. JEFF BINGAMAN, U.S. SENATOR FROM NEW 
                             MEXICO

    The Chairman. Before we go ahead and get started here, I am 
told that Senator Murkowski may not be able to be here or if 
she is, she will have to be late, so let me give a short 
statement and then call on Senator Schumer for his statement.
    The purpose of this hearing is to discuss proposals for 
establishing Federal Energy Efficiency Resource Standard for 
retail electricity and natural gas distributors and related 
issues, which Senator Schumer has introduced as S. 548, The 
Save America Energy Act sponsored by him here in the House and 
in the Senate, by Congressman Markey in the House.
    Both bills would create a Federal energy efficiency 
resource standard that would be independent of the Renewable 
Electricity Standard.
    A special draft of this renewable electricity standard will 
be considered by our committee and when we have our next 
business meeting, we hope, this next week, and it will allow 
any States that the renewable electricity standard which I am 
referring to, will allow the States to meet 20 percent of that 
requirement through energy efficiency measures.
    The committee has invited witnesses who represent diverse 
interests and opinions on a Federal EERS. We hope to learn more 
about the current efforts at the State level, where the EERS 
provisions have been enacted, and how a Federal EERS would work 
or whether efficiency standards will be combined with or linked 
to a Federal renewable electricity standard.
    So the other topics that we hope to cover include energy 
savings that we can hope to achieve through these programs, 
whether an EERS will reduce the cost of wholesale electric 
prices under a carbon cap, whether retail gas and electric 
distributors would have difficulties meeting the EERS, and what 
impact a Federal EERS would have on the level of efficiency 
investments across the board.
    So I will start with Senator Schumer and we are glad to 
have him and hear his remarks about the bill that he has 
introduced, and then following that, we will go through the 
other witnesses.
    Senator Schumer.

  STATEMENT OF HON. CHARLES E. SCHUMER, U.S. SENATOR FROM NEW 
                              YORK

    Senator Schumer. Thank you, Mr. Chairman. It's very good to 
be here. I want to first thank you, and Ranking Member 
Murkowski, Senator Menendez, all of the members of the 
committee of the very good work you are doing on such a vital 
topic in our country today, which is how do we both clean and 
reduce our energy consumption.
    The bill I have introduced with Senator Sanders would set a 
national goal for energy savings for retail electricity and 
natural gas distributors between 2012 and 2020. This goal, the 
energy efficiency resource standard is similar in structure to 
the Renewal Energy Standard that you folks will deal with later 
this week.
    The legislation I introduced, has been introduced on the 
House side by Congressman Markey and Waxman, and it included in 
their discussion draft of their energy bill released last 
month.
    Specifically it would require a 15 percent retail 
electricity savings and a 10 percent natural gas savings 
through the adoption of simple, currently available energy 
efficiency measures for a total 8 year savings to consumers of 
$170 billion and an estimated job creation of 222,000.
    An easy way of thinking about this approach is while 
Renewal Energy Standard (RES)focuses on what you burn, the Save 
America Energy Act is concerned with how much you burn. Until 
we address the demand side of the energy equation in a 
meaningful way, we are not going to be able to put our Nation 
on the right path toward a new energy economy.
    America is at a critical juncture in its history. We all 
know that we face an economic crisis like none we have 
experienced since the Depression, and at the same time we have 
tremendous opportunity to generate innovative energy industries 
to replenish job loss, as well as putting America on the path 
toward independence from foreign oil.
    A lot of talk in Washington is focused on the RES, the 
Renewable Energy Technology and Jobs, and we need to put 
similar focus on developing technologies and jobs that can be 
put into energy efficiency.
    Mr. Chairman, you will be one of the first to recognize all 
of these conservation measures in the legislation we voted on 
last year, and subsequently I applaud the committee for your 
efforts.
    So about the EERS proposal. Energy efficiency is easy. It 
is cheap. It is clean and may be just as important for our 
body, it's non-ideological. You don't get into any of the 
ideological fights.
    Energy efficiency is indeed, a low hanging fruit of energy 
policy. The Save America Energy Act would be implemented and 
enforced at the State level. It would compliment 19 existing 
State standards. My State of New York has one, which are 
already saving energy--and sparing consumer pocketbooks--across 
the country.
    It would allow States to tailor their programs to their 
specific needs, because the bill leaves it to the States to 
determine specific efficiency programs and rate structures of 
utilities to pursue, to achieve a National Standard, and 
thereby allow States to attain equal or higher efficiency 
standards should they so wish, and the ability of flexibility 
for utilities, too. They can comply with the bill through a 
variety of mechanisms. Among them, not exclusively, but just a 
sample: building codes, offering discounts and rebates for 
energy star appliances, installing programmable thermostats, 
energy efficiency lighting, better installation, and 
retrofitting and weatherizing homes.
    So the policy is not a ``one-size-fits-all.'' The Federal 
Government sets the minimum goals and lets the State decide how 
to reach them.
    Second, the EERS is cheap. It's going to save consumers, as 
I mentioned, 170 billion over 8 years on their energy bills, 
freeing up dollars that can be spent elsewhere in the economy.
    According to a study by the American Council for Energy-
Efficient Economy, the bill will create 220,000 jobs by 2020, 
and reduce the cost of comprehensive cap-and-trade policy, 
which I know this committee is concerned about, by removing the 
need to build new power plants, shrinking the number of 
existing facilities that need to be upgraded, and driving 
consumer electricity prices lower as demand falls.
    So the bill is a down payment on the type of major global 
warming legislation that Congress plans to proceed down the 
road. It compliments it, it doesn't replace it, I would add 
that.
    Third, EERS is clean. The legislation would lead to an 
overall reduction of greenhouse gas emissions, resulting in 
carbon dioxide reductions totaling about 260 metric million 
tons in 2020. That's the same as taking 43 million automobiles 
off the road for a year.
    Finally it's practical, non-ideological and could be 
implemented quickly.
    So Mr. Chairman, we know that the climate change debate has 
been contentious one that is going to take some time. But we 
also know that in these challenging times we can't afford 
politics as usual. This is something that in circumstance may 
bridge politics, hopefully even transcendent it a little bit, 
and move forward.
    It is technology neutral. It's not about coal or natural 
gas or electricity, hydro, solar, wind or any other type of 
energy. Whichever type of energy the utility uses, they have to 
use it more efficiently and distribute it more efficiently. The 
bill is about implementing an energy standard that will benefit 
States.
    By the way, we know this approach works. It has worked in 
many States: California, New York, Texas, Connecticut, Vermont 
and Nevada are very successful.
    So I hope that the committee will include this proposal, S. 
548, in comprehensive energy legislation in your plans because 
of its advantages.
    I want to thank you for the opportunity to testify.
    [The prepared statement of Senator Schumer follows:]

      Prepared Statement of Hon. Charles E. Schumer, U.S. Senator 
                             From New York
    Good morning, Mr. Chairman, Senator Murkowski and distinguished 
members of the Committee. I appreciate the opportunity to appear before 
you today to discuss S. 548, The Save American Energy Act.
    This bill, which I have introduced with Senator Sanders, would set 
a national goal for energy savings from retail electricity and natural 
gas distributors between 2012 through 2020. This goal, the energy 
efficiency resource standard (EERS), is similar in structure to the 
Renewable Energy Standard (RES). The legislation has been introduced on 
the House side by Congressmen Markey and Waxman, who have included it 
in the discussion draft of their energy bill released last month.
    Specifically, it would require 15% retail electricity savings and 
10% natural gas savings through the adoption of simple, currently 
available energy efficiency measures, for a total 8-year savings to 
consumers of $170 billion and estimated job creation of 222,000.
    An easy way of thinking about this approach is--while a renewable 
energy standard focuses on what you burn, the Save America Energy Act 
is concerned with how much you burn. And until we address the demand 
side of the energy equation in a meaningful way, we will be unable to 
put our nation on the right path towards a new energy economy.
    America is at a critical juncture in its history. We face an 
economic crisis not experienced since the Great Depression--a crisis 
that is resulting in the loss of hundreds of thousands of American jobs 
a month.
    At the same time, we have a tremendous opportunity to generate new 
innovative energy industries to replenish these job losses while 
putting America on the path towards independence from foreign oil.
    A lot of talk in Washington has focused on renewable energy 
technologies and jobs. We need to put just as much focus on developing 
technologies and jobs to implement energy efficiency.
    Mr. Chairman, you have recognized the potential for a new energy 
policy in America to turn our economic ship around--and I applaud your 
efforts.
    Today, I am here to talk about an approach that I firmly believe 
deserves this panel's consideration as part of a comprehensive overall 
energy policy. Energy efficiency is easy. It is cheap. It is clean. And 
importantly, it is non-ideological.
    First, it is easy. Energy efficiency is indeed the ``low-hanging 
fruit'' of energy policy.
    The Save American Energy Act would be implemented and enforced at 
the state level and would complement 19 existing state standards, 
including New York's, which are already saving energy--and sparing 
consumers' pocket books--across the country.
    This legislation would allow states to tailor their programs to 
their specific needs. The bill leaves it to states to determine the 
specific efficiency programs and rate structure that utilities could 
pursue to achieve the national standard, and allows the states to set 
or retain equal or higher efficiency standards.
    And the bill leaves flexibility for utilities, too. They can comply 
with the bill through a variety of mechanisms, including building 
codes, offering discounts and rebates for energy star appliances, 
installing programmable thermostats, energy efficient lighting, 
installing better installation, and retrofitting and weatherizing 
homes.
    This policy is not ``one-size-fits-all.'' The federal government 
sets the minimum goals and lets the states decide how to reach them.
    Second, the EERS is cheap. The energy savings under The Save 
American Energy Act will save consumers $170 billion over the course of 
8 years on their energy bills, freeing up dollars that can be spent 
elsewhere in the economy, giving consumer spending a much needed shot 
in the arm and creating a demand for green jobs, such as energy 
auditors, engineers, and installers of energy efficient equipment.
    According to a study by the American Council for an Energy-
Efficient Economy, the bill would create an estimated 222,000 American 
jobs by 2020.
    The bill would also reduce the cost of a comprehensive cap-and-
trade policy by removing the need to build new power plants, shrinking 
the number of existing facilities that need to be upgraded, and driving 
consumer electricity prices lower as demand falls. This bill is a down 
payment on the type of major global warming legislation that Congress 
plans to pursue down the road.
    Third, it is clean. My legislation would lead to an overall 
reduction in greenhouse gas emissions, resulting in carbon dioxide 
emissions reductions totaling approximately 260 million metric tons in 
2020--equivalent to taking 43 million automobiles off the road for a 
year.
    Finally, it is a practical, non-ideological policy that could be 
implemented quickly. We all know that the climate change debate has 
been a contentious one, and will take some time to work out a cap and 
trade policy that will accommodate the diverse range of energy sources 
across our nation.
    But we also know, in these challenging times, this country cannot 
afford politics as usual. The Save America Energy Act is a non-
ideological, common sense way to prepare the nation for the potential 
benefits of a climate change policy while creating new jobs.
    This bill is technology neutral. It is not about coal, natural gas, 
electricity, hydro, solar, wind or any other type of energy, be it 
renewable or otherwise. This bill is about implementing an energy 
standard that will benefit all states by saving them energy, money, and 
creating jobs.
    And most importantly, we know this approach works. We've seen 
successful energy efficiency resource standards already implemented in 
states like California, New York, Texas, Connecticut, Vermont, and 
Nevada.
    In conclusion, I urge the Committee to include The Save America 
Energy Act in the comprehensive energy legislation that you are 
planning. It is an easy, cheap, clean and non-ideological way of fast-
tracking a new energy economy at a time when we need it most.
    Thank you again for the opportunity to testify today.

    The Chairman. Thank you very much. Thanks for your 
leadership in putting this bill forward.
    Senator Menendez, do you have any questions of our 
colleague?
    Senator Menendez. No. I just want to compliment Senator 
Schumer for putting forth a very good idea and one that I hope 
we will move forward with.
    The Chairman. Thank you very much. We appreciate it.
    Senator Schumer. I very much appreciate the opportunity to 
testify.
    The Chairman. No problem. Let me call Panel Two forward and 
I will introduce folks as they come to take their chairs at the 
table.
    Ms. Patricia Hoffman is the Acting Deputy Assistant 
Secretary for the Office of Electricity Delivery and Energy 
Reliability in the Department of Energy, and we are glad to 
have her here.
    Mr. David Manning is Executive Vice President for External 
Affairs for the National Grid in Brooklyn, New York.
    Mr. Centolella is Commissioner with the Utility Commission 
of Ohio, in Columbus. We thank you for being here.
    Mr. Thomas Skains is the Chairman of the American Gas 
Association, and we thank you for being here.
    Mr. Steve Nadel is Executive Director of the ACEEE, here in 
Washington. He's a frequent testifier before our committee.
    Mr. Rich Wells is the Vice President for Energy with Dow 
Chemical Company in Michigan.
    Why don't we just ask each of you to take 5 or 6 minutes 
and summarize the main points you would like us to understand. 
We will hear from all 6 of you, and then we will ask some 
questions.
    So Ms. Hoffman, why don't you start off?

  STATEMENT OF MS. PATRICIA HOFFMAN, ACTING DEPUTY ASSISTANT 
     SECRETARY, OFFICE OF ELECTRICITY DELIVERY AND ENERGY 
               RELIABILITY, DEPARTMENT OF ENERGY

    Ms. Hoffman. Mr. Chairman and members of the committee, 
thank you for this opportunity to testify before you on S. 548, 
which seeks to amend the Policy Utilities Regulatory Policy Act 
of 1978 and establish a Federal Energy Efficiency Resource 
Standard for the retail electric and natural gas distributors.
    President Obama is committed to a comprehensive energy plan 
that reduces our greenhouse gas emissions and increases our 
energy security.
    We are already putting Americans to work making homes and 
buildings more energy efficient through the significant 
investment of the American Recovery and Reinvestment Act, which 
will grow our economy while cutting energy bills for American 
families.
    Over the last several decades the experiences of leading 
electric and gas utilities, third party program administrators 
and State agencies administering energy efficiency programs 
have shown that it can be a more reliable way to deliver energy 
services to electric and gas ratepayers.
    Electric and gas utilities are increasingly addressing 
energy efficiency in their resource planning and investment 
decisions. For example, the Department of Energy funded a 2008 
analysis by Lawrence Berkeley National Laboratory for the 
Western Interstate Energy Board, which found that 16 utilities 
in the western United States are planning on meeting 31 percent 
of their projected customer load growth by improvements in 
energy efficiency.
    The bill would set a national requirement for energy 
savings between 2012 and 2020 for retail distributors of both 
electricity and natural gas. These utilities would then be 
required to use cost effective energy efficiency measures in 
their resource and planning decisions.
    The saving requirement would begin in 2012 and then 
increase as energy efficiency investments accumulate over the 
next decade.
    In addition to the contribution of utility energy 
efficiency programs to the achievement of these requirements, 
there is also flexibility in the provisions that would count 
gains from more stringent building codes and equipment 
standards, as well as combined heat and power.
    Electric utility efficiency savings on their distribution 
networks are also included. Further, non-utility efficiency 
providers, including States, that instead administer efficiency 
programs using utility ratepayers funds, can participate 
through bilateral contracts.
    Cumulative rather than annual reduction targets are used, 
presumably since efficiency measures installed in the early 
years continue to save energy during the compliance period.
    A cumulative savings approach also encourages utilities to 
install energy efficiency measures with long economic lifetimes 
as they will continue to contribute to the savings requirements 
for many years.
    The administration has not completed its analysis of S. 
548, and therefore the administration does not have a position 
on it at this time. The Department does have some technical 
comments to make on the bill, particularly on its role in 
implementing the legislation if enacted.
    First, reliably delivering energy efficiency is not without 
its challenges. Experience with efficiency programs at the 
State level indicate that good evaluation, measurement and 
verification (EM&V) protocols are required to assure that 
savings from energy efficiency measures and programs are 
verified and actually achieved and maintained.
    EM&V is particularly important when energy efficiency is 
relied upon by electric and gas utilities as a resource.
    The bill requires the Department of Energy to set a 
national EM&V protocol within 1 year. Such a timeframe for the 
Department appears ambitious, especially given the extensive 
public review such a protocol will require. However the 
Department does have considerable expertise on the subject, 
including assistance to States on the design of their own EM&V 
protocols.
    Currently the Department with its partner agency, United 
States Environmental Protection Agency, is supporting a group 
of State and utility companies under the National Action Plan 
For Energy Efficiency to identify common practices and emerging 
issues on EM&V that would need to be addressed as part of any 
voluntary national or regional EM&V protocol.
    Second, the bill requires the Department to administer the 
national Energy Efficiency Resource Standard, or EERS. The 
Department notes that while the proposal will likely impose 
sizeable demands on the Department initially, this work load 
may decline over time since it's quite possible that many 
States, particularly those with existing efficiency 
requirements will choose to ask the Department for permission 
to administer the Federal standards for their State.
    Finally, the lack of any provisions to recognize the 
savings that have already achieved by ``early action'' States 
and utilities may warrant further analysis and considerations.
    This concludes my statement, Mr. Chairman, and I look 
forward to answering any questions that you and your colleagues 
may have.
    [The prepared statement of Ms. Hoffman follows:]
    Prepared Statement of Patricia Hoffman, Acting Deputy Assistant 
   Secretary, Office of Electricity Delivery and Energy Reliability, 
                          Department of Energy
    Mr. Chairman and Members of the Committee, thank you for this 
opportunity to testify before you on S. 548, which seeks to amend the 
Public Utilities Regulatory Policy Act of 1978 to establish a Federal 
energy efficiency resource standard for retail electricity and natural 
gas distributors, and for other purposes.
    President Obama is committed to a comprehensive energy plan that 
creates jobs, reduces our greenhouse gas emissions, and increases our 
energy security. An important part of that plan is to deploy the 
cheapest, cleanest, fastest energy source--energy efficiency.
    We are already putting Americans to work making homes and buildings 
more energy efficient through the significant investments of the 
American Recovery and Reinvestment Act, which will grow our economy 
while cutting energy bills for American families.
    But we need to do more.
    We also need to continue to develop more energy efficient 
technologies and find new ways of accelerating their adoption, to take 
the investments that leading States and electric and gas utilities are 
also making on energy efficiency, and to make all of these steps 
permanently part of the way we live and do business.
    Over the last several decades, the experiences of leading electric 
and gas utilities, third party program administrators, and state 
agencies administering energy efficiency show that it can be a reliable 
way to deliver energy services to electric and gas ratepayer. Electric 
and gas utilities increasingly address energy efficiency in their 
resource planning and investment decisions. For example, a DOE-funded 
2008 analysis by the Lawrence Berkeley National Laboratory for the 
Western Interstate Energy Board found that 16 utilities in the western 
United States (representing 65 percent of the load in the 12 western 
states) are planning on meeting 31 percent of their projected customer 
load growth by improvements in energy efficiency; savings from 
individual utilities' proposed efficiency activities ranged from 12 
percent to over 70 percent of load growth after ten years.
    As a strategy for delivering energy services by electric and gas 
utilities, energy efficiency offers the advantages of low cost (typical 
cost of an energy efficiency portfolio is 3 cents/kwh for saved 
energy); zero emissions including carbon; no siting and permitting 
challenges endemic for generation, transmission, or pipelines; and 
quick, incremental implementation. However, measuring the effectiveness 
of energy efficiency improvements has its challenges, such as in the 
selection of the baselines from which reductions are taken.
    S. 548 appears to build on state experience in establishing 
efficiency goals for utilities and other measures to accelerate energy 
efficiency. It would set national requirements for energy savings 
between 2012 and 2020 for retail distributors of both electricity and 
natural gas. These utilities would thus be required to use cost-
effective energy efficiency in their resource procurement and planning 
decisions.
    Retail electric and natural gas distribution utilities, limited to 
those that exceed a certain level of retail sales, would need to 
achieve a total of 15 percent cumulative electricity savings and 10 
percent cumulative natural gas savings by 2020. The savings 
requirements begin in 2012 and then increase as efficiency investments 
accumulate over the next decade. In addition to counting the 
contribution of utility energy efficiency programs to the achievement 
of these requirements, there are also flexibility provisions that would 
count the gains from more stringent building codes and equipment 
standards, as well as combined heat and power. Electric utility 
efficiency savings in their distribution networks are included. 
Further, non-utility efficiency providers, including states that 
instead administer efficiency programs using utility ratepayer funds, 
can participate through bilateral contracts.
    Cumulative rather than annual reduction targets are used, 
presumably since efficiency measures installed in early years continue 
to save energy during the compliance period. A cumulative savings 
approach also encourages utilities to install energy efficiency 
measures with long economic lifetimes as they will continue to 
contribute to the savings requirements for many years.
    S. 548 includes provisions for the Department to set implementing 
regulations, accept and review compliance reports, establish 
evaluation, measurement and verification (EM&V) protocols, and 
periodically revisit the standards if needed, among others. Alternative 
compliance payments and penalties for non-compliance are included.
    The Administration has not completed its analysis of S. 548 and 
thus the Administration does not have a position on it at this time.
    The Department has some technical comments to make on the bill, 
particularly on its role in implementing S. 548, if enacted. These 
include:

    First, reliably delivering energy efficiency is not without its 
challenges, just as any energy resource has its specific challenges. 
Experience with efficiency programs at the state level indicates that 
good evaluation measurement and verification (EM&V) protocols are 
required to assure that savings from energy efficiency measures and 
programs are verified, and are actually achieved and maintained. EM&V 
is particularly important when energy efficiency is relied upon by 
electric and gas utilities as a resource (that is deferring or avoiding 
supply-side resources), which can affect system reliability.
    The bill requires the Department to set a national EM&V protocol 
within one year. Such a timeframe for the Department appears ambitious, 
especially given the extensive public review such a protocol will 
require. However, the Department and its national labs do have 
considerable expertise on the subject, including the provision of 
assistance to states on design of their own EM&V protocols. Currently 
the Department, with its partner agency the U.S. Environmental 
Protection Agency (EPA), is supporting a group of state and utility 
members of their National Action Plan for Energy Efficiency to identify 
current practices and emerging issues in EM&V that would need to be 
addressed as part of voluntary national or regional EM&V protocol.
    Second, S. 548 requires the Department to administer the national 
EERS. The Department notes that while the proposal would likely impose 
sizable demands on the Department initially, this workload may decline 
over time since it is quite possible that many states, particularly 
those with existing efficiency requirements, will chose to ask the 
Department for permission to administer the Federal standard for their 
state.
    Finally, the lack of any provisions to recognize the savings 
already achieved by ``early action'' states and utilities may warrant 
further analysis and consideration.
    This concludes my statement, Mr. Chairman. I look forward to 
answering any questions you and your colleagues may have.

    The Chairman. Thank you very much.
    Mr. Centolella, go right ahead.

STATEMENT OF PAUL A. CENTOLELLA, COMMISSIONER, PUBLIC UTILITIES 
                COMMISSION OF OHIO, COLUMBUS, OH

    Mr. Centolella. Thank you. Mr. Chairman and members of the 
committee, on behalf of the Ohio Public Utilities Commission, 
thank you for this opportunity on Earth Day to address how to 
best improve United States energy efficiency.
    Ohio has passed bipartisan legislations requiring electric 
users to achieve energy-savings in excess of 22 percent of use 
by 2025. Today I will briefly describe the foundations of 
regulatory policy on energy efficiency, Ohio Standard and 
modifications to S. 548 to develop an effective State-Federal 
partnership, turning first to policy foundations.
    Policies that promote cost-effective efficiency 
improvements lower cost for consumers, reduce environmental 
impact, and promote national security.
    Studies have documented the large, unrealized potential to 
make cost-effective efficiency improvements. This is a case in 
which markets have not produced the economically efficient 
result. Most consumer decisions which impact energy occur 
within a context where energy efficiency is not the center 
consideration. Consumers are seeking a warmer house, light by 
which to read a book, or a new production line to expand 
production. For the consumer, natural gas and electricity use 
are often incidental to obtain these services. Building codes, 
appliance standards and utility programs have realized, and 
future Smart Grid applications could reduce significant 
savings.
    Ohio Standard is aggressive. By 2025, the standard to 
reduce annual electricity use to a level that is 13.8 million 
megawatt hours below 2007 consumption. The total energy savings 
could exceed that produced by any other States' efficiency 
standard.
    Our commission's rules allow aggressive program 
implementation by allowing utilities to bank early surplus 
energy savings. Ohio Standard is grounded in the review process 
covering assessment of potential program design and compliance.
    This public process is at least as important as the 
standards themselves. Successful programs require the support 
of stakeholders, trade allies, such as contractors and 
retailers and consumers.
    The commissions has flexibility to address conditions. A 
utility may file an application to amend a benchmark that is 
unable to meet due to the fact that it is beyond its control 
after exhausting all reasonable compliance options.
    Ohio Standard is also part of the broader set of policies. 
Energy savings in excess of efficiency benchmarks can be 
applied to Ohio's advanced energy standard, however, energy 
savings do not count in the State's renewable energy standard 
and can not be double counted in meeting multiple requirements.
    Turning to S. 548. A national standard will lead each 
utilities, which would not otherwise have done so, to implement 
cost effective energy efficiency programs. Given the benefits 
of energy efficiency, including energy efficiency only as a 
component of a renewable standard is not unlike asking LeBron 
James to play while on the bench in a championship game.
    S. 548 will fundamentally change the role of the Federal 
Government. What is needed is an expanded State-Federal 
partnership, which will require more than State implementation 
and the administration of a Federal standard.
    The States regulate gas and electric distribution rates and 
the recovery of energy efficiency program costs, accrued 
utility energy-efficiency and integrated resource plans, 
balance the expense expenditures and costs to consumers with 
the development of the Smart Grid, States will be laboratories 
for innovative approaches that could transform how consumers 
use energy.
    So I would encourage the committee to modify S. 548, to 
first exempt States from the Federal standards when the State 
has clearly defined energy efficiency benchmarks.
    Utilities or the State periodically access the maximum 
achievable cost-effective level of energy efficiency, and that 
assessment is subject to a public review.
    The State certifies that it has implemented energy-
efficiency standards and the policies designed to achieve all 
such energy-efficiency improvements and the State periodically 
reports its progress. The Federal statue may define ways that 
are cost-effective based on a total resource cost or societal 
test.
    Second, authorize States administering the Federal standard 
to modify benchmarks that cannot lead to factors beyond its 
control after exhausting all reasonable compliance options.
    Third, authorize banking of surplus energy savings.
    Finally, clarify that the State may consider energy-
efficiency would be a resource or a reduction to forecast load. 
The resource metaphor has become a barrier to appropriate 
recognition of crisis response on demand, an RPO advocacy 
requirement.
    With these modifications, S. 548 could provide a catalyst 
for State and utility action, while preserving the essential 
role of the States in regulating the delivery and retail sale 
of electricity and natural gas. These are the modifications 
which will engage States and utilities in achieving the maximum 
benefit from this legislation.
    Thank you, Mr. Chairman.
    [The prepared statement of Mr. Centolella follows:]
    Prepared Statement of Paul A. Centolella, Commissioner, Public 
               Utilities Commission of Ohio, Columbus, OH
    Mr. Chairman and Members of the Committee, thank you for the 
opportunity to speak with you on this Earth Day about how best to 
improve U.S. energy efficiency.\1\
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    \1\ This testimony reflects my views regarding general policy 
issues and does not reflect an opinion regarding any case currently 
pending before the Public Utilities Commission of Ohio.
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    Last year, the Ohio General Assembly passed bipartisan legislation 
establishing efficiency standards that will require Ohio electric 
utility energy efficiency programs to achieve energy savings in excess 
of 22% of annual energy consumption by 2025\2\ and produce more 
megawatt-hours of energy savings than are required under any other 
State's energy efficiency standard.\3\ Last week, the Ohio Commission 
adopted final rules implementing the efficiency standard, as well as a 
separate peak demand reduction standard, renewable and advanced energy 
standards, and greenhouse gas reporting and planning requirements.\4\
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    \2\ Section 4928.66, Ohio Revised Code.
    \3\ A description of different state standards is contained in: L. 
Furrey, S. Nadel, and J. Laitner. 2009. Laying the Foundation for 
Implementing a Federal Energy Efficiency Resource Standard. Appendix B. 
Washington, D.C.: American Council for an Energy Efficient Economy.
    \4\ In the Matter of the Adoption of Rules for Alternative and 
Renewable Energy Technology, Resources, and Climate Regulations, Public 
Utilities Commission of Ohio Case No. 08-888-EL-ORD, Opinion and Order 
(April 15, 2009). Under Section 4903.10, Ohio Revised Code, parties 
have thirty days to file applications for rehearing. Final rules are 
subject to review by the General Assembly's Joint Committee on Agency 
Rules.
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    I was appointed by Governor Strickland to the Ohio Commission in 
April 2007. During the twenty-five years preceding my appointment, I 
was a consultant advising utilities and regional transmission 
organizations on operational and regulatory issues and in the 
development of regional electricity markets, served as one of the 
principal policy consultants to the U.S. Department of Energy during 
the early years of electric industry restructuring, and worked as a 
Senior Attorney and the Senior Energy Policy Advisor for Ohio's 
residential utility consumer advocate.
    Today, I will briefly address the foundations of economic and 
regulatory policy related to energy efficiency, describe Ohio's energy 
efficiency standard, and address how to develop an effective State--
Federal partnership, in which Federal efficiency legislation could 
provide a catalyst for needed efficiency improvements, while preserving 
the essential role of the States in regulating the delivery and retail 
sale of electricity and natural gas.
                i. energy efficiency: a policy framework
    In the last few years, markets for natural gas and for the skills, 
materials, and fuel needed by our electric power system have become 
global. In the next few decades, demand will increase significantly for 
the services--light, heat, and drive power--that energy provides, at a 
time when we will need greater infrastructure investment and may be 
making sharp reductions in greenhouse gas emissions. These changes 
present major challenges to our ability to provide American consumers 
and businesses reliable and affordable energy services.
    Our power system will need to become both more efficient and more 
resilient, with an overlay of information and communications systems 
that are both secure and open, to foster third party innovation. This 
``smart grid'' will become the platform for more efficient pricing, 
applications that manage and reduce energy consumption, reliability 
improvements, distributed generation and storage, and plug-in vehicles. 
The electric utility of the future may look very different from today's 
power companies.
    Policies will need to both address key challenges and adapt to 
major changes in the utility industry.
    Policies that promote cost-effective energy efficiency improvements 
are an essential means of lowering energy costs for consumers, reducing 
environmental impacts, and protecting our national security. The Ohio 
Commission has long recognized that improving energy efficiency is an 
integral part of natural gas policy. Ohio's electric efficiency 
standard represents the minimum efficiency savings required by statute. 
The Commission's rules are designed to require electric utilities to 
deploy all cost-effective energy efficiency measures.\5\
---------------------------------------------------------------------------
    \5\ In the Matter of the Adoption of Rules for Alternative and 
Renewable Energy Technology, Resources, and Climate Regulations, Public 
Utilities Commission of Ohio Case No. 08-888-EL-ORD, Opinion and Order 
(April 15, 2009) at 6.
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    Many studies have documented a large, unrealized potential to make 
additional cost-effective efficiency improvements. This potential 
represents a case in which markets by themselves have not produced the 
economically efficient result. Most consumer decisions which impact 
energy use occur in a context where energy efficiency is not the 
central consideration. Consumers are seeking a warm house, light by 
which to read a book, or a new assembly line to expand production. 
Natural gas and electricity are used only as a means to obtain these 
services. Well designed utility energy efficiency programs can address 
market failures.\6\
---------------------------------------------------------------------------
    \6\ For a more detailed discussion, see: In the Matter of the 
Application of Vectren Energy Delivery of Ohio, Inc., Public Utilities 
Commission of Ohio Case No. 05-1444-GA-UNC, Supplemental Opinion and 
Order, Concurring Opinion of Commissioners Centolella and Lemmie, (June 
27, 2007).
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    Historically, building codes and appliance efficiency standards, 
which set a floor for efficient energy use, and utility programs that 
pull more efficient technologies into the market have been among the 
most effective means to encourage improvements in energy efficiency. In 
the future, near real time feedback to consumers regarding their energy 
use and other non-utility applications, which may ride on a smart grid 
platform, could transform the efficiency with which consumers use 
energy. Our policies should be sufficiently flexible to adapt to such 
change, as it occurs on a state-by-state basis.
                 ii. ohio's energy efficiency standard
    On May 1, 2008, Ohio Governor Ted Strickland signed into law Senate 
Bill 221 to maintain ``predictable and affordable electricity rates'' 
and ``aggressively attract renewable and advanced energy investment in 
Ohio in order to create jobs and recognize the influence of global 
climate change.''\7\ Ohio's new electricity law contains an energy 
efficiency standard and a separate peak demand reduction standard that 
significantly alter the trajectory of changes in annual electricity 
consumption, measured in megawatt-hours per year, and peak demand, the 
highest quantity of megawatts delivered at any point during the year.
---------------------------------------------------------------------------
    \7\ Gov. Ted Strickland, Press Release (April 22, 2008).
---------------------------------------------------------------------------
    Ohio law requires the Commission to promote and encourage energy 
conservation.\8\ Our new electricity law also makes it state policy to 
``encourage innovation . . . demand-side management, time-
differentiated pricing, and implementation of advanced metering 
infrastructure'' and requires the Commission to effectuate this 
policy.\9\
---------------------------------------------------------------------------
    \8\ Section 4905.70, Ohio Revised Code.
    \9\ Sections 4928.02(D) and 4928.06(A), Ohio Revised Code.
---------------------------------------------------------------------------
    Ohio's efficiency standard requires each electric utility to 
implement energy efficiency programs that achieve energy savings that 
meet or exceed annual benchmarks. Beginning in 2009, each utility is 
required to implement energy efficiency programs that achieve energy 
savings equal to three-tenths of one percent of energy delivered during 
a rolling three year baseline. The savings requirement is an additional 
five-tenths of a percent in 2010, seven-tenths of one per cent in 2011, 
eight-tenths of one per cent in 2012, nine-tenths of one per cent in 
2013, one per cent from 2014 to 2018, and two per cent each year 
thereafter, achieving a cumulative, annual energy savings in excess of 
twenty-two per cent by the end of 2025.\10\ The baseline is the rolling 
average of total, annual, and normalized kilowatt-hour sales of 
distribution service during the three calendar years preceding the 
compliance year.\11\
---------------------------------------------------------------------------
    \10\ Section 4928.66(A)(1)(a), Ohio Revised Code.
    \11\ In the Matter of the Adoption of Rules for Alternative and 
Renewable Energy Technology, Resources, and Climate Regulations, Public 
Utilities Commission of Ohio Case No. 08-888-EL-ORD, Final Rules at 
Chapter 4901:1-39.
---------------------------------------------------------------------------
    Based on the Commission's 2008 forecast of expected load growth and 
assuming no further improvements in appliance standards or building 
codes, meeting these efficiency standards could reduce Ohio's total 
annual electricity use by 2025 to a level that is below 2007 
electricity consumption by more than 13.8 million megawatt-hours.
    In addition to the energy efficiency standard, each utility must 
implement peak demand reduction programs designed to achieve a one per 
cent reduction in peak demand in 2009 and an additional seventy-five 
hundredths of one per cent reduction each year through 2018.\12\
---------------------------------------------------------------------------
    \12\ Section 4928.66(A)(1)(b), Ohio Revised Code.
---------------------------------------------------------------------------
    In addition to traditional utility efficiency programs, such as 
information, financing, and rebate programs, utilities may meet these 
standards based on energy savings (or in the case of the peak demand 
reduction standard, demand reductions) from:

   The commitment of mercantile customer energy savings to 
        utility programs: Large commercial and industrial customers can 
        enter into arrangements with a utility allowing the utility to 
        count savings in excess of what could have been achieved by 
        adopting industry standard new equipment or practices.\13\
---------------------------------------------------------------------------
    \13\ Given that these customer initiated investments are outside of 
planned utility programs, our rules do not attempt to quantify savings 
from what might be claimed to be acceleration in the purchase of new 
equipment, prior to the end of the useful life of existing equipment.
---------------------------------------------------------------------------
   Transmission and distribution investments that reduce line 
        losses: The utility may count the net impact on losses of such 
        improvements.
   Demand response programs: Demand response involves a change 
        in customer demand as a result of price signals or other 
        incentives.

    An electric utility may not count toward meeting its benchmarks 
measures that must be adopted to comply with appliance or equipment 
standards or an applicable building code.\14\
---------------------------------------------------------------------------
    \14\ Additionally, behind-the-meter generation is not counted 
towards meeting Ohio's peak demand reduction or energy efficiency 
standards.
---------------------------------------------------------------------------
    The Commission's rules allow utilities to bank surplus energy 
savings and apply those savings toward meeting a subsequent year's 
energy efficiency benchmark. Banking encourages aggressive 
implementation of efficiency programs and eliminates any incentive for 
utilities to interrupt programs when annual benchmarks have been met or 
to pursue only minimal compliance.\15\
---------------------------------------------------------------------------
    \15\ In the Matter of the Adoption of Rules for Alternative and 
Renewable Energy Technology, Resources, and Climate Regulations, Public 
Utilities Commission of Ohio Case No. 08-888-EL-ORD, Final Rules at 
Section 4901:1-39-05(E).
---------------------------------------------------------------------------
    Ohio law gives the Commission flexibility to address changing and 
unanticipated conditions that may emerge during the implementation of 
the standard. For example, a utility may file an application to amend 
its benchmark, if it is unable to meet the benchmark due to regulatory, 
economic, or technological reasons beyond its reasonable control.\16\ 
In any such application, the utility must demonstrate that it has 
exhausted all reasonable compliance options.\17\ The law allows the 
Commission to reduce a utility's baseline to account for new economic 
growth.\18\ However, the Commission has said that, ``We expect that any 
baseline adjustments made to account for economic growth typically will 
be temporary, and will address circumstances in which unanticipated 
increases in the overall rate of growth have made full compliance 
infeasible. We also expect that any adjustments will account not only 
for positive economic growth, but also negative economic growth.''\19\ 
Additionally, baseline sales will be normalized for weather and for 
other impacts on numbers of customers, sales, and peak demand that are 
outside of the utility's control.
---------------------------------------------------------------------------
    \16\ Section 4928.66(A)(2)(b), Ohio Revised Code.
    \17\ In the Matter of the Adoption of Rules for Alternative and 
Renewable Energy Technology, Resources, and Climate Regulations, Public 
Utilities Commission of Ohio Case No. 08-888-EL-ORD, Final Rules at 
Section 4901:1-39-05(F).
    \18\ Section 4928.66(A)(2)(a), Ohio Revised Code.
    \19\ In the Matter of the Adoption of Rules for Alternative and 
Renewable Energy Technology, Resources, and Climate Regulations, Public 
Utilities Commission of Ohio Case No. 08-888-EL-ORD, Opinion and Order 
(April 15, 2009) at 18.
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    The standards are embedded within a public process that provides 
for Commission review of utility program planning and compliance. This 
review process is as important as the standards themselves. The success 
of efficiency programs is measured by their ability to influence 
consumer behavior. Successful utility programs require the support of 
stakeholders, trade allies such as building contractors and retailers, 
and the public. Commission review provides an opportunity for public 
input and a transparent process for assessing what works in a specific 
local environment.
    Utilities must complete an assessment of the technical, economic, 
and achievable potential for reducing energy usage and peak demand 
through cost-effective measures and programs. Every three years, each 
utility must file a comprehensive program portfolio which meets or 
exceeds its efficiency benchmarks and includes programs for all 
customer classes that encourage innovation and market access for all 
cost-effective energy efficiency.\20\ The Commission will hold hearings 
to review these assessments and program portfolio plans.
---------------------------------------------------------------------------
    \20\ In the Matter of the Adoption of Rules for Alternative and 
Renewable Energy Technology, Resources, and Climate Regulations, Public 
Utilities Commission of Ohio Case No. 08-888-EL-ORD, Final Rules at 
Sections 4901:1-39-03 and 39-04.
---------------------------------------------------------------------------
    Cost-effectiveness is measured under a ``total resource cost test'' 
which compares avoided supply costs to demand-side measure and program 
costs borne by the utility and participants.\21\ And, the utility may 
propose additional programs that provide substantial non-energy 
benefits, including low income customer participation, emission 
reductions not fully reflected in cost savings, or enhanced system 
reliability.\22\
---------------------------------------------------------------------------
    \21\ For a complete definition, see: In the Matter of the Adoption 
of Rules for Alternative and Renewable Energy Technology, Resources, 
and Climate Regulations, Public Utilities Commission of Ohio Case No. 
08-888-EL-ORD, Final Rules at Section 4901:1-39-01 (W).
    \22\ In the Matter of the Adoption of Rules for Alternative and 
Renewable Energy Technology, Resources, and Climate Regulations, Public 
Utilities Commission of Ohio Case No. 08-888-EL-ORD, Final Rules at 
Sections 4901:1-39-04(B) and 39-01 (O).
---------------------------------------------------------------------------
    Each utility is required to file an annual status report that 
includes a measurement and verification report by an independent 
program evaluator.\23\ The public may comment on these reports. The 
Commission's Staff will review the status reports and comments and 
publish its findings and recommendations regarding program 
implementation and compliance. The Commission may hold public hearings 
on a utility's status report. And, the Commission will file an annual 
verification report regarding benchmark compliance as required by 
statute.\24\
---------------------------------------------------------------------------
    \23\ In the Matter of the Adoption of Rules for Alternative and 
Renewable Energy Technology, Resources, and Climate Regulations, Public 
Utilities Commission of Ohio Case No. 08-888-EL-ORD, Final Rules at 
Section 4901:1-39-05.
    \24\ In the Matter of the Adoption of Rules for Alternative and 
Renewable Energy Technology, Resources, and Climate Regulations, Public 
Utilities Commission of Ohio Case No. 08-888-EL-ORD, Final Rules at 
Section 4901:1-39-06.
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    To summarize, Ohio's energy efficiency standard requires a 
comparable or greater annual percentage of electric efficiency savings 
and more total megawatt-hours of energy savings than any other State 
efficiency standard. The maximum additional annual savings under the 
Ohio standard is two-percent per year. Although it considers 
improvements in the compliance year attributable to appliance and 
building standards, S. 548 requires at least two-and-one-half percent 
savings in years 2018 through 2020. Unlike Ohio's rules, S. 548 does 
not appear to authorize banking of surplus energy savings.\25\ And, S. 
548 covers gas as well as electric utilities.
---------------------------------------------------------------------------
    \25\1A In certain circumstances, S. 548 permits limited bilateral 
transfers of savings among utilities in a single state or electric 
utilities in a single power pool. The Oho Commission has considered 
authorizing a more flexible trading system using energy efficiency 
credits. However, we are not aware of an available and suitable energy 
efficiency credit tracking program. We will reconsider the issue should 
such a program be created. In the Matter of the Adoption of Rules for 
Alternative and Renewable Energy Technology, Resources, and Climate 
Regulations, Public Utilities Commission of Ohio Case No. 08-888-EL-
ORD, Opinion and Order (April 15, 2009) at 23.
---------------------------------------------------------------------------
    Ohio's efficiency standard is grounded in a public review process 
at the Commission covering the assessment of efficiency potential, 
program planning, and compliance. Our statute gives the Commission 
flexibility to respond to unforeseen and changing local conditions.
    Finally, Ohio's energy efficiency standard is part of a broader set 
of State and Commission policies. It complements standards for peak 
demand reduction, renewable and advanced energy resources. Demand-side 
management and energy efficiency improvements in excess of what are 
required to meet Ohio's efficiency standard can be applied to Ohio's 
advanced energy requirement.\26\ However, energy savings are not 
counted toward meeting the renewable energy standard and cannot be 
double counted to meet multiple requirements.\27\
---------------------------------------------------------------------------
    \26\ Section 4928.01(34)(g), Ohio Revised Code.
    \27\ In the Matter of the Adoption of Rules for Alternative and 
Renewable Energy Technology, Resources, and Climate Regulations, Public 
Utilities Commission of Ohio Case No. 08-888-EL-ORD, Final Rules at 
Sections 4901:1-40-01(M) and 4901:1-40-04(D)(4)
---------------------------------------------------------------------------
    The Commission has approved smart grid proposals and utility scale 
Advanced Metering Infrastructure (AMI) deployments for Duke Energy Ohio 
and American Electric Power.\28\ These investments will provide 
capabilities needed to implement efficient retail pricing and support 
applications giving consumers real-time feedback regarding their energy 
use. The challenges we face require us to pursue a range of policies in 
different regulatory and policy frameworks.
---------------------------------------------------------------------------
    \28\ In the Matter of the Application of Duke Energy Ohio, Inc., 
for Approval of an Electric Security Plan, Public Utilities Commission 
of Ohio Case No. 08-920-EL-SSO, Opinion and Order (December 17, 2008); 
In the Matter of the Applications of Columbus Southern Power Company 
and Ohio Power Company for Approval of an Electric Security Plan, 
Public Utilities Commission of Ohio Cases No. 08-917-EL-SSo and 08-918-
EL-SSO, Opinion and Order and Concurring Opinion of Chairman Alan R. 
Schriber and Commissioner Paul A. Centolella (March 18, 2009).
---------------------------------------------------------------------------
    Our Commission has avoided treating energy efficiency only ``as a 
resource in utility planning.'' Treating energy efficiency as a 
resource provided a useful way of talking about utility efficiency 
programs in the context of Integrated Resource Planning, as it was 
widely practiced in the 1980s and continues to be used in more limited 
contexts today. However, the metaphor that demand-side measures are 
resources, just like generation, has been a barrier to the recognition 
of price responsive demand in Regional Transmission Organization (RTO) 
resource adequacy rules and could threaten investments in AMI and smart 
grid. ``Price responsive demand'' is the predictable response of 
consumers on dynamic retail rates that reflect increases in wholesale 
prices. While the demand of these consumers falls when spot prices 
increase, these predictable demand reductions are not dispatched by an 
RTO system operator and may not qualify as an RTO ``resource.`` The 
Ohio Commission is working closely with the PJM Interconnection, 
L.L.C., and the Midwest Independent Transmission System Operator to 
reform RTO tariffs to treat price responsive demand as a component of 
the demand forecast, rather than as a resource.\29\
---------------------------------------------------------------------------
    \29\ For a detailed discussion of these reforms, see: P. Centolella 
and A. Ott. March 9, 2009. The Integration of Price Responsive Demand 
into PJM Wholesale Power Markets and System Operations. (Available at: 
http://www.hks.harvard.edu/hepg/). See also: P. Centolella. November 
13, 2008. Tariff Proposal on Price Responsive Demand. (Available at: 
http://www.midwestiso.org/publish/Document/45e84c_11cdc615aa1_-
7ad10a48324a?rev=1).
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   iii. principles for evaluating federal energy efficiency resource 
                               standards
    A national standard for utility energy efficiency program savings 
will lead utilities, which might not otherwise have done so, to 
implement cost-effective energy efficiency programs. Many utilities do 
not see running significant efficiency programs for their customers as 
part of their core business. And, utilities with generation affiliates 
selling power at market-based prices have an additional disincentive to 
undertaking efficiency programs. Efficiency improvements, at least in 
the short run, will tend to place downward pressure on generation 
prices. Ratemaking reforms that decouple retail distribution rates from 
sales volumes do nothing to address this disincentive.
    I strongly support expanding utility energy efficiency programs. 
Any energy efficiency standard should be separate from Renewable Energy 
Portfolio Standards.
    However, the Committee must consider whether S. 548 will advance 
energy efficiency in a cost-effective and administratively efficient 
manner. The uniform Federal standard created by S. 548 fundamentally 
changes the role of the Federal government with respect to the 
distribution and retail sale of electricity and natural gas. This 
results in three fundamental inconsistencies that could limit the 
proposal's effectiveness and lead to delays and unnecessary litigation.
    First, the bill would set a single uniform standard for programs at 
all utilities. This standard will ``reflect the maximum achievable 
level of cost-effective energy efficiency potential.''\30\ The bill 
effectively requires the Secretary to set the floor for the minimum 
savings that utility programs must achieve, at his best estimate of the 
maximum achievable cost-effective savings. Prices, resource 
requirements, load growth, climate, the utilities' customer bases, 
consumer attitudes, existing equipment and buildings, building codes, 
the rate of adoption of new technology, and current levels of 
efficiency vary significantly from utility to utility. A uniform 
standard set at maximum achievable levels is likely to mean that many 
utilities will be unable to comply.
---------------------------------------------------------------------------
    \30\ While the initial standards are fixed, the bill would require 
the Secretary to review and the maximum achievable level in 2014, 2018, 
and at subsequent ten year intervals. S. 548 at Sections 610 (c)(3)(C) 
and 610 (c)(4)(A).
---------------------------------------------------------------------------
    Second, the fundamental objective is to improve energy efficiency. 
However, the proposed standard is based on only efficiency improvements 
resulting from utility programs, codes, and standards. If an efficiency 
improvement is not among the specified ``types of energy efficiency and 
energy conservation measures that can be counted''\31\ or, except in 
the case of codes and standards, the utility cannot demonstrate that it 
``played a significant role in achieving the savings,''\32\ savings 
would not be counted toward meeting the standard. This could have the 
perverse effect of discouraging continuing efficiency improvements 
without the direct involvement of the utility.
---------------------------------------------------------------------------
    \31\ S. 548 at Section 610 (e)(1)(A).
    \32\ S. 548 at Section 610 (e)(1)(I).
---------------------------------------------------------------------------
    Third, the bill would set a high standard for savings yet any 
flexibility in compliance is limited to opportunities for bilateral 
transactions and alternative compliance payments in jurisdictions where 
State administration has been approved. Experience with similar 
approaches in environmental regulation suggests the result could be 
delay and extended litigation. This risk could be minimized with state 
regulatory oversight and expanded opportunities for banking and trading 
surplus savings.
    These inconsistencies can be resolved through an expanded State--
Federal energy efficiency partnership. The states are committed to 
building such a relationship.
    The involvement and support of state regulators is essential to the 
success of utility efficiency programs. States regulate gas and 
electric distribution rates and the recovery of energy efficiency 
program costs; determine rate design and mitigate utility disincentives 
to achieving energy savings; review and approve utility energy 
efficiency and integrated resource plans; and balance utility 
expenditures with their impact on the costs paid by consumers and 
businesses. State commission proceedings foster public involvement and 
stakeholder support for efficiency programs. And, state commissions are 
in a position to act on their unique knowledge of local and utility-
specific conditions.
    Moreover, the electric power industry is beginning a period in 
which significant changes are likely to occur. With the development of 
a smart grid, there will be new opportunities to enhance energy 
efficiency. And, the prospect of greenhouse gas regulation will focus 
significant attention on improving energy efficiency. This is a time to 
encourage innovative approaches to efficiency improvement. States are 
the natural laboratory for such experimentation.
    An expanded State--Federal efficiency partnership requires more 
than delegation to the states of the administration of a Federal 
standard. Decisions regarding what is maximum achievable cost-effective 
potential and how to pursue it, if at all possible, should be made 
first at the State level.
    Specifically, I would encourage the Committee to modify to S. 548 
to:

   Exempt states from the Federal standard and authorize them 
        to implement state requirements where:

    --The State has set, in any form, clearly defined energy efficiency 
            benchmarks;
    --Utilities or the State periodically assess the maximum achievable 
            cost-effective level of energy efficiency improvements and 
            that assessment is subject to public review;
    --The State certifies to the Secretary of Energy that the State has 
            implemented energy efficiency standards and policies 
            designed to achieve maximum achievable cost effective 
            energy efficiency improvements; and
    --The state periodically reports progress toward achieving its 
            benchmarks.

    For purposes of the exemption, cost effective measures and programs 
may be defined by Federal statute as based on a total resource cost or 
societal test.

   To the extent that a State does not develop its own 
        benchmarks, but adopts and administers the proposed Federal 
        standard, authorize the State commission to modify a utility's 
        benchmarks where the utility is unable to meet the benchmark 
        due to regulatory, economic, or technological reasons beyond 
        its reasonable control and has exhausted all reasonable 
        compliance options.
   Authorize banking of surplus energy savings for use in 
        meeting any subsequent year's benchmark.
   Clarify that States may consider energy efficiency to be a 
        resource or a reduction to forecast load for purposes of 
        utility planning and procurement.

    Modified in this manner, a national standard could provide a 
catalyst for state and utility actions to expand cost-effective energy 
efficiency programs, while preserving the essential role of the states 
in regulating the delivery and retail sale of electricity and natural 
gas.

    The Chairman. Thank you very much.
    Mr. Manning, go right ahead, please.

   STATEMENT OF DAVID J. MANNING, EXECUTIVE VICE PRESIDENT, 
         EXTERNAL AFFAIRS, NATIONAL GRID, BROOKLYN, NY

    Mr. Manning. Mr. Chairman and members of the committee, 
thank you very much for including us in this very important 
panel on Earth Day. I want to point out that the National Grid 
is a large supplier of electric and gas in the Northeast. We 
serve approximately 15 million people, with customers 
everywhere from New York to New Hampshire. So we're very 
focused on these issues. We also have about a 30-year track 
record in doing energy-efficiency programming. Also Governor 
Shaheen was helpful in her Governorship in terms of advancing 
that cause, so I want to thank her through the committee.
    We also want to thank our own Senator Schumer for shedding 
the light and putting a spotlight on the energy-efficiency 
issue. There has been a lot great deal said about renewals. 
There is a great discussion about climate change, about cap-
and-trade, and we appreciate the opportunity to focus on energy 
efficiency. It is those two things which provide the most cost 
effective and immediate opportunity.
    That said, we do believe, sir, that all options must be on 
the table. We need a more expansive, robust energy-efficiency 
program, coupled with renewable energy, including wind, solar, 
biomass and thermal, but most importantly the American public 
has been captured by a great term, Smart Grid. It is not always 
understood, but my hat is off to whoever came up with that name 
because it has captured the attention of the public.
    Smart Grid is necessary to connect renewables, which will 
not always be near the load center and to facilitate the type 
of technologies we talk about today in terms of energy-
efficiency.
    So we need a more robust transmission system which is 
smarter, self diagnosis, power goes both ways. We need energy-
efficiency technology, and that of course, is the essence of 
our conversation today. We also need clean, or low-emitting 
base-load power generation, such as nuclear, hydroelectric, 
natural gas and emerging clean coal technologies will lower 
emissions, lower bills, and of course, reduce our dependency on 
foreign sources of energy.
    Today climate change has captured the attention. We think 
energy-efficiency is, for us, most effective because it is 
cost-effective, it avoids new power plants, it lowers 
greenhouse gases and it insures consumers longer term savings 
in our energy policy.
    To that end, a number of years ago, in an economic forum, 
this debate was raging in terms of whether or not you could do 
that with efficiency without bankrupting the country, and we 
didn't have this standard data at that time. So we partnered 
with DTE, PG&E from California, we partnered with the 
Environment Case Fund. We partnered with NRDC, Honeywell, 
Shell; companies with real expertise, and retained McKinsey & 
Co, who spent over a year doing a thorough study of energy-
efficiency which was released in 2007, and you'll find what I 
call the Mackenzie Curve, at the back of my testimony.
    This is a very important report because it was vetted by 
academics at Texas A&M, California Davis, MIT, Princeton. So I 
want to just draw your attention for a moment. What it does, 
was it demonstrated that we can take--it was focused on 
abatement. The focus of the study was focused on energy-
efficiency technology, demonstrated we could take a tremendous 
amount of energy consumption and CO2 emissions out 
of the economy without changing our lifestyle. There was not 
significant change of lifestyle. What you can see on the left 
is computers, commercial electronics, lighting, those have an 
immediate payback, which is substantial.
    So that lower curve showed that they have a negative cost. 
They saved themselves immediately. Over 40 percent of the 
technologies listed pay for themselves in their life time.
    On the right side are the more aggressive or more 
difficult, where we actually have to spend some money. But 
almost half of the technologies enumerated are cost-effective 
and pay for themselves.
    What we've been able to do ourselves is take approximately 
48,000 cars off the road through energy-efficiency program, 
both gas and electric, that we've been engaged in over the last 
30 years as a company.
    Now admittedly, there are more needs because the entire 
energy prices that belong in the pipe. The market is aware of 
that, but we've also had the opportunity with good programs, 
and of course, that brings us to the utility.
    Decoupling is a rate program which is helpful in getting 
the utilities not only on the way to these kinds of 
improvements, but supportive of energy-efficiency improvement. 
So that kind of rate structure work is important to make sure 
everybody is focused on getting this done.
    We also want to point out that there is an opportunity to 
submit an expansion, and again, my friend to my left from the 
AGA will address this, I am sure, that there is a great 
opportunity for natural gas in terms of energy-efficiency 
through technologies, including generation and provides power 
technology, distributive generation, providing power.
    Also in terms of fuel searching, I raise that because 
National Grid, we are the power and energy company of the 
Northeast. We still have a lot of oil heat. Of course, in the 
Northeast, that oil is almost entirely sourced from the Middle 
East, and we, last year alone, converted over 60,000 homes and 
businesses from oil to gas. Each time that happens, there is a 
40 percent reduction in nox-ox and SO2.
    So that's an important issue. We shouldn't lose that 
opportunity, but I am going to leave that to the AGA.
    So Mr. Chairman, thank you very much for your attention. We 
are anxious to answer your questions and we appreciate this 
opportunity.
    [The prepared statement of Mr. Manning follows:]

   Prepared Statement of David J. Manning, Executive Vice President, 
              External Affairs, National Grid, Brooklyn NY
    Chairman Bingaman, Ranking Member Murkowski, and Members of the 
Committee, thank you for including National Grid in this very important 
hearing on energy efficiency resource standards.
    National Grid is an international energy delivery company. In the 
U.S., National Grid delivers electricity to approximately 3.3 million 
customers in Massachusetts, New Hampshire, New York and Rhode Island, 
and operates the electricity transmission and distribution network on 
Long Island, serving an additional 1.1 million customers. We are the 
largest distributor of natural gas in the northeastern U.S., serving 
approximately 3.4 million customers in Massachusetts, New Hampshire, 
New York and Rhode Island. National Grid also owns and operates over 
4,000 megawatts of electricity generation under contract with the Long 
Island Power Authority.
    May I first congratulate you and your Congressional colleagues for 
your focus and success with important initiatives on energy efficiency, 
renewable energy, infrastructure such as smart grid, and other critical 
energy support in the American Recovery and Reinvestment Act (ARRA). 
The $3.1 billion in state matching grants for energy efficiency, the 
funding for weatherization assistance, and the funding for efficiency 
improvements at affordable housing units are critical steps towards 
moving energy efficiency to the forefront of a comprehensive national 
energy policy.
    Over $1 billion of efficiency funding is available to the four 
states we serve through the ARRA. Senator Shaheen was especially 
helpful in shaping the ARRA weatherization and state energy program 
provisions. Just a few weeks ago, Senator Shaheen announced that New 
Hampshire will receive $23 million for weatherization assistance and 
$26 million for its state energy program. We at National Grid are proud 
to be working with New Hampshire state and local officials as well as 
their counterparts in New York, Massachusetts and Rhode Island on this 
vital effort to create jobs and help residents and businesses save 
money through energy efficiency.
    Mr. Chairman, we also appreciate the directional approach outlined 
in your draft Renewable Electricity Standard (RES) bill, which creates 
incentives for energy efficiency and renewable energy. We have always 
said that we need a balanced approach to energy overall--all options 
must be on the table. We need more expansive, robust energy efficiency 
programs. We need significant new sources of renewable energy: wind, 
solar, biomass and geothermal. We need a comprehensive strategy to 
address our transmission infrastructure, including policies that will 
enable us to bring renewable energy resources, which are often 
isolated, to dense urban areas and other load centers. We need smart 
grid technology and smart meters to maximize the potential of current 
and future energy efficiency technologies to automate the most 
efficient use of energy and to remotely turn demand off during peak use 
and pricing periods. These actions, combined with clean, no-or low-
emitting base-load power generation such as nuclear, hydroelectric, 
natural gas and emerging clean coal technologies, will lower emissions, 
lower customers' bills and play an important role in an effective 
national energy policy.
    While a national energy strategy must be multifaceted, my comments 
today will focus on energy efficiency. National Grid stands with many 
other energy providers, particularly those who belong to the Clean 
Energy Group, and the environmental community in recognizing that 
energy efficiency uniquely addresses many of our nation's core energy 
issues--it is more cost-effective than building new power plants, has 
the potential to dramatically lower greenhouse gas emissions and 
provides consumers with long-term savings on their energy bills.
    We thank this panel and the efforts of Senator Schumer with his 
introduction of S. 548 to shine the spotlight directly on energy 
efficiency. While renewable energy and an RES have rightly captured the 
attention and expectation of the American public, energy efficiency 
also deserves our focused attention. The American Council for an Energy 
Efficient Economy (ACEEE) estimates that Senator Schumer's EERS bill 
would save Americans $168 billion, create over 220,000 jobs, and reduce 
global warming pollution by the equivalent of removing 48 million cars 
from the road. In National Grid's service area alone, ACEEE projects 
that customers would save an additional $5.3 billion and create nearly 
7,000 jobs by 2020.
    National Grid's experience throughout the Northeast demonstrates 
that cost-effective energy efficiency measures are ready to be deployed 
today with the right mix of policies and incentives. We have decades of 
experience in delivering low-cost energy savings, which we believe can 
be replicated throughout the country. The certainty available from 
federal legislation, a state regulatory compact that encourages energy 
efficiency, the ability to rate base energy efficiency technologies in 
order to expedite and expand their market penetration and a tax and 
grant structure designed to stimulate investment will all assure the 
success of a concerted effort to use energy more efficiently.
    Let me begin with the simple facts on the cost-effectiveness of 
energy efficiency. Energy efficiency can cost as little as 3 cents per 
kWh saved, while electricity costs 6 to 12 cents per kilowatt hour. 
Thus, energy efficiency measures are often the most effective way to 
avoid unnecessary energy supply investments and lower customers' energy 
bills on a sustainable basis. Despite the obvious advantages of energy 
efficiency, we spend about $215 billion annually in the United States 
on the production of electricity, but invest only $3.2 billion in 
securing electricity savings through efficiency programs. The savings 
are similar for natural gas, where efficiency measures cost $1 to $2 
per thousand cubic feet (Mcf), compared to a typical market cost 
ranging from $6 to $8 per Mcf. Yet we spend approximately $91 billion 
annually on natural gas supplies and only $530 million annually on 
natural gas efficiency.
    A recent study by the Electric Power and Research Institute shows 
the potential for realizing energy efficiency savings. By analyzing the 
impact of codes and standards, as well as market driven efficiency, the 
study shows measurable reductions in energy consumption. Opportunities 
in the EPRI study range from commercial lighting to massive reductions 
in consumption through residential appliances and standby wattage. The 
full EPRI study can be found at http://my.epri.com/portal/
server.pt?Abstract_id=000000000001016987.
    Energy efficiency is also a critical tool for addressing climate 
change. National Grid, in partnership with other leading energy 
companies such as PG&E, DTE, Honeywell and Shell, and environmental 
groups such as the Natural Resources Defense Council and Environmental 
Defense, worked with McKinsey & Co to evaluate the potential for energy 
efficiency in the U.S. The landmark study ``Reducing U.S. Greenhouse 
Gases: How Much, At What Cost?'' found that the U.S. can make 
substantial emission reductions by 2030 without damaging the economy 
with the help of energy efficiency. A chart* summarizing the study is 
attached, and the report itself is available via www.mckinsey.com/mgi/
publications/Curbing_Global_Energy/executive_summary.asp.
---------------------------------------------------------------------------
    * Graphic has been retained in committee files.
---------------------------------------------------------------------------
    National Grid knows first hand that the benefits of energy 
efficiency are real. For example, National Grid has efficiency programs 
in place that are saving customers over $300 million annually, after an 
expenditure of more than $1.5 billion on efficiency technologies--an 
excellent investment with a rapid 5-year payback. As a result of these 
programs, more than 4.7 million National Grid customer projects have 
been completed to date, often with a payback period of five years or 
less, and saving more than $3.6 billion in energy costs. This includes 
converting almost all of Boston's public schools from oil to natural 
gas, helping cash strapped schools focus their limited resources on 
education, and residential boiler conversions that reduce 
CO2 and other emissions by up to 40%. In 2007 alone, our gas 
programs saved 4.6 million therms and avoided 27,000 tons of 
CO2 and our electricity program saved 380,000 megawatt-
hours, avoiding 218,000 tons of CO2. The total carbon 
emissions equate to 48,000 cars off the road for a year.
    We expect National Grid's efficiency programs to enjoy significant 
growth during the next several years as we expand our New England and 
downstate New York programs and develop new programs in Upstate New 
York. Our spending on efficiency is forecast to more than double over 
the next five years, reaching approximately $700 million in 2014. This 
increase reflects our commitment to energy efficiency, as well as the 
supportive regulatory environment in the states we serve. The Regional 
Greenhouse Gas Initiative signals the commitment of the northeastern 
states to address climate change and pursuing energy efficiency is a 
major component of meeting the new requirements. State legislation is 
also driving energy efficiency investment, with New York, Rhode Island, 
and Massachusetts all adopting groundbreaking energy efficiency 
policies and programs over the last few years, and New Hampshire 
continuing to build upon the efficiency goals of its comprehensive 
energy plan. These changes have enabled us to pursue new approaches, 
such as partnering in solar initiatives and offering efficiency 
programs which integrate the delivery of electric and gas efficiency 
for the first time.
    While spending on energy efficiency is increasing, it remains but a 
small fraction of what the total country spends on energy requirements, 
effectively leaving billions of dollars in potential savings on the 
table. This country must take better advantage of this opportunity and 
prioritize energy efficiency. National Grid supports the concept of 
federal energy efficiency resource standard legislation as one of the 
strategies that will pave the way towards a more energy efficient 
future.
    All four states in which National Grid operates have adopted energy 
efficiency standards or requirements and our experience to date has 
been positive. For example, New York adopted its Energy Efficiency 
Portfolio Standard (EEPS) in June 2008. The EEPS will reduce 
electricity consumption 15 percent below projected levels by 2015, 
equivalent to a 7.5 percent reduction from current levels. National 
Grid has responded by launching a new electricity efficiency program in 
Upstate New York. Based on our extremely successful Upstate gas 
programs, we expect our electricity programs to be similarly effective 
in helping New York achieve the EEPS requirements.
    Rhode Island has adopted a least cost procurement requirement that 
requires investment in energy efficiency before investing in higher-
cost supply increases. These requirements, which may effectively reduce 
energy use by up to 20%, push costeffective energy efficiency 
investment to the forefront and drive additional investment. In Rhode 
Island National Grid has saved over 12 billion kilowatt-hours of 
electricity and 2.2 million therms of natural gas, saving consumers 
over $1.3 billion and we look forward to increasing our energy 
efficiency programs in the state.
    In New Hampshire our energy efficiency efforts have benefited 
enormously from Senator Shaheen's work as governor to create programs 
that have saved New Hampshire families and businesses over $400 million 
and we look forward to significantly increasing our energy efficiency 
investments in the state.
    As you consider EERS approaches, we would like to share some of the 
lessons that we have learned and some of the potential issues we see in 
moving to a national program. First, creating the right baseline for 
measuring energy savings can often raise difficult design issues. 
Certainty over the baseline used in calculating a company's energy 
savings is critical to planning and the overall success of the program. 
``Business as usual'' (BAU) forecasts can be difficult to define when 
you are projecting into an uncertain future. EERS legislation should 
contain a careful and clear definition of BAU, including what factors 
are to be included, the data that will be used, the period of time for 
the projection and scope of coverage (e.g. national, state, or 
utility).
    A national policy should recognize that many utilities, like 
National Grid, have already invested heavily in energy efficiency and 
no longer have the low-hanging fruit available in other parts of the 
country. A one-size fits all approach could unfairly penalize early 
actors and we urge you to consider ways to equitably credit early 
actors.
    An EERS should also be combined with appropriate rate-setting 
mechanisms, such as decoupling, to address the inherent tension between 
utility companies' financial interest in encouraging their customers to 
use more energy and those customers' own interest in lowering their 
utility bills through energy efficiency actions. Decoupling benefits 
customers by alleviating this tension and it works in combination with 
energy efficiency programs to help consumers lower their monthly 
utility bills.
    Finally, we want to make sure that the benefits of natural gas are 
fairly perceived within the efficiency debate. While it is a carbon 
fuel, natural gas has a substantially lower emission intensity than 
either coal or oil and is broadly available domestically. A significant 
expansion of combined heat and power technology utilizing natural gas 
would offer a leading opportunity to generate electricity more 
efficiently and reduce our carbon footprint. Similarly, climate change 
policy will push the country away from petroleum transportation fuels 
and towards electricity, resulting in growing demand for electric 
vehicles. Shifts towards combined heat and power, electric vehicles and 
other beneficial switches should be consistently encouraged in our 
nation's energy policy, including an EERS.
    Mr. Chairman and Members of the Committee, we do not believe that 
any of these issues are insurmountable and we look forward to working 
with the committee to address them. We believe the current economic 
downturn provides a real opportunity to respond to a multitude of 
challenges in our economy. Driving economic activity in the energy 
sector can create significant employment, all here at home, while 
reducing our dependence on foreign fuels and the release of harmful 
emissions into our atmosphere. Energy efficiency should act as a 
foundation of our national energy policy as we take other key steps to 
develop and implement innovative investments to ensure a reliable low 
carbon and efficient energy strategy for America. Importantly, these 
programs can be quickly expanded to provide much needed jobs and energy 
savings in the near term. The existing programs are not nearly 
sufficient and we look forward to working with you on developing an 
EERS and other energy efficiency policies that will help us to reorder 
our economy for a greener future.
    We commend your work and we thank you for the opportunity to answer 
your questions.

    The Chairman. Thank you very much.
    Mr. Skains, go right ahead.

   STATEMENT OF THOMAS E. SKAINS, CHAIRMAN, CHIEF EXECUTIVE 
OFFICER AND PRESIDENT, PIEDMONT NATURAL GAS COMPANY, CHARLOTTE, 
                               NC

    Mr. Skains. Thank you to the committee for this opportunity 
to participate in your hearing. I am Thomas Skains, CEO of 
Piedmont Natural Gas, a Natural Gas distribution company 
serving approximately one million customers in the Carolinas 
and Tennessee.
    I am here today on behalf of Piedmont and more than 202 
local utility company members of the American Gas Association 
(AGA), which I currently serve as chairman. We deliver natural 
gas to 170 million Americans, who rely on it for their heat, 
hot water and cooking, all essential human needs.
    AGA members strongly support energy-efficiency and carbon 
reduction measures. In fact, natural gas utilities and their 
customers are leaders in this area. With that said, we are 
troubled by aspects of this legislation.
    Any legislation that seeks to mandate energy-efficiency, we 
believe should be based on in-put from all affected parties, 
including natural gas utilities. It should be done in concert 
with our climate change goals, be clear and predictable and 
rely on carrots and program funding, rather than sticks and 
penalties. Importantly, it must focus on the results of the 
program and not force a tremendous expenditure of resources in 
trying to determine precisely how the results were achieved.
    Natural gas utilities have two great resources to draw on: 
our fuel and our customers. Our fuel is a clean, efficient, 
abundant and domestic energy source.
    Our customers lead the Nation in energy-efficiency.
    Since 1970, the number of residential natural gas customers 
has increased from 38 million to more than 65 million, a 70 
percent increase; their energy consumption and carbon emissions 
have remained flat. This results from a trend of declining use 
per customer, 30 percent since 1980. This dramatic reduction is 
attributable primarily to tighter homes, more efficient 
appliances and energy-efficiency measures, many of which were 
implemented by natural gas utilities.
    Natural gas utilities have been leaders in working with 
regulators across the country to implement rate designs that 
allow utilities to promote efficiency by breaking the link 
between utility revenues and the natural gas consumed, commonly 
referred to as decoupling.
    Spending on natural gas efficiency programs reached a half 
a billion dollars in 2007. So let me be clear. We support 
reducing the Nation's energy and carbon intensity, but what is 
not clear is how the legislation before you will support that 
goal.
    Here are some of the problems that we see. First, the focus 
is on huge, after the fact penalties rather than incentives. It 
is tied to consumer behavior and the utility can neither 
control nor dictate. Utilities have limited control or 
knowledge of what goes on behind the meter. This is especially 
true for industrial customers.
    In addition, utilities can only engage in energy-efficiency 
activities with the approval and regulating oversight of their 
State regulatory commissions.
    Second, the imposition of the penalties could be a barrier 
to economic growth and development by raising the cost of 
energy to both new and existing customers.
    Third, the legislation could have the unintended 
consequence of increasing the Nation's carbon intensity, as my 
good friend, Mr. Manning said, increasing the direct use of 
natural gas in more homes and businesses across America can 
help reduce overall energy consumption and greenhouse gas 
emissions. This can be done in the near term with existing 
technology and at a relatively low-cost.
    The carbon footprint of the typical natural gas home is 40 
percent smaller than an electric home. It appears that this 
legislation could discourage an increase in consumption of 
natural gas relative to electricity or other higher carbon 
emitting energy sources, such as fuel oil.
    Finally, we are still not sure as to what reductions our 
customers would have to achieve and what actions utilities 
would have to take in order to avoid the penalties in this 
bill.
    It is not clear what is mean by the terms, ``business as 
usual'' or ``significant role'' when forecasting implementing 
and measuring energy saving.
    Certainty is absolutely essential to proper planning and 
measuring results. We believe it would be unnecessary and 
wasteful for us to spend tremendous resources in trying to 
prepare the required annual submissions and to set up Federal 
and State bureaucracies to validate our efforts.
    In conclusion, natural gas utilities are committed to 
partner with consumers and policymakers to develop and 
implement viable energy-efficient programs.
    We are also committed to making the investments needed to 
continue to increase the efficiency of energy use by America's 
homes and businesses.
    We see a legislative and regulatory construct that would 
provide investment incentives and economic certainty, rather 
than potential civil penalties and regulatory confusion.
    We appreciate the opportunity to share our experience with 
you today, and look forward to working with you and your staffs 
to achieve our common goals.
    Thank you, sir.
    [The prepared of Mr. Skains follows:]

 Testimony of Thomas E. Skains, Chairman, Chief Executive Officer and 
         President, Piedmont Natural Gas Company, Charlotte, NC
                           executive summary
   Natural gas is America's clean, secure, efficient, and 
        abundant fossil fuel
   Residential natural gas consumers, who use the fuel for 
        essential human needs, have a 30-year record of reducing 
        consumption and greenhouse gas emissions
   History demonstrates that programmatic measures, such as 
        appliance efficiency standards and building codes and 
        standards, will lead to more certain emissions reductions than 
        a cap-and-trade system
   Natural gas, because it has the smallest carbon footprint of 
        any fossil fuel is part of the energy efficiency and climate 
        change solution
   EERS seeks to reach a laudable goal, but the mechanism is 
        less than perfect Utilities do not control their customers' 
        consumption
   EERS does not take into account economic growth
   EERS does not take into account carbon-driven fuel switching
   The mechanism of EERS is potentially troublesome
                              introduction
    Thank you for the opportunity to testify before the committee. My 
name is Thomas E. Skains, and I am the Chairman, Chief Executive 
Officer, and President of Piedmont Natural Gas Company, located in 
Charlotte, North Carolina. Piedmont provides natural gas service to 
more than 1 million residential, commercial, industrial, and power 
generation customers as well as municipalities in North Carolina, South 
Carolina, and Tennessee.
    I am testifying today on behalf of the American Gas Association 
(AGA), which represents 202 local energy utility companies that deliver 
natural gas to more than 65 million homes, small businesses, and 
industries throughout the United States. AGA member companies deliver 
gas to approximately 170 million Americans in all fifty states. Natural 
gas meets one-fourth of the United States' energy needs. I am the 2009 
Chairman of AGA.
    I am pleased to provide the views of AGA on the Energy Efficiency 
Resource Standard (EERS) concept. This concept is included in S. 548 
offered by Senator Schumer, H.R. 889 offered by Chairman Markey, and 
the March 30, 2009 House Energy and Commerce Committee discussion draft 
offered by Chairmen Waxman and Markey.
    In order for the committee to understand our views on the EERS we 
would like to provide a bit of background about natural gas, energy 
efficiency, and climate change. These provide the predicate for our 
views on EERS at the moment. It appears that the EERS concept may yet 
be in its infancy, and AGA's views will undoubtedly change as the 
concept matures. Moreover, the EERS concept seems to be interwoven with 
the issue of carbon-regulation policy.
natural gas is america's clean, secure, efficient, and abundant fossil 
                                  fuel
    Natural gas is America's cleanest and most secure fossil fuel. 
Natural gas is essentially methane, a naturally-occurring substance 
that contains only one carbon atom. When burned, natural gas is the 
most environmentally-friendly fossil fuel because it produces low 
levels of unwanted byproducts (SOX, particulate matter, and 
NOX) and less carbon dioxide (CO2) than other 
fuels. Upon combustion natural gas produces 43% less CO2 
than coal and 28% less than fuel oil. Moreover, almost all of the 
natural gas that is consumed in America is produced in North America, 
either in the United States or Canada, with the vast majority of that 
being produced in the United States. Only a small portion--1 to 2%--is 
imported from abroad as liquefied natural gas.
    Natural gas is also the most efficient of the fossil fuels. 
Approximately 90% of the energy value of natural gas is delivered to 
consumers. In contrast less than 30% of the primary energy involved in 
producing electricity reaches the consumer. Additionally, natural gas 
is an abundant fuel. Recent prodigious discoveries of shale gas have 
significantly added to this abundant resource base. Changes in 
economics and technology will continue to increase our resource base 
estimates in the future, as they have consistently done in the past.
    Natural gas is used to meet essential human needs for small-volume 
customers. The majority of the homes in this country use natural gas, 
and in this sector 98% of all gas is used for space heating, water 
heating and cooking, while the remaining 2% is used for clothes drying 
and other purposes. This fuel is, therefore, used for essential human 
needs rather than for luxuries. Natural gas is, therefore, an essential 
fuel for America.
    There are two important facts about natural gas that are either 
little known or often overlooked:

   America's residential natural gas customers have led the 
        nation in reducing their consumption of natural gas over the 
        last 30 years and can continue, with appropriate policies, to 
        reduce consumption further. It takes less natural gas to serve 
        65 million homes today than it took to serve 38 million homes 
        in 1970.
   Natural gas is not part of the climate change problem; 
        rather, it is part of the climate change solution because it 
        offers an immediate answer with existing technology and has the 
        smallest carbon footprint of all fossil fuels.
    residential gas consumers have an unrivaled record in reducing 
            consumption levels and greenhouse gas emissions
    Residential natural gas customers have consistently reduced their 
per-household consumption of this fuel--and the carbon emissions 
resulting from its use--for more than 30 years. On a national basis, 
residential customers have reduced their average natural gas 
consumption by approximately 30% since 1980. The success of residential 
and commercial natural gas consumers is illustrated by the fact that 
they have reduced their per-household consumption so dramatically that 
there has been virtually no growth in sectoral emissions in nearly four 
decades despite an increase in natural gas households of over 70%. 
Stated another way, total annual residential natural gas consumption is 
lower today than it was in the 1970s, despite the fact that the number 
of natural gas households has increased more than 70% from 38 million 
to 65 million. Consumption of natural gas in the residential sector, on 
a national average basis, is shown in the following graph:*
---------------------------------------------------------------------------
    * Graph has been retained in committee files.
---------------------------------------------------------------------------
    Unlike electricity, where there are a number of options for 
reducing consumption in the relatively near term, almost all natural 
gas in the home is consumed by furnaces, water heaters, and stoves--
durable appliances with relatively long lives. While ``dialing down'' 
is certainly an option, it has its limits, and consumers have already 
dialed down dramatically with the natural gas price increases of this 
decade.
    AGA and its members believe, of course, that both natural gas 
utilities and their customers should contribute to improving the 
nation's energy efficiency in order to meet the nation's goals of 
optimizing our resources, maximizing our energy independence, and 
reducing carbon emissions.. Our collective experience with energy 
efficiency, however, informs our view that natural gas residential and 
commercial customers can improve their performance through an array of 
programmatic measures.
    The reductions in consumption per household experienced over the 
past three decades are largely attributable to tighter homes and more 
efficient natural gas appliances. These factors will undoubtedly 
provide the foundation for continued future reductions in consumption. 
Moreover, natural gas utilities are aggressively promoting decoupled 
rate structures that allow them to promote conservation and efficiency 
consistent with shareholder interests. Nearly 40% of all residential 
natural gas customers are served by gas utilities that have decoupled 
rates or that are engaged in state proceedings that are presently 
considering decoupled rates. Rate decoupling is important to energy 
efficiency because it breaks the link between utility revenue recovery 
and customers' energy consumption.
    using natural gas in homes and businesses is part of the energy 
                 efficiency and climate change solution
    Many misguidedly believe that because natural gas is a fossil fuel 
it is one of the causes of greenhouse gas emissions and, as result, a 
contributing factor to climate change. In fact, however, natural gas is 
part of the climate change solution. As mentioned previously, natural 
gas is a fuel that emits low levels of traditional pollutants such as 
NOx and SOx. With regard to greenhouse gas emissions, natural gas, 
because it has only one carbon atom, emits less carbon when consumed 
than any other fossil fuel. As a result, natural gas has the potential 
to be a vehicle to move the nation toward its greenhouse gas reduction 
goals. For the same reasons, natural gas is an essential element in the 
push for optimizing our natural resources and increasing our energy 
efficiency.
    There are significant differences in efficiency between natural gas 
and electricity. Approximately 90 percent of the energy value in 
natural gas is delivered to the home. With electricity less than 30 
percent of the primary energy value reaches the customer. The largest 
difference in efficiency for electricity is lost as waste heat at the 
generating station, as well as line losses in transmission and 
distribution. These radically different efficiencies produce the 
significant differences in both efficiency and carbon emissions between 
electric and natural gas appliances.
    The full potential for natural gas efficiencies is demonstrated 
most dramatically by the carbon footprint of the natural gas water 
heater. The average natural gas water heater emits approximately 1.7 
tons of CO2 per year. In contrast, the average electric 
water heater results in more than twice as much--3.8 tons per year. The 
difference between the two could not be more dramatic, and it becomes a 
multiple of three when the comparison is made between a high-efficiency 
natural gas water heater and a high-efficiency electric water heater. 
These numbers are based on national averages, and, as a result, actual 
differences will vary from area to area.
    The same differences in efficiency and emissions follow when 
comparing an all-electric home with a natural gas home. A typical all-
electric home on average produces 10.8 tons of CO2 per year, 
while an all-natural-gas home produces 7.2 tons of CO2 per 
year. Again, these numbers reflect national averages, and actual 
experience will necessarily differ, but the order of magnitude of 
difference remains.
    The plain consequence is that the nation can improve its overall 
energy efficiency as well as reduce its carbon footprint by opting for 
appliances that use natural gas in direct applications (i.e., where the 
natural gas is used to heat air, water, or food). There is the 
opportunity, on a national basis, to improve efficiency dramatically 
and reduce carbon emissions by millions upon millions of tons if we 
utilize more natural gas directly in homes and businesses as the fuel 
for the future.
    Converting small-volume customers to high-efficiency natural gas 
applications is one of the best ways available today to leap forward in 
efficiency and reduce greenhouse gas emissions. As the example above 
demonstrates, converting electric resistance water heaters to natural 
gas can increase efficiency and reduce greenhouse gas emissions by one-
half to two-thirds. Doing so would have the benefit of reducing overall 
energy consumption, costs, and the need to construct new electricity 
generating plants--a critical problem in a carbon-constrained 
environment--and electric transmission lines.
  the energy efficiency resource standard provision seeks to reach a 
              laudable goal but by a very imperfect route
    These two critical facts--the record of increasing efficiency and 
the inherent efficiency of natural gas--provide the prism through we 
must necessarily view a proposal such as EERS.
    AGA and its member companies are committed to continuing to press 
for energy efficiency, in order to save our customers money, to 
maximize the utility of our natural resources, and to reduce the carbon 
emissions of our nation. As noted above, there is a growing, and 
accelerating, trend toward decoupled natural gas utility rates. Such 
approaches, by breaking the link between customer energy consumption 
and utility revenues, help utilities become full partners in the quest 
for energy efficiency. Moreover, most natural gas utilities today 
participate in, or even operate, energy efficiency programs. On a 
national scale they collectively deployed $500 million in 2007 for this 
purpose--an amount that we expect to double in the next several years.
    Furthermore, as discussed above, natural gas residential and 
commercial customers have led the way in efficiency and carbon-
reduction over the last thirty years. These customers have reduced 
their annual consumption by 1% or more annually from 1980 to 2000 and 
about 2% annually since 2000. AGA member companies will continue to 
work with their customers to ensure a continuation of this trend, 
although it will become increasingly difficult to do so as the least 
costly measures have, in many cases, already been taken. We believe 
that the goals of a program such as EERS would be best met through 
universally applied building codes and appliance standards, 
supplemented by a variety of education and incentive programs.
    In contrast to the preferred programmatic approach discussed, the 
EERS proposals would establish an ``energy efficiency resource 
standard'' for both electric utilities and natural gas utilities. As it 
would apply to natural gas utilities, the EERS would, in the most basic 
terms, require the customers of a natural gas utility to reduce their 
consumption of natural gas by 10% between 2012 and 2020 or the utility 
will be required to pay a penalty (of either $5 or $10 per MMBtu) for 
each MMBtu by which they fall short of the target.
    While the energy efficiency goal is laudable, the construct of the 
proposed EERS is fraught with problems. Unfortunately the conversation 
on this topic has, to this point, largely occurred among proponents of 
the idea. A serious and thorough vetting of such a dramatic proposal 
will be necessary by all parties interested in advancing energy 
efficiency. Such a program can only be workable, if at all, with 
significant input from the natural gas utilities involved. If adequate 
federal and state funding is available, local gas utilities are 
positioned to work with the states and their customers to develop and 
implement effective energy saving programs. However, for this approach 
to be successful, utilities must be allowed to earn a return for their 
contributions, not merely be subject to penalties.
    AGA suggests that the proposed means (as outlined in the current 
EERS proposals) to the desired end is a minefield for both utilities 
and their customers. While we will not enumerate all the difficulties, 
we will outline below a few that should suffice to illustrate that this 
concept still needs further in-depth analysis before becoming a policy 
pillar that can be relied upon in the quest to increase energy 
efficiency and reduce carbon emissions. Additionally, the discussion 
above should make clear that, from 30 years of experience, we have a 
wealth of knowledge as to the programmatic measures that can be 
employed to reach the desired end of increased energy efficiency.
 utilities can influence, but do not control, the consumption levels of
                            their customers
    The fundamental scheme of the EERS is that customers must reduce 
their consumption, and natural gas utilities must pay the penalty if 
they do not. Without question there are many actions that natural gas 
utilities can take--and do take--to encourage energy efficiency. But 
they cannot adjust customers' thermostats, close open windows, or 
unilaterally install additional insulation or new appliances in their 
homes. While utilities can influence the conduct of their customers 
through education and publicity campaigns, appliance rebate and 
weatherization programs, incentives for efficient appliances, and the 
like (all of which is subject to approval or oversight by the state 
public utility commissions having jurisdiction over the utilities), 
they cannot control the actions of their customers, which is what is 
ultimately measured by the EERS mechanism. AGA believes that sound 
policy argues instead for a program that provides carrots, not sticks, 
for the entities whose behavior is to be influenced. If the goal is to 
reduce energy consumption, the policy mechanisms to be employed should 
focus on the efficiency drivers that have proven successful in the past 
and are likely to be so in the future. This lack of control is further 
exacerbated in the industrial market, where most customers are 
sophisticated energy consumers who do not purchase their gas supplies 
from the utility and are thus transport-only customers.
      the eers fails to account for the needs of economic growth 
                            and development
    One of our national goals is certainly to facilitate a growing and 
vibrant economy and the jobs that necessarily follow from that. A 
growing economy requires that America's energy industries expand to 
meet the needs of that growing economy--both businesses and citizens. 
Moreover, as a matter of national policy we should be seeking to 
attract new industry to the United States, both for the jobs it 
provides as well as the stimulative effect on the economy as a whole. 
The concept of the EERS, as well as the construct used for it here, 
runs contrary to these overarching national goals. Energy efficiency 
standards should ensure that each consumer uses energy wisely but 
should not restrict economic development and growth in our country. Any 
EERS should accommodate energy demand by new homes, businesses and 
manufacturers.
    As drafted, the EERS provision calls for a 10% decrease in 
consumption by natural gas utility customers by the year 2020 that is 
above business as usual and that has a causal relationship to the 
utility's actions. The reduction is to be achieved by all customers 
taken as a group (although excluding electric generation customers). In 
a number of areas of the United States, population is growing and the 
economy has been expanding over the last decade or so. As now framed 
the EERS provision would appear to place these utilities in a very 
difficult position in terms of achieving the goal of the 10% reduction.
    AGA recognizes that the EERS mechanism attempts to utilize some 
sort of comparative mechanism, analyzing a base case against actual 
experience. This is troublesome in its own right, but even if it were 
to be employed, the practical difficulty is that a utility will be 
faced with ensuring the accuracy of its base case as to projected 
customer growth or face else an ex post facto penalty. This hardly 
seems fair, and it does not appear to be a wise grounding for what will 
ultimately be an important efficiency policy.
       the eers fails to account for carbon-driven fuel switching
    Some proposals, such as that by Chairmen Waxman and Markey in the 
House, would overlay EERS on a cap-and-trade scheme. This is something 
of a two-fisted approach with a definite potential for conflict and 
unintended consequences. AGA urges the Congress to give careful thought 
to whether an EERS together with a cap-and-trade scheme will result in 
conflicting goals.
    One particular instance greatly concerns AGA. If we assume that the 
nation adopts a cap-and-trade (or some other) carbon regulation system 
in the near future, the result, when implemented, will be to place a 
price on carbon. When carbon markets are functioning efficiently, at 
least in the relatively near term, residential customers will begin to 
recognize that by shifting their water heating, space heating, and 
cooking to natural gas (where such service is available) they will save 
money and reduce CO2 emissions. This will result from the 
fact that natural gas will have a lower carbon output and price than 
electricity in most areas. Moreover, we expect that states, for a 
variety of reasons (state carbon footprint, the job development aspects 
of reasonable energy prices, and the need to minimize new, expensive 
electric capacity), will encourage customers to migrate toward direct 
natural gas appliances. In any event, for whatever reason undertaken, 
we believe that these trends are likely and that the result will be a 
good one: lower overall energy consumption, energy costs, and carbon 
emissions for the United States.
    Under the EERS, however, the natural gas utility would pay the 
financial penalty because its customers will have increased their usage 
of natural gas instead of reducing it, all in order to achieve greater 
overall energy efficiency, lower energy bills, and reduced carbon 
emissions. This hardly seems like the outcome we should be seeking to 
achieve. It is, moreover, plausible--indeed likely--that where the 
goals of a cap-and-trade system and EERS overlap they will produce 
conflicting results. Given the complexity of the two regulatory 
schemes, we do not think that this is the only scenario in which the 
two systems may collide.
               the mechanics of the eers are problematic
    The EERS seems to be grounded, to one extent or another, in a 
concept of energy savings that are the ``result'' of, or ``caused'' by, 
specific actions of one kind or another. This approach is problematic 
in that it is unduly vague and susceptible to widely differing 
interpretation and application. For example, assume a home owner 
reduces consumption of natural gas. Was this caused by a utility 
program for weatherization or the fact that children grew up and left 
home for school? These types of imponderables are numerous within the 
scheme of these provisions. It must be understood and appreciated that 
natural gas utilities have limited knowledge about what goes on 
``behind the meter''--we do not have the ability or the right to obtain 
perfect information inside the home or business.
    Some of the EERS constructs involve a comparison between a 
``business-as-usual'' projection and measures implemented after the 
bill becomes law that ``cause'' natural gas savings. Projecting a 
``business-as-usual'' scenario into the future (especially if a new 
scheme of carbon regulation has been implemented) could be dicey to say 
the least. Will DOE issue regulations providing detailed guidance as to 
how this should be done? How will projections of economic growth and 
development be factored into this ``business-as-usual'' scenario? How 
will natural gas utilities predict the degree of fuel switching to 
natural gas resulting from pricing the externality of carbon? What will 
be the factors to determine whether ``savings'' resulted from utility 
actions?
    At its core, these aspects of this proposed mechanism are 
troublesome and, frankly, strike fear in the hearts of AGA member 
companies when the risk of error, misjudgment, or interpretation is a 
penalty (or stick) of a per-MMBtu penalty. In the end, predictions can 
only be correct as a matter of accident. Given this truism, it is 
fundamentally unfair to have the Damocles sword of this penalty 
provision hanging overhead, perhaps with the penalty determination 
ultimately made, long after the fact, by an individual in the depths of 
a federal agency. Again, we think sounder policy is to identify the 
goal and provide incentives to reach it rather than ex post facto 
penalties for failing to achieve it.
    For years after 2020 DOE may set future years standards that turn 
on ``cost-effective energy efficiency potential.'' Yet ``cost-
effective'' is defined so broadly as to be nearly meaningless.
    We could go on in enumerating concerns with the EERS methodology 
employed in the bills that we have reviewed. The examples given above, 
however, amply demonstrate that this is a thicket into which we should 
not wander. As AGA has stated in many forums, if the ultimate goal is 
to increase energy efficiency and achieve greenhouse gas reductions--
and surely it is--then we have an ample record on how to reach that 
end.
    The goals of the EERS provisions are laudable ones; with the 
correct complementary market incentive policies, they are in all 
likelihood achievable without the need to resort to punitive penalties. 
AGA commits to work with Congress to develop a suite of policies that 
can achieve this result.
    AGA and its members appreciate the opportunity to present their 
views on these important subjects. We look forward to working with the 
committee and its staff to be a constructive voice in this important 
national conversation.

    The Chairman. Thank you very much.
    Mr. Nadel, go right ahead.

STATEMENT OF STEVEN NADEL, EXECUTIVE DIRECTOR, AMERICAN COUNCIL 
                FOR AN ENERGY-EFFICIENT ECONOMY

    Mr. Nadel. Thank you, Chairman Bingaman, and the other 
Senators. I appreciate the opportunity to talk here today.
    A Federal Energy Efficient Resource Standard, often called 
an EERS, would set energy saving targets for electric and 
natural gas distribution utilities throughout the United 
States. As detailed in my written testimony, currently 19 
States have an EERS in some form. These standards have worked 
well in practice in those States that have been implemented for 
multiple years. The Federal EERS would extend these standards 
to the remaining 31 States, but also increase States that 
currently have an EERS. However, States with a strong EERS can 
continue to enforce their savings targets. There are several 
States that already have savings targets, more aggressive, such 
as Ohio, than this bill.
    These States would also benefit from the fact that local 
power pools, prices would come down, also emissions would come 
down. So even if they have a strong State standard already, by 
having neighboring States participate in this Federal EERS, 
they would benefit.
    My organization, ACEEE, supports S. 548 and we thank 
Senator Schumer for introducing the bill. One thing I wanted to 
make clear is that this bill does not require absolute 
reductions in energy use relative to current demand. So 
instead, it uses a 2-year rolling baseline, so that economic 
growth can be accommodated. So in rapidly growing States, 
electricity use, natural gas use will continue to go up. It 
will just go up at a slower rate. It's not a fixed baseline, 
it's a rolling baseline.
    Savings would be documented from evaluations of energy-
efficiency program prepared by an evaluation expert, and 
ideally, we talked about the number of evaluation experts that 
they have under contract with National Labs and elsewhere, and 
we can really build upon that expertise upon the evaluation 
protocols that States have already adopted to help set these 
national guidelines.
    S. 548 provides that States can have primary responsibility 
for administering the EERS if the States so request. We do 
expect the majority of the States to take on this role, since 
they know that our States and their utilities went on it. They 
will track regulations and provide oversight, permitting TAV to 
administer this program and in our view that is not a large 
bureaucracy. Yes, they need staff and consultant help, but they 
don't need a large bureaucracy.
    For many months this Senate Energy Committee has been 
considering a Renewal Energy Standard, often called an RES, 
that would allow States to count up to 5 percent energy 
efficiency savings toward the RES target. ACEEE estimates that 
the existing State EERS will save about 5 percent of electric 
sales by 2020, therefore, it's already going to happen anyway, 
I will just give credit in the RES, just giving credit for 
``business as usual'' and won't result in any additional 
efficiency savings.
    Studies in many States demonstrate that cost-effective 
electric and natural gas energy-efficiency savings of 20 
percent or more are available around the country.
    This bill would set targets at 15 percent for electric, 10 
percent for natural gas, so there is much more cost-effective 
savings available. This bill makes a major progress toward that 
target and then lets States go further, if they want.
    The savings targets are accumulative, meaning that targets 
each year can be met with measures installed in back years as 
well as installed in early years that are still in place. So in 
2020, you will have many measures in place that were installed, 
then in 2019 and all the way back to 2010 or even 2009.
    Savings from new building codes and equipment efficiency 
standards count toward these targets, as do energy savings by 
combined power plants and recycled energy.
    So I know Mr. Skains was talking about opportunities to 
reduce carbon emissions through the use of natural gas, use of 
combined heat and power is one of those that may get credit for 
electrical savings under this.
    Many of the existing State programs do not include savings 
from codes, standards or combining power plants. So roughly 
speaking, the 15 percent Federal program may fulfill many of 
the 10 percent State targets, targets in States such as 
Michigan and New Mexico that were adopted just last year.
    Based on the targets that the States have set, based on 
analysis of more than 20 States on cost-effective potential, 
based on the achievements of many of these States, we find that 
the savings levels is S. 548 are very reasonable and should be 
achievable at all States. It's not like renewable energy, there 
is a debate, ``Gee, is there enough in all States?'' We don't 
hear anybody arguing that, gee, there is not enough efficiency 
in their State to meet these targets.
    I would point out that these savings will not happen 
without an EERS. Just yesterday, EPA released an analysis on 
the Waxman-Markey discussion draft. At the most, efficiency 
savings that would generated as a result of cap-and-trade, it 
was one of the many things they looked at, it concluded that 
the efficiency savings would total about 6 percent in 2020, 9 
percent by 2030, and 13 percent by 2050. While these are 
significant, they are far less than what is contained in the 
targets in S. 548.
    We need an EERS to go much farther than just the affects of 
cap-and-trade alone.
    As Senator Schumer noted earlier, ACEEE, just last month, 
released an analysis on the S. 548. We concluded that it would 
save enough power to power 48 million households for a year, an 
annual savings that would save the consumers about $170 billion 
in net savings, generate over 220,000 jobs, and displace the 
need for 390 new medium-sized power plants.
    As Senator Schumer noted, and we discussed in detail in the 
written testimony, this EERS would also be a critical cost-
containment strategy for future Federal climate legislations. 
We've done detailed modeling and with cap-and-trade and an 
EERS, electricity prices are lower than with cap-and-trade 
alone. EERS helped reduce our electricity prices.
    Now some may complain that the cumulative impact of cap-
and-trade and RES and EERS. But our analysis finds that this 
three-pronged approach actually is less expensive than just 
doing cap-and-trade alone.
    ACEEE has been working on energy policy for many years. 
We've done detailed analysis of all of past major energy bills, 
including the 2005 and 2007 bills that this committee and 
ultimately this Congress, or previous Congress have passed. 
What we find is just as S. 548 alone will save more energy in 
2020 than all of the efficiency provisions in the Energy Policy 
Act of 2005, and will save as much energy as all of the 
efficiency provisions in EISA 2009, that includes the corporate 
average fuel economy standards.
    The Energy Efficiency Resource Data recalled the 800 pound 
gorilla, the Energy Efficiency Policy. This is a really big 
deal. These benefits will not occur if energy-efficiency is 
just a safety valve for renewable energy standard. We think 
efficiency is important enough in its own right, that it 
deserves its own separate provision, the savings targets in S. 
548.
    I would recommend that this committee include this bill as 
part of comprehensive energy legislation.
    Thank you very much for your attention and I look forward 
to your questions.
    [The prepared statement of Mr. Nadel follows:]

   Prepared Statement of Steven Nadel, Executive Director, American 
                Council for an Energy-Efficient Economy
Summary
    A federal Energy Efficiency Resource Standard (EERS) would set 
energy savings targets for electric and natural gas distribution 
utilities throughout the United States. Currently, 19 states have an 
EERS in some form. These standards have worked well in practice. A 
federal EERS would extend these standards to the remaining 31 states, 
and would also increase efficiency savings in states where the state 
EERS is not as strong as the federal EERS. States with a strong state 
EERS could continue to enforce savings targets that exceed the federal 
targets, and would also benefit from emissions reductions caused by the 
EERS in neighboring states, and from the fact that decreased energy 
demand will modestly reduce electric and natural gas prices in all 
states (since prices are affected by the supply-demand balance, when 
demand goes down, prices generally also go down).
    Under S. 548, the Save American Energy Act, energy savings would be 
documented from evaluations of energy efficiency programs prepared by 
evaluation experts and following evaluation guidelines to be set by 
DOE. There are many state-level evaluation guidelines that DOE can draw 
from to establish these national guidelines. S. 548 provides that 
states can have primary responsibility for administering the EERS if 
the state requests and the Secretary approves such request. We expect 
most states to take on this role, since they know their states and 
utilities well. DOE's role would be to draft regulations and provide 
oversight, permitting DOE to administer this program without a large 
federal bureaucracy.
    For many months the Senate Energy Committee has been considering a 
Renewable Energy Standard (RES) that would allow states to count up to 
5% energy efficiency savings towards the 2020 RES target. ACEEE 
estimates that existing state EERS's will save 5% of electric sales by 
2020 and thus the proposal for 5% savings as part of an RES will have 
little impact. Studies in many states demonstrate that cost-effective 
electric and natural gas energy efficiency savings of 20% or more are 
available throughout the country. S. 548 would set savings targets of 
15% electric savings and 10% natural gas savings by 2020. Savings from 
new building codes and equipment efficiency standards count towards 
these targets as do energy savings from combined heat and power (CHP) 
plants and recycled energy. Many state targets do not include codes, 
standards and CHP savings, and thus a 15% federal electricity saving 
target is roughly equivalent to state targets of under 10% savings by 
2020. Based on state targets and recent state-level accomplishments, we 
find that the savings levels in S. 548 are reasonable.
    According to ACEEE's recent analysis, the energy saved through S. 
548 could power almost 48 million households in 2020, accounting for 
about 36% of the households in the United States. Moreover, this level 
of energy savings will save American consumers and businesses almost 
$170 billion, create over 220,000 jobs and reduce carbon dioxide 
emissions by 262 million metric tons while eliminating the need to 
build 390 power plants. These impacts are all over and above savings 
from state EERS's that have already been adopted--our calculations 
include current EERS's as part of the base case.
    We also see an EERS as a critical cost-containment strategy for 
future federal climate change legislation. Modeling done by ACEEE, and 
discussed in the body of my testimony, shows that a national EERS would 
reduce electricity prices, substantially dampening the upward pressure 
on prices caused by climate change legislation.
    ACEEE has been estimating the energy savings from potential energy 
legislation since the 1980s. We have conducted detailed analyses on the 
energy savings from the Energy Policy Act of 2005 (EPAct) and from the 
Energy Independence and Security Act of 2007 (EISA). The EERS in S. 548 
will save more energy in 2020 than all of the efficiency provisions in 
EPAct combined and nearly as much in 2020 as all of the efficiency 
provisions in EISA combined, including EISA's Corporate Average Fuel 
Economy Standard. The EERS is the ``800 pound gorilla'' of energy 
efficiency policy.
    These benefits will not occur if energy efficiency is just a safety 
valve to a renewable energy standard. Energy efficiency is important 
enough in its own right that the U.S. deserves and needs an EERS with 
savings targets like those in S. 548. ACEEE strongly recommends that 
such an EERS be included as a centerpiece in the next federal energy 
bill.
Introduction
    My name is Steven Nadel and I am the Executive Director of the 
American Council for an Energy-Efficient Economy (ACEEE), a nonprofit 
organization dedicated to increasing energy efficiency to promote both 
economic prosperity and environmental protection. I have worked 
actively on utility energy efficiency programs for more than 20 years 
and have been working on energy efficiency resource standards since 
2000. I have written several reports and papers on the subject\1\ and 
have also worked with multiple states helping them to establish and 
implement such policies including Maryland, New York, Ohio, 
Pennsylvania, Vermont and Virginia.
---------------------------------------------------------------------------
    \1\ Several of these are listed in the references section at the 
end of this testimony.
---------------------------------------------------------------------------
    ACEEE worked with Senator Schumer's office in the development of S. 
548, the Saving American Energy Act and we strongly support this bill. 
We urge this Committee to incorporate this bill into upcoming energy 
legislation. From our research, an Energy Efficiency Resource Standard 
(EERS) along the lines of S. 548 will have more impact on promoting 
energy efficiency than any other provision now pending before this 
Committee. We thank Senator Schumer for introducing S. 548 and thank 
Senators Bingaman and Murkowski for scheduling this hearing to discuss 
this important subject.
    In the sections below I:

   describe what an EERS is and how it works;
   discuss how the required energy savings are measured and 
        documented;
   discuss EERS adoption and experience at the state level, 
        including information on the 19 states that have adopted an 
        EERS to date;
   present the results of an ACEEE analysis on the impacts of 
        S. 548;
   discuss the relationship between an EERS and an RES, as well 
        as with potential climate change legislation;
   respond to some questions and concerns I have heard 
        expressed about a federal EERS.
EERS Description
    An EERS is a law requiring distribution utilities to meet energy 
saving targets, generally specifying how much energy needs to be saved 
each year. A federal EERS as proposed in S. 548 would set a national 
goal for energy savings, requiring retail electricity and natural gas 
distributors to cumulatively reduce their electricity sales by 15% and 
natural gas sales by 10% by 2020. The proposed savings targets build on 
various studies that demonstrate significant available cost-effective 
savings at the state level and on actual savings targets being achieved 
in states with experience implementing an EERS.
    An EERS is similar in concept to a renewable electricity standard 
(RES). An RES requires utilities to obtain a certain amount of energy 
from renewable resources (wind, solar, biomass, etc.) while an EERS 
requires electric utilities and natural gas distributors to attain a 
required level of energy savings through energy efficiency. Failure to 
comply with an EERS law results in penalties, which are based on the 
level of under-or non-compliance.
    The EERS in S. 548 would apply to electric distribution utilities 
who sell at least 750,000 MWh annually and to natural gas distribution 
utilities who sell at least 2.5 billion cubic feet of natural gas 
annually.\2\ Based on a review of annual utility energy sales compiled 
by the Energy Information Administration (EIA), the EERS would apply to 
about 440 electric utilities out of the more than 3200 listed by EIA, 
and to about 240 natural gas distribution companies out of about 2000 
listed by EIA. These covered utilities represent about 89% of U.S. 
electricity sales and about 96% of U.S. retail natural gas sales (and a 
lower proportion of total natural gas sales as many large industrial 
customers purchase natural gas at the wholesale level and not from 
distribution utilities).
---------------------------------------------------------------------------
    \2\ S. 548 lists thresholds of 1.5 million MWh and 5 billion cubic 
feet of gas, but these apply to sales over two years. The 750,000 MWh 
and 2.5 billion cubic feet of gas thresholds are annual averages.
---------------------------------------------------------------------------
EERS Mechanics
    Under the legislation, utilities get credit for savings from 
building codes and appliance standards (including federal standards) 
and from energy efficiency programs and combined heat and power 
installations where they ``played a significant role in achieving the 
savings'' (i.e. if the utility, the state, and a retailer all play a 
significant role, the utility gets credit, without having to figure out 
the size of their role relative to the role of others). In the end, it 
is a matter of counting kilowatt-hour savings and making a 
determination that the target has or has not been met. The target for a 
given year is relative to the average total sales in the prior two 
years (i.e., the base quantity is rolling to reflect increases or 
decreases in sales from year to year).
    On average, based on state-specific analyses in six states, ACEEE 
estimates that codes and standards will reduce 2020 electricity use by 
4.5% and natural gas use by 1.6%. S. 548 and companion bills in the 
House (H.R. 889 and the Waxman-Markey ``Discussion Draft'' call for 15% 
electric and 10% natural gas savings by 2020, leaving 10.5% electric 
savings and 8.4% natural gas savings to be achieved by utility 
programs. If standards and codes achieve more savings, the utility 
targets will be adjusted downward by a corresponding amount, and vice 
versa.
    If a utility's sales go down due to the recession, that decline 
does not count as efficiency savings. Conversely, if a utility's sales 
go up, the savings target only increases by a little bit using the 
percentage savings targets in the legislation (e.g. 1% of the sales 
increase in 2012). As illustrated in the two tables and two figures* 
below, the energy savings required will vary slightly with growth rates 
as a function of utility sales.
---------------------------------------------------------------------------
    * All figures have been retained in committee files.

                                                       S. 548 Impacts with 1% per Year Growth Rate
                                                 (illustration using a utility selling 100 kWh per year)
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                               Rolling
                                                                                    Sales      Average                                      Incremental
                                                                Annual Growth   (adjusted for    (of       Cumulative       Cumulative       (Annual)
                Year                    Expected Sales (kWh)        (kWh)         growth and   prior 2     Target (%)     Energy Savings  Energy Savings
                                                                                 prior year's   years'                         (kWh)           (kWh)
                                                                                   savings)     sales)
--------------------------------------------------------------------------------------------------------------------------------------------------------
                2010                   99.5..................                          99.5
--------------------------------------------------------------------------------------------------------------------------------------------------------
                 2011                 100.5..................             1.00        100.5
--------------------------------------------------------------------------------------------------------------------------------------------------------
                2012                  101.5..................             1.01        100.5    100.00               1.0%            1.00            1.00
--------------------------------------------------------------------------------------------------------------------------------------------------------
                2013                   102.5.................             1.02        100.5    100.50               2.0%            2.01            1.01
--------------------------------------------------------------------------------------------------------------------------------------------------------
                2014                  103.5..................             1.03        100.3    100.51              3.25%            3.27            1.26
--------------------------------------------------------------------------------------------------------------------------------------------------------
                2015                  104.6..................             1.04        100.1     100.39             4.50%            4.52            1.25
--------------------------------------------------------------------------------------------------------------------------------------------------------
                2016                  105.6..................             1.05         99.6    100.17               6.0%            6.01            1.49
--------------------------------------------------------------------------------------------------------------------------------------------------------
                2017                  106.7..................             1.06         99.2    99.84               7.50%            7.49            1/48
--------------------------------------------------------------------------------------------------------------------------------------------------------
                2018                  107.7..................             1.07         97.8     99.41              10.0%            9.94            2.45
--------------------------------------------------------------------------------------------------------------------------------------------------------
                2019                  108.8..................             1.08         96.5    98.50              12.50%           12.31            2.37
--------------------------------------------------------------------------------------------------------------------------------------------------------
                2020                   109.9.................             1.09         95.3    97.16               15.0%           14.57            2.26
--------------------------------------------------------------------------------------------------------------------------------------------------------


                                                       S. 548 Impacts with 3% per Year Growth Rate
                                                 (illustration using a utility selling 100 kWh per year)
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                               Rolling
                                                                                    Sales      Average                                      Incremental
                                                                Annual Growth   (adjusted for    (of       Cumulative       Cumulative       (Annual)
                Year                    Expected Sales (kWh)        (kWh)         growth and   prior 2     Target (%)     Energy Savings  Energy Savings
                                                                                 prior year's   years'                         (kWh)           (kWh)
                                                                                   savings)     sales)
--------------------------------------------------------------------------------------------------------------------------------------------------------
                2010                   99.0..................                          99
--------------------------------------------------------------------------------------------------------------------------------------------------------
                 2011                 102.0..................             2.97        102.0
--------------------------------------------------------------------------------------------------------------------------------------------------------
                2012                  105.0..................             3.06        104.0    100.49               1.0%            1.00            1.00
--------------------------------------------------------------------------------------------------------------------------------------------------------
                2013                   108.2.................             3.15        106.1    103.00               2.0%            2.06            1.06
--------------------------------------------------------------------------------------------------------------------------------------------------------
                2014                  111.4..................             3.25        108.0    105.07              3.25%            3.41            1.35
--------------------------------------------------------------------------------------------------------------------------------------------------------
                2015                  114.8..................             3.34        110.0     107.07             4.50%            4.82            1.40
--------------------------------------------------------------------------------------------------------------------------------------------------------
                2016                  118.2..................             3.44        111.7    108.98               6.0%            6.54            1.72
--------------------------------------------------------------------------------------------------------------------------------------------------------
                2017                  121.8..................             3.55        113.4    110.81              7.50%            8.31            1.77
--------------------------------------------------------------------------------------------------------------------------------------------------------
                2018                  125.4..................             3.65        114.2    112.56              10.0%           11.26            2.95
--------------------------------------------------------------------------------------------------------------------------------------------------------
                2019                  129.2..................             3.76        114.9    113.80             12.50%           14.23            2.37
--------------------------------------------------------------------------------------------------------------------------------------------------------
                2020                  133.0..................             3.88        115.9    114.55              15.0%           17.18            2.96
--------------------------------------------------------------------------------------------------------------------------------------------------------

    The standard is expressed in cumulative terms because efficiency 
measures installed in early years will continue to save energy for many 
years. In 2020, the 15% electricity savings is relative to the average 
sales from 2018 and 2019 because those sales take into account all of 
the energy savings up to that point. Cumulative savings are the savings 
achieved in a particular year from measures installed in that year, as 
well as from measures installed in earlier years that are still in 
place. For example, an energy-efficient dishwasher installed in 2012 
might achieve savings of 100 kWh in 2012. That same dishwasher will 
save 100 kWh per year for its useful life. These savings achieved post-
2012 may also be claimed by the utility, until the dishwasher is taken 
out of service. Although the savings are cumulative, because the 
targets increase slowly over the compliance period, additional measures 
will be needed each year to meet the growing annual targets. However, 
each year's target only increases by an incremental amount, eventually 
reaching a maximum of 2.5% additional savings required per year.
      
    
    
Measurement and Documentation
    The EERS specifies the amount of energy savings utilities need to 
achieve. A utility will need to document achieved savings through 
evaluation reports. What kind of savings count towards the goal and how 
those savings are counted will be detailed in evaluation, measurement 
and verification regulations promulgated by the DOE. However, it is 
anticipated that the federal procedures will reflect procedures 
currently implemented in states with an EERS.
    Estimated savings should be adjusted for changes in weather, 
production levels and changes in building floor area to ensure that 
savings are attributable to energy efficiency measures. For combined 
heat and power savings, for example, the energy usage can be read from 
a meter on the system. Based on data from the power pool a formula can 
be used to determine the annual energy savings relative to buying power 
from the local utility. For programs aimed at commercial and 
residential customers, savings can be estimated by taking a sampling of 
participants, determining the energy savings that are attributed to a 
certain program through billing analysis, extrapolating those estimated 
savings to all participants and then comparing the energy use of 
participants versus non-participants (which provide the business-as-
usual baseline).
    Savings should be documented on a program-by-program basis. Energy 
savings are reported to the state Public Utilities Commission, or other 
governing body, which reviews the reported savings and makes revisions 
if deemed necessary.
EERS Adoption and Implementation
    EERS's have been adopted in 19 states, to date, as shown on the map 
below.*
---------------------------------------------------------------------------
    * Maps have been retained in committee files.
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    Texas was the first state to adopt an EERS, with their EERS adopted 
in a 1999 restructuring law signed by then-Governor George W. Bush. 
Iowa is the most recent state, with targets for their largest utility 
set in a final decision earlier this year by the Iowa Utilities Board. 
State EERS adoption dates are summarized in the figure below.
    The 19 states that are implementing an EERS are positioned to 
achieve a little over 5% electricity savings by 2020. California, 
Connecticut, Hawaii, Nevada, Texas and Vermont have had the most 
experience with implementation of an EERS and, as such, are considered 
some of the most successful states in operating energy efficiency 
programs. Many of these states have consistently increased their annual 
energy savings goals over time and all of these states have been 
achieving or are on track to achieving their stated energy savings 
goals. The savings targets for states with an EERS in place are 
detailed on the next page. As noted previously, many of these state 
targets do not include savings from building codes, equipment 
efficiency standards, or combined heat and power plants. Adding these 
mechanisms to state targets should increase the 2020 electric savings 
by at least 5% and the 2020 natural gas savings by at least 2%.
      
    
    
    Efficiency Vermont is the nation's first statewide provider of 
energy efficiency services. Efficiency Vermont is operated by an 
independent, non-profit organization under contract with the Vermont 
Public Service Board and funded by an energy efficiency charge on 
customers' electric bills. Technical assistance and financial 
incentives are provided to Vermont households and businesses, helping 
reduce their energy costs with energy-efficient equipment and lighting 
and with energy-efficient approaches to construction and renovation. 
The array of markets served by programs offered in Vermont is 
summarized in the figure below.
    Since its inception in 2000, Efficiency Vermont has helped 
Vermonters reduce annual energy costs in their businesses and homes by 
more than $31 million, which is more than Efficiency Vermont's annual 
budget. Between 2000 and 2008, Vermont businesses and homeowners who 
worked with Efficiency Vermont have saved more than 550 million 
kilowatt hours (kWh) in annual electric energy. Households and 
businesses are expected to see these savings continue for an average of 
13 years. Moreover, the cumulative lifetime economic value of 
efficiency investments in Vermont totals more than $445 million. 
Preliminary results are that 2008 efficiency programs in Vermont 
reduced statewide electricity sales by 2.5%. When combined with savings 
from measures installed in earlier years that are still in place, total 
savings in 2008 were about 9% of sales with savings in the past two 
years exceeding Vermont's 1.5% per year historic load growth (see 
figure on the next page).
    Reaching continually increasing energy savings targets requires 
more than simply providing customers with incentives and rebates, as 
these states have shown. Outreach, training and education, customized 
programs, and increasing access to all customer classes have helped 
California, Connecticut, Hawaii, Nevada, Texas, and Vermont become the 
leaders in EERS implementation at the state level. These states have 
employed combinations of a variety of energy efficiency programs to 
achieve their success.
Impacts of S. 548
    According to ACEEE's recent analysis (Furrey, Nadel and Laitner), 
the energy saved through S. 548 could power almost 48 million 
households in 2020, accounting for about 36% of the households in the 
United States. Moreover, this level of energy savings will save 
American consumers and businesses almost $170 billion, create over 
220,000 jobs and reduce greenhouse gas pollution by 262 million metric 
tons while eliminating the need to build 390 power plants. These and 
other impacts are summarized in the table below. These impacts are all 
over and above savings from state EERS's that have already been 
adopted--our calculations include current EERS's as part of the base 
case.
      
    
    
    According to the study, customers will have invested $78.5 billion 
in energy efficiency upgrades by 2020 through the help of utility or 
state-run energy efficiency programs. As a result of such measures, 
consumers will save $247 billion gross, or a net savings of about $169 
billion on their utility bills.
    As a result of the energy savings under S. 548 about 17 jobs are 
gained per $1 million spent, while 7 jobs are lost per $1 million in 
lost revenue in the electricity and natural gas sectors. At the 
national level, ACEEE estimates that an EERS will create over 220,000 
net jobs by 2020. Moreover, unlike other resources such as renewable 
energy and coal, which are geographically limited, significant energy-
saving opportunities are available in all 50 states. As such, local 
jobs supporting energy efficiency--jobs that cannot be outsourced--are 
available in all 50 states.
    Implementation of S. 548 can also significantly reduce carbon 
dioxide emissions. Energy efficiency measures reduce energy consumption 
so that less fossil fuel is burned for energy generation. As fossil 
fuel use decreases, carbon dioxide emissions are avoided. ACEEE 
estimates that the proposed EERS stands to reduce carbon dioxide 
emissions by 262 million metric tons in 2020--the equivalent of 
removing 48 million automobiles from the road for that year. This 
represents more than a 4% reduction in projected annual carbon dioxide 
emissions for 2020.
    About 90 percent of electricity in the United States is generated 
by coal, natural gas, and nuclear power. If the United States meets 
increased energy needs with power from new power plants, at a cost of 
up to 13 cents per kilowatt-hour, U.S. consumers could expect 
significant increases in their utility bills. At about one-fourth of 
that cost, or 3 cents per kilowatt-hour, energy efficiency measures are 
a more cost-effective option for meeting and ultimately reducing U.S. 
energy needs. In addition to being cheaper than conventional energy 
resources, energy efficiency is the only resource that can actually 
reduce a customer's overall energy usage, thereby reducing their energy 
bills for years to come. As the targets slowly increase over the 
compliance period, consumers will be investing in more energy 
efficiency each year, leading to greater savings and reduced energy 
bills.
    The EERS will also place downward pressure on natural gas prices. 
Since natural gas prices are determined by the interactions of supply 
and demand, as demand is reduced, natural gas prices will decline 
somewhat. The general trends are illustrated in the figure below from a 
2005 ACEEE study on the effect of energy efficiency on natural gas 
prices. In this study, electricity and natural gas savings through 
energy efficiency programs averaged 10.7% electricity savings and 9.8% 
natural gas savings in 2020. The impacts on natural gas markets vary 
from year to year depending on how tight world markets are so the data 
in the graph below are only indicative of general trends and not a 
prediction of the exact impact on natural gas prices in the future.
Relationship of an EERS to an RES
    An EERS and a Renewable Energy Standard (RES) are fully 
complementary to each other. An EERS reduces electricity use through 
use of energy efficiency measures. An RES then helps meet a portion of 
remaining load with renewable resources.
    The EERS and RES are much more effective as independent mechanisms 
working in tandem, rather than combined as an RES that can partially be 
met with energy efficiency, as passed the House in 2007. Adding 
efficiency as an option for meeting an RES is usually done as a 
``safety valve'' for utilities by weakening requirements for renewable 
energy. But such an approach results in much less efficiency investment 
than is cost-effective, leaving substantial unharvested benefits. As 
shown in the table below, a 2007 analysis by ACEEE found that combining 
an RES and EERS would not take full advantage of the emissions 
reductions, electricity savings, job creation, and consumer savings 
potential that could result from having a separate RES and EERS.
      
    
    
    In addition, energy efficiency and renewables are unique resources 
with unique characteristics. An RES would apply to the entity supplying 
power--sometimes a competitive load serving entity--which in some cases 
is not the local distribution company that would be regulated under an 
EERS; attempting to merge an RES and EERS could create unnecessary 
regulatory complications.
    Furthermore, having both a stand-alone RES and EERS as opposed to 
either one alone (or just pursuing business as usual) provides lower 
electricity prices by 2025 even in the Midwest and the South, regions 
that are more heavily dependent on coal. This is illustrated in the 
figures below, which shows what regional wholesale prices would be 
under business-as-usual compared to what they would be under the 2007 
House RES (15% by 2020, though 4 of the 15 can be met with efficiency), 
a stand-alone EERS (10% reduction in electricity usage and 5% in 
natural gas usage by 2020), or a combination of a 15% RES (with no 
efficiency option) and a 15% EERS by 2025.
    An EERS actually makes achieving an RES easier and less expensive, 
since an RES requires a percentage of total electricity sold to be from 
renewables, and energy efficiency reduces the total amount of 
electricity sold. If sales go down 15% in 2020 due to an EERS, a 
utility will need to generate 15% fewer renewable kilowatt-hours.
Relationship of an EERS to Climate Legislation
    Energy efficiency is an essential ingredient of a cap and trade 
program as efficiency investments help to keep the costs of carbon 
regulation down. An EERS reduces the costs of a cap because it 
guarantees minimum investments in efficiency, which reduces energy 
demand and bills. When demand is down, money is saved because less new 
power plants need to be built and fewer existing power plants need to 
be upgraded. Energy efficiency is the least-cost (often no-cost or 
negative-cost) means of reducing heat-trapping emissions, and the 
potential reductions from efficiency are immense.
    Explicitly promoting efficiency and renewables through an EERS and 
an RES in conjunction with a carbon cap makes the cap more affordable. 
The figure on the next page shows what wholesale electricity prices 
would be with just a climate framework, as compared to a combined 
climate-RES framework, a combined climate-EERS framework (with the EERS 
requiring a 10% reduction in electricity usage and 5% in natural gas 
usage by 2020), and a ``Three Pillars'' climate-RES-EERS framework. The 
``Three Pillars'' approach yields lower prices by 2025 than any other 
combination.
Responses to Questions and Concerns About a Federal EERS
            Can't we just rely on the market?
    Some have argued that we should rely strictly on the market to 
adopt efficiency measures and do not need regulation. Related to this 
argument, others suggest that a carbon price alone will spur sufficient 
investment in energy efficiency and no further regulation is needed. 
However, these arguments ignore the substantial market barriers that 
impede energy efficiency investments including limited information on 
and stocking of efficient equipment, lack of capital to finance up-
front efficiency investments, and third-party decision makers such as 
builders and landlords who purchase inexpensive equipment, since they 
do not pay equipment operating costs. Much higher energy prices will 
eventually spur efficiency investments, but with the economic 
dislocations that much higher energy prices can bring. With an EERS and 
other efficiency policies, efficiency investments are made without 
having to first drive energy prices sky-high.
            Why not just leave to states to decide?
    Currently, nineteen states are implementing a state-based EERS. 
Policy actions at the federal level are necessary to strengthen the 
continued development and implementation of energy efficiency at the 
state level and expand this policy to all 50 states. In some of the 
states that currently have an EERS, little to no direct electricity 
savings would be realized under the federal proposals. This is because 
the state EERS calls for greater energy savings than the federal 15% 
electricity savings target. Nearly all of these states do, however, 
stand to achieve increased natural gas savings as a result of the 
federal EERS. These states further benefit because the federal EERS 
will promote savings in nearby states, helping to reduce demand and 
energy prices throughout the region. On a regional basis, a federal 
EERS stands to reduce energy bills, increase jobs, and reduce carbon 
emissions far beyond what any individual state can achieve on its own. 
Furthermore, even in states with an EERS, businesses will benefit from 
a federal EERS, through increased business for energy-saving equipment 
and services as companies in one state provide efficient goods and 
services in neighboring states.
            Is cap & trade, an RES and an EERS together too much?
    Energy efficiency and renewable energy investments can help lower 
the cost of electricity under cap and trade legislation, saving 
consumers money. In tandem, the benefits of both an efficiency and 
renewable energy standard are magnified because they help reduce the 
cost to consumers of cutting emissions. Energy efficiency helps reduce 
energy demand while cleaner, renewable energy replaces other, higher 
carbon-emitting sources, further reducing carbon dioxide emissions. 
Energy efficiency reduces the cost of cap-and-trade because less new 
energy facilities are needed and also because a smaller portion of 
existing facilities need to be upgraded to help meet emissions 
ceilings. As such, electricity prices under cap-and-trade legislation 
will be approximately 15 percent less if an EERS and RES are also in 
place (refer to National Wholesale Electric Prices graph on page 17).
            Are the targets in S. 548 achievable?
    The proposed savings targets build on various studies that 
demonstrate significant available cost-effective savings at the state 
level and on actual savings targets being achieved in states with 
experience implementing an EERS. A summary of the results of state-
level studies is provided on the next page and shows a median 
achievable energy efficiency potential of 18% electric savings, which 
is higher than the targets in S. 548.
    Furthermore, these studies rarely include new energy-saving 
technologies such as LED lighting and advanced microprocessor controls. 
As new efficiency technologies and practices are invented and brought 
to market, the amount of cost-effective efficiency savings available 
will increase.
    Utilities and states are showing that these targets can be achieved 
in practice. On the next page is a chart showing energy efficiency 
achievements and targets in leading states, indicating quite a few 
states achieving or targeting more than 1% per year efficiency savings, 
putting them on a clear path to reach the S. 548 targets.
      
    
    
            Is the federal EERS administrable? Will it create a large 
                    federal bureaucracy?
    We believe the EERS will not be difficult to administer and will 
not require a large federal bureaucracy. DOE will have to develop 
initial implementing rules, but it has experienced contractors who can 
help, and can build on existing state implementation rules. In terms of 
regulatory oversight, the proposed federal EERS has been set up similar 
to the proposed RES, with administration to happen at the state level 
if the Secretary approves a state's request. We expect most states to 
administer the program at the local level, preferring not to ``trust 
the bureaucrats in Washington.'' The utility reporting requirements for 
achieved savings, as specified in the law, are designed to mimic 
standard practice in many states, so that current procedures can 
largely be followed. The federal proposal has DOE reviewing state 
implementation every four years, with half the states to be reviewed 
every two years. This will require some DOE staff and contractors, but 
not a large bureaucracy.
            Will an EERS penalize utilities who promote use of electric 
                    and natural gas vehicles and cost-effective fuel 
                    switching?
    The Energy Information Administration projects electricity use for 
electric transportation to grow from 0.2% of electric sales in 2006 to 
0.3% of electric sales in 2030. In the event this growth speeds up, DOE 
should factor it into decisions setting post-2020 standards. This 
slight increase in electric sales due to electric plug-in hybrids 
should not affect a utilities ability to meet the EERS targets. We 
support an amendment to S. 548 making clear that DOE should factor in 
growth in electric and natural vehicle sales when setting post-2020 
savings targets. Suggested wording is attached to my testimony.
    Switching from one fuel to another, to the extent such switching 
saves consumers money, is something that both the electric and natural 
gas industries seek (e.g. switching to some industrial electro-
technologies or switching to natural gas use for space and water 
heating). However, we are not aware of instances where fuel switching 
has occurred to a degree that this would have a significant impact on 
sales and savings targets. If fuel-switching were to become more common 
in the future, DOE can and should factor this in when setting future 
efficiency savings targets.
            Should we provide credit for early action?
    Some progressive utilities that have run efficiency programs for 
decades are worried that the proposed federal EERS target will be much 
more difficult and costly for them to meet since they have already 
picked the ``low-hanging fruit'' that remains available to other 
utilities that have yet to act on efficiency.
    States that have been implementing energy efficiency programs for a 
long time have the experience of knowing what types of programs work 
for their customers. Additionally, it has been a good business model 
for these early players, saving them money. In some cases though, it is 
true that the next kWh saved will be more costly, as the availability 
of ``low-hanging fruit'' decreases (although our research shows energy 
efficiency programs continue to cost, on average, 3 cents per kWh)\4\. 
When we look at plans from such utilities as Massachusetts Electric, 
Narragansett Electric, Seattle City Light, and Austin Energy, it 
appears to that they should be able to meet the S. 548 targets by 
following their current plans, plus factoring in codes and standards. 
We will continue to research these issues further.
---------------------------------------------------------------------------
    \4\ Kushler, York, and Witte. 2004. Five Years In: An Examination 
of the First Half-Decade of Public Benefits Energy Efficiency Policies. 
Report U042. Washington, D.C.: American Council for an Energy-Efficient 
Economy. ACEEE is now collecting updated data on the cost of efficiency 
programs and preliminary findings are that costs per lifetime kWh saved 
are still about 3 cents.
---------------------------------------------------------------------------
    At the same time, those states that have a lot of potential energy 
savings (since they haven't reaped the low-hanging fruit) stand to 
achieve the easier savings at low cost but they do not have the 
experience of operating programs. This lack of experience at the 
utility as well as the regulatory level may act as a hurdle to getting 
successful programs running. For these states it is like going from 0 
to 60 mph while the experienced states are already going 55 mph. To 
address these states and utilities, the savings targets in S. 548 start 
slowly, with significant savings delayed to the latter years. Also, S. 
548 has a provision permitting a utility to miss the initial targets 
and make up the lost savings during the second reporting period.
            Should an EERS and an RES be combined?
    We prefer a separate EERS and RES because energy efficiency is too 
important to just leave as a safety valve for an RES, a safety valve 
that would save far less energy than a separate EERS. If the proposed 
EERS targets in S. 548 were added to whatever RES target Congress 
proposes, this objection goes away. Still, such legislation would need 
to include an EERS on natural gas utilities. One other consideration is 
that the proposed EERS and RES apply to slightly different entities. 
The EERS applies to distribution utilities, the RES to load serving 
entities. While these two are often the same, in the case of retail 
sales by independent power providers, the independent power provider is 
subject to the RES, while the electric distributor is subject to the 
EERS. This means that the distribution utility would likely offer the 
primary energy efficiency programs in a region, but independent power 
providers would either need to operate separate programs for their 
customers, or would need to contract with the distribution utility for 
efficiency services. Either option could work, but both are more 
complicated than just putting the obligation on the distribution 
utility.
Conclusion
    ACEEE has been estimating the energy savings from potential energy 
legislation since the 1980s. We've conducted detailed analyses on the 
energy savings from the Energy Policy Act of 2005 (EPAct) and from the 
Energy Independence and Security Act of 2007 (EISA). We have done 
similar analyses for the pending provisions in 2009 energy legislation 
in both the House and Senate. The EERS in S. 548 will save more energy 
in 2020 than all of the efficiency provisions in EPAct combined and 
nearly as much in 2020 as all of the efficiency provisions in EISA 
combined (e.g. 4.5 quadrillion Btu's of energy from the EERS, 4.7 
``quads'' from all of EISA). The EERS is the ``800 pound gorilla'' of 
energy efficiency policy. It is time to move federal energy efficiency 
policy into the big leagues by adopting a federal EERS.
    A federal EERS along the lines of S. 548 will substantially reduce 
U.S. electricity and natural gas use, save consumers and businesses 
billions of dollars (nearly $170 from investments made through 2020), 
create more than 220,000 new jobs, and serve as a key policy for 
moderating the cost of federal climate change legislation. These 
benefits will not occur if energy efficiency is just a safety valve to 
a renewable energy standard. Energy efficiency is important enough in 
its own right that the U.S. deserves and needs an EERS with savings 
targets like those in S. 548. ACEEE strongly recommends that the next 
federal energy bill include such an EERS as a centerpiece.
    This concludes my testimony. I am happy to answer any questions you 
may have.
References
    Furrey, Laura, Steven Nadel, and John Laitner. 2009. Laying the 
Foundation for Implementing a Federal Energy Efficiency Resource 
Standard. ACEEE Report E091. Washington, D.C.: American Council for an 
Energy-Efficient Economy.
    Prindle, William, Maggie Eldridge, John Laitner, Neal Elliott, and 
Steven Nadel. 2007. Assessment of the House Renewable Electricity 
Standard and Expanded Clean Energy Scenarios. ACEEE Report E079. 
Washington, D.C.: American Council for an Energy-Efficient Economy.
    Nadel, Steven. 2006. Energy Efficiency Resource Standards: 
Experience and Recommendations. ACEEE Report E063. Washington, D.C.: 
American Council for an Energy-Efficient Economy.
    Elliott, R.N. and Anna M. Shipley. 2005. Impacts of Energy 
Efficiency and Renewable Energy on Natural Gas Markets: Updated and 
Expanded Analysis. ACEEE Report E052. Washington, D.C.: American 
Council for an Energy-Efficient Economy.

    The Chairman. Thank you very much.
    Mr. Wells.

   STATEMENT OF RICH WELLS, VICE PRESIDENT, ENERGY, THE DOW 
                 CHEMICAL COMPANY, MIDLAND, MI

    Mr. Wells. Thank you, Mr. Chairman, and members of the 
committee. We appreciate the opportunity to provide you our 
views on energy-efficiency resource standards and their role in 
future energy and climate change polices of our country.
    First, I would like to address the critical role energy 
plays for Dow Chemical. As a leading specialty chemicals and 
advanced materials company, Dow uses the equivalent of 850,000 
barrels of oil every day in global operations. Of this total, 
approximately half is here in the United States.
    The energy used by Dow is converted into a wide variety of 
products essential to our economy and our citizens' qualify of 
life, including pharmaceuticals, insulations, electronic 
materials, and much more.
    With energy being the key enabler for all our products, it 
is no surprise that the volatility of energy prices over the 
last 6 years has had a dramatic on our company. In 2002, our 
annual energy and feedstock bill was $8 billion. Last year that 
number climbed to over $26 billion.
    Because of that, we have energy efficiency and conservation 
program which has been refined over the last two decades. This 
program--through its energy savings of $8 billion and 
CO2 reductions of 86 million metric tons over the 
past 15 years--has helped us to sustain our operations and 
retain the ability to invest in our future despite these rising 
energy costs.
    We are not done. We have set a corporate goal to further 
improve energy efficiency by an additional 25 percent by the 
year 2015. If the United States was to accomplish a similar 
goal, we could eliminate the oil equivalent of all imports from 
the Middle East.
    We believe the promotion of both energy-efficiency and 
renewable energy should be at the heart of any energy security 
and climate change strategy.
    A national energy-efficiency resource standard would be a 
tangible way to assure that energy-efficiency becomes the tool 
of choice for achieving early and effective reductions in 
energy costs, natural gas demand and greenhouse gas emissions.
    Currently, new conventional base-load production sources 
generate electricity at a rate between seven and 14 cents per 
kilowatt-hours. At a cost of three cents per kilowatt-hour 
saved, the efficiency improvements are significantly less 
expensive than building new generation and transmission 
capacity. Implementing a national EERS would commit every State 
to utilize this least-cost resource, establish a baseline level 
of cost-effective and achievable energy savings, and reduce 
CO2 emissions far beyond the level possible by those 
States acting alone.
    As already mentioned, the ACEEE estimates that by 2020, a 
Federal EERS would reduce peak electrical demand by over 
110,000 megawatts, cut carbon dioxide emission by approximately 
260 million metric tons and create 220,000 net jobs. 
Furthermore, utility customers would save a net $168 billion. 
When it's all added up, the benefits of an EERS outweigh the 
costs by a factor of three to one.
    An EERS would also reduce natural gas demand, particularly 
during peak periods, thereby reducing both its price and 
volatility. US Manufacturers, long the shock absorber for high 
domestic natural gas prices, would benefit from a competitive 
and more predictable natural gas supply.
    Under an EERS, utilities would offer a variety of programs 
to help customers reduce their energy usage. This could take 
the form of rebates for the purchase of energy-efficient 
equipment, conducting energy audits and insulating homes.
    As an example, our Dow Building Solutions business is 
partnering with utilities to help them develop cost-effective 
energy-efficient retrofit programs aimed at addressing the 
energy performance of our Nation's existing building stock.
    We are currently working with the State of Michigan and its 
two largest utilities to shape that State's new EERS program. 
We have also recently launched a residential and commercial 
effort with another major utility aimed at quantifying the 
energy-efficiency of air sealing packages for homes, as well as 
exploring ways to provide incentives for new construction to go 
beyond existing energy codes.
    There is one important fact about energy-efficiency--
opportunities exist throughout our economy and throughout the 
country.
    As the committee considers this legislation, we urge the 
following considerations:
    First, assure that the standard is applied to utilities and 
not to industrial users of energy.
    Second, if Congress decides to enact a Renewable 
Electricity Standard (RES) rather than an EERS, Congress should 
allow a large part of the renewable mandate to be met through 
energy-efficiency.
    In conclusion, energy-efficiency and renewable energy are 
essential elements of a comprehensive energy policy--and must 
be deployed cost effectively if any climate change policy is to 
be workable. EERS can be an effective tool to assure that these 
objectives are achieved at the lowest possible cost.
    I appreciate the opportunity to speak today and I will be 
happy to entertain any questions you may have.
    [The prepared statement of Mr. Wells follows:]

   Prepared Statement of Rich Wells, Vice President, Energy, The Dow 
                     Chemical Company, Midland, MI
    Chairman Bingaman, Senator Murkowski and members of the committee, 
thank you for the opportunity to provide our views on the energy 
efficiency resource standard and its role in the future energy and 
climate change policies of our country.
    First, I would like to address the critical role energy plays for 
Dow. As a leading specialty chemicals and advanced materials company, 
Dow uses the equivalent of 850,000 barrels of oil every day in its 
global operations. Of this total, approximately half is in the U.S.
    Energy used by Dow is converted into a wide variety of products 
essential to our economy and our citizens' quality of life, including 
pharmaceuticals, insulation, electronic materials, and much more.
    With energy being the key enabler for all of our products, it is no 
surprise that the volatility of energy prices over the last six years 
has had a dramatic impact on Dow. In 2002, our total annual energy and 
feedstock bill was $8 billion. For 2008, that number climbed to $27 
billion.
    Dow has an energy efficiency and conservation program which has 
been refined over the past two decades. This program--through its 
energy savings of $ 8 billion and CO2 emission reductions of 
86 million metric tons over the past 15 years--has helped us to sustain 
our operations and retain the ability to invest in our future despite 
these rising energy costs.
    And we are not done; Dow has set a corporate goal to further 
improve energy efficiency by an additional 25% by the year 2015. If the 
United States was to accomplish a similar goal, it could save the oil 
equivalent of all imports from the Middle East.
    We believe the promotion of both energy efficiency and renewable 
energy should be at the heart of any energy security and climate change 
strategy.
    A national energy efficiency resource standard would be a tangible 
way to assure that energy efficiency becomes the tool of choice for 
achieving early and effective reductions in energy costs, natural gas 
demand, and greenhouse gas emissions.
    Currently, new conventional base-load production sources generate 
electricity at a rate between 7 and 14 cents per kilowatt-hour. At a 
cost of 3 cents per kilowatt-hour saved, efficiency improvements are 
significantly less expensive than building new generation and 
transmission capacity. Implementing a national EERS would commit every 
state to utilize this least-cost resource, establish a baseline level 
of cost-effective and achievable energy savings, and reduce carbon 
dioxide emissions far beyond the level possible by those states acting 
alone.
    The American Council for an Energy-Efficient Economy estimates that 
by 2020, a federal EERS could reduce peak electrical demand by about 
90,000 megawatts, cut carbon dioxide emissions by approximately 260 
million metric tons and create 260,000 net jobs. Furthermore, utility 
customers would save a net $144 billion. When it is all added up, the 
benefits of the proposed EERS outweigh the costs by a factor of 3 to 1.
    An EERS will also reduce natural gas demand, particularly during 
peak periods, thereby reducing both its price and volatility. US 
Manufacturers, long the shock absorber for high domestic natural gas 
prices, would benefit from a competitive and more predictable natural 
gas supply.
    Under an EERS, utilities would offer a variety of programs to help 
customers reduce their energy usage. This could take the form of 
rebates for the purchase of energy efficient equipment, conducting 
energy audits, and insulating homes.
    For example, our Dow Building Solutions business is partnering with 
utilities to help them develop cost-effective energy efficient retrofit 
programs aimed at addressing the energy performance of our nation's 
existing building stock.
    We are currently working with the State of Michigan and its two 
largest utilities to shape the state's new EERS program. We have also 
recently launched a residential and commercial effort with another 
major utility aimed at quantifying the energy efficiency of air sealing 
packages for homes, as well as exploring ways to provide incentives for 
new construction to be built above existing energy codes.
    One important fact about energy efficiency---opportunities exist 
throughout our economy and throughout the country.
    As the committee considers this legislation, we urge the following 
considerations.

          1. Assure that the standard is applied to utilities and not 
        to industrial users of energy.
          2. If Congress decides to enact a Renewable Electricity 
        Standard (RES) rather than an EERS, Congress should allow a 
        large part of the renewables mandate to be met through energy 
        efficiency.

    In conclusion, energy efficiency and renewable energy are essential 
elements of a comprehensive energy policy--and must be deployed cost-
effectively if any climate change policy is to be workable. EERS can be 
an effective tool to assure that these objectives are achieved at the 
lowest possible cost.
    Thank you for the opportunity to speak with you today, and I will 
be happy to answer your questions.

    The Chairman. Thank you very much. Thank you all for your 
testimony. We will start and ask questions and then call on 
your colleagues.
    One obvious first question is whether or not if we did 
anything like this by way of legislation, should we also apply 
it to natural gas?
    Mr. Nadel, you say we should, and you cite the 19 States 
that currently have EERS. How many of those States have applied 
it to natural gas?
    Mr. Nadel. I would have to do an exact count. I believe it 
is about three. I would get back to you to be sure, but I know 
Minnesota has it, Michigan has it, and New York is developing 
it. Let me double check. There are a couple of--maybe----
    The Chairman. Because it does seem that there are some 
different objectives we are trying to achieve here. I think Mr. 
Manning points out that they are trying to move some of their 
customers, if I understand it, away from use of fuel oil and to 
natural gas, and at the same time they're suggesting that there 
ought to be additional requirements put on natural gas 
companies. So Mr. Manning, do you have a comment?
    Mr. Manning. If I could just speak to that. New York City, 
for instance, buildings within New York City alone, still 
running on having oil, and they would like to move away from 
that, obviously. Only 1800 of those buildings were in our 
service area. They would like to pursue a very aggressive 
conversion program. Ultimately a program to disallow oil heat 
within the----
    The Chairman. Do you have suggestions as to what we should 
do to encourage that shift from heavy oils to natural gas? I 
would be anxious to hear those.
    Mr. Manning. Absolutely. Of course, there is a lot of work 
that we are doing with biofuels. For instance, connecting 
captures. We have been capturing methane and putting it right 
into our gas distribution system for decades. It was one of the 
first projects.
    We installed the first fuel cell in 1972 in Staten Island. 
So we do already encourage a lot of technology development of 
the gas line, so I have to support my colleagues there, but I 
do think though, in terms of the implementation of an EERS, we 
have to be sensitive to the opportunities for growth through 
conversion and the opportunities for advanced technologies in 
terms of efficiency.
    So we are of the view that you can, in fact, facilitate gas 
conversions through an EERS practice, which of course, gives 
credit for and requires increased efficiency.
    So part of the natural gas conversion opportunity is a 40 
percent reduction in emissions.
    So there would be clear opportunities if we get the rules 
right, that people could select the fuel like natural gas to 
bring in under compliance. So what we have to do as staff is to 
make sure that those conversions and new growth, and new 
technologies, such as the electrification of valve sites, there 
are those out there that believe we have done a tremendous 
amount of work in natural gas for years. We have been working 
on that for 20 years.
    The Chairman. We have a couple other questions, just to 
change. Does anyone want to comment?
    Mr. Skains. Yes, Senator, I do. Thank you. The principle 
that you raise is an important one and it doesn't just apply to 
fuel oil. It applies to all fuels that are higher emitting than 
natural gas. It could be fuel oil. It could be propane. It 
could be electric use in homes. That the gas appliances could 
serve that use more efficiently, more cost effectively with 
less CO2 emissions. For example, an electric water 
heater emits two to three times the amount of CO2 as 
a natural gas water heater.
    We think any energy-efficient measurement standard should 
take into account and promote the conversion of higher ended 
fuel sources to lower ended fuel sources. So I agree with Mr. 
Manning wholeheartedly and I would expand it to include the 
prospect of many energy sources. This legislation as it is 
currently drafted, doesn't get there, but we think we can work 
with your staff and the other participants to do so.
    The other thing we are concerned about, too, is economic 
growth and development. We don't think that this bill should 
deter the addition of new natural gas customers, whether they 
be new homes and businesses, new manufacturing in the United 
States. We want to encourage economic growth development and 
jobs here, so we think there should be a credit, not just 
during the base period calculations, but during the compliance 
years for new growth in conversions, and that means utilities 
aren't penalized by adding customers with an efficient fuel.
    The Chairman. Let me ask Mr. Centolella, your point here 
that we should clarify that States may consider energy-
efficiency to be a resource or a reduction to forecast load for 
purposes of zoning and planning and procurement. Why would we 
have to do that? That's something that every State, public 
utility, presumably, I assume that every utility would do that 
to the extent that they felt they could improve efficiency, 
they would want to put that in their forecast, and that would 
be something we could recognize. What is the point there? I am 
not understanding.
    Mr. Centolella. In referencing a section of S. 548, which 
directs States to consider energy-efficiency as a resource, 
it's a model that is commonly used in practices that have gone 
on in States for some time in resource planning, but it is a 
model that we have seen create problems when we get to the 
level of RTO and RTO advocacy requirements.
    At the RTO level, something that is called a resource 
typically requires the ability to be dispatched by a system 
operator. Things like energy-efficiency, particularly where we 
run into this is price responsive, predictable responses of 
consumers dynamic retail prices.
    Those are not dispatchable by the system operator in the 
sense that, Midwest, for example, is not going to send a 
dispatch to the plant on the air conditioner, even though my 
air conditioner might have a chip in it and responds to dynamic 
retail pricing.
    So we want to make sure that States aren't obligated by 
this law to use a framework that may not be the appropriate 
framework, particularly as go forward in more and more Smart 
Grid type of application.
    The Chairman. So you are saying that if we are going to 
use--referring to this as a resource could cause some problems 
elsewhere?
    Mr. Centolella. Yes.
    The Chairman. My time is up. Let me see, Senator Menendez 
was the first one here.
    Senator Menendez. Thank you, Mr. Chairman. Thank you all 
for your testimony.
    Mr. Nadel, let me ask you, the latest draft of the 
committee's RES bill allows a one-quarter of the RES to be met 
through energy-efficiency. That amounts to a 15 percent RES and 
a 5-percent EERS. If we were to add up the 19 States EERS 
currently in place, how would that compare to the 5-percent 
national RES?
    Mr. Nadel. It would equal or slightly exceed national level 
and get just over 5 percent from existing EERS by 2020.
    Senator Menendez. So really if we have a 5-percent EERS, 
there is not much of an improvement by 2012?
    Mr. Nadel. Correct.
    The Chairman. Let me just ask for clarification. Is that 
just in the 19 States or you are saying nationally there is 
little or no improvement by having a requirement, a national 5 
percent requirement?
    Mr. Nadel. Right. The 19 States together will have enough 
efficiency to equal 5 percent of the whole Nation, of all 50 
States.
    Senator Menendez. Second, Mr. Manning, let me ask you. You 
said in your testimony that a significant expansion of combined 
heat and power technology utilizing natural gas would offer a 
leading opportunity to generate electricity more efficiently 
and reduce our carbon footprint, as I recall your testimony.
    Mr. Manning. Yes, that is correct.
    Senator Menendez. I couldn't agree more. You know, we 
looked at the report recently by the Oak Ridge National 
Laboratory that estimates that combined heat and power has 
already reduced emissions equivalent of taking 45 million cars 
off the road and would provide policies, we could easily triple 
that by 2030. Unfortunately this seems to be severe regulatory 
barriers in the form of tariffs and difficulty in 
interconnecting CHP projects in many States.
    Do you agree that in order to meet an aggressive national 
EERS that these barriers to combine heat and power have to be 
removed?
    Mr. Manning. Yes, that's a personal position and a 
corporate position. We do believe that proliferation of 
combined heat and power, both as distributors in terms of 
baseline. We have a lot of plants, Senator, that are 29 percent 
efficient. The old single-cycle, where you are basically 
boiling water and generating electricity.
    I would like to give a quick comparison as to whether or 
not that we have created, based on natural gas, combined cycle, 
to displace the dam of the Columbia River. The steam, after 
it's run down--the power is generated by a jet turbine, right 
off of a DC-10--heat goes out and generates--instead of going 
out the stack, generates water. The second turbine is a 
combined cycle. Then the steam goes out the back end into a 
MacDonald's French Fry factory, and that steam blows the skin 
off, runs the cutters, runs the fryers, runs the freezer and 
cycles back in the plant. This is a million pounds a day of 
MacDonald's French Fries. The trucks are driving by.
    So there's an example of how combined cycle becomes 
cogeneration and your efficiency level goes up at every 
opportunity. That, of course, within the business of a home, 
you've got the opportunity, as my friends will point out from 
AGA, natural gas for the home delivers a much higher efficiency 
level than if you are generating from large plant sources.
    So the combined cycle in the home ranks as the best example 
for the free market for generating power and heat 
simultaneously.
    Senator Menendez. so just for the record, steam that went 
into the French Fries was in the machinery, right?
    Mr. Manning. So in summary, real potatoes are used.
    [Laughter.]
    Senator Menendez. So finally, Ms. Hoffman, if I think that 
Mr. Manning's answer is the answer of many experts who agreed 
that expanded use of combined heat and power will be a key part 
of making an aggressive EERS, and based upon that Oak Ridge 
Laboratory report that talked about lack of uniform standards 
and how such CHP projects can act through the grid as a 
significant barrier to this market, do you think it's time for 
a National Interconnection Standard?
    Ms. Hoffman. The Department of Energy helped develop the 
Voluntary Standard, IEEE 1547, which is an interconnection 
standard that has been adopted by a number of different States. 
I think we should look at that standard and see how we can 
improve on it as it currently exists.
    Senator Menendez. Thank you very much.
    The Chairman. Thank you, very much.
    Senator Cantwell. Thank you, Mr. Chairman. Thank you for 
having this important hearing. A couple of witnesses mentioned 
Smart Grid and I want to talk a little bit about that.
    Mr. Nadel, thank you very much for your leadership in the 
area in general, for your abdication of the efficiency 
standard.
    I want to focus on the issue of peak demand on this 
disproportionate cost that we have to the system, and the fact 
that Congress ought to be looking at ways to decrease the peak 
demand in addition to energy-efficiency. So Mr. Centolella, 
would you want to comment on that?
    Mr. Centolella. Sure. Thank you, Senator. Let me comment on 
both Smart Grid and peak demand reductions.
    In terms of Ohio State statute, we have both an energy 
saving standard and we also have peak demand reduction 
standard.
    Our rules are designed to pursue and facilitate utilities 
having demand response programs that may be price based or 
incentive based, as well as on traditional demand reduction 
programs to meet that standard. One of the things that we are 
very interested in is how to encourage cost-effective Smart 
Grid investments. We have already approved two utility scale 
AMI and Smart Grid projects for Renew Energy Ohio and America 
Electric Power. Duke Energy in 2009, will put in 50,000 
advanced leaders and service carriers and then build it out for 
5 years. American Electric Power, in its first phase, as we 
improve, will put in 110,000 advanced meters. We expect to 
follow that up with looking at how we can create some dynamic 
retail pricing, so that, in fact, consumers can benefit from 
being able to manage their energy use in relationship to what 
it actually costs to produce energy at any given point in time.
    As I mentioned briefly with the Chairman, we are also 
working with the two RTOs that are active in our State, 
modified to those RTO tariffs, to make sure that the benefits 
of that demand reduction actually flow back to consumers and 
that the investments that are made in Smart Grid have benefits 
to consumers in terms of dynamic pricing.
    Of course, Smart Grid is much broader than just reducing 
peak demand through demand response. The way we view it is, it 
is an architectural view, which you are creating an overlay of 
information and communication systems that is both secure, and 
also open that provides a platform for distribution, 
innovation, generation and storage, plug-in electric vehicles 
and a whole range of applications that we are just now 
beginning to imagine, many of which could help consumers 
significantly in terms of energy-efficiency, as well as making 
this system more reliable, increasing power quality and helping 
us to integrate new technology.
    Senator Cantwell. Isn't it a case that peak demand response 
is to distribute storage and other ways help to foster this 
development.
    Mr. Nadel. Yes, there are many ways to reduce peak demand. 
You just mentioned several. Also, response programs, feedback 
programs, where people get feedback on their energy use of 
their previous use and reduce their demand.
    But also the traditional energy-efficiency programs, on 
average, if you a 10-percent savings or better, you get about a 
10-percent reduction on peak demand.
    Mr. Manning. One further point, Senator, through many of 
the regions, your power source is staged in. This will of 
course, stage in the power which is actually used on peak, you 
are often using the least efficient sources of energy. So 
that's just another benefit in these savings. You not only take 
the pressure off of your distribution system, but you are also 
probably also idling some of your inefficient energy sources.
    Senator Cantwell. I am trying to figure this out for your 
ratepayers. What do we do when this credit market is frozen, we 
have this dilemma of making these investments obviously on a 
rate of return, and balancing ratepayer based issues as well? 
What do you think we need to do to move more expeditiously?
    Mr. Manning. That is a real challenge. We, fortunately, are 
a larger company, so we still have access to the credit lines 
ourselves. But it really puts us----
    Senator Cantwell. Mr. Manning, that is the issue. We are 
working with utility commissions for all ratepayers.
    Mr. Manning. That is the issue, is in working with State 
utility commissions, if you want to drive energy efficiency 
aggressively, and this is certainly in the areas that they can 
contribute to that issue, but in other words, another way to do 
it, of course, is to spread the cost of some of these 
innovative technologies within the rate base so that they 
become more affordable. So it does require a new conversation 
in terms of the regulatory compact between utilities. 
Decoupling is a first set. I believe it's decoupling that gets 
the utility onsite, but it also, of course, requires some 
opportunity for rate recovery to drive the implementation and 
costs will come down as a result.
    Senator Cantwell. Is there time for one more question?
    The Chairman. Yes, sure. Let me ask, and start with you, 
Ms. Hoffman, one of the points you make is that we should find 
a way that people who have, or utilities that have pursued 
energy-efficiency in a serious way should be given credit for 
that. We should not be assuming that everyone is starting in 
the same place. How do we do that? Do you have a suggestion for 
us, and maybe Mr. Nadel, you have some ideas on how States that 
have adopted the EERS; if any of you know how to solve that 
problem, I would interested to hear it.
    Ms. Hoffman. Look at the baseline and allow some of the 
States that have implemented energy-efficiency measures to 
modify that baseline accordingly.
    The Chairman. Do you have a comment?
    Mr. Centolella. Yes, this is part of the reason why we have 
suggested exempting States that have meet criteria from the 
Federal standard. What you see as you look across states, and 
these are States that are in different positions for a whole 
range of reasons. One of which may be that some States have 
done all more already in energy-efficiency than others.
    But they have different customer bases, they have different 
levels of load growth, different rates of technology options, 
and different attitudes in price on consumers, and so we think 
that it is appropriate to have essentially the same decision 
criteria that this bill would ask the secretary to use in terms 
of defining on a uniform and national level what is maximum, 
achievable cost effective potential, to take that 
decisionmaking down to the States that are prepared to move 
forward with their own standards, and have them apply the same 
decision criteria about what is maximum achievable cost 
effective potential. But to do it in a way that reflects their 
States' conditions, engages the stakeholders, engages the 
public in a review process in those States, so that you get a 
standard that reflects where each individual State is at.
    I think if we do that and set this national goal by 
engaging the States and the thousands of consumers that 
participate in our regulatory proceedings in that process, we 
will end up with better standards. We will end up with 
standards that are more likely to take effect sooner and not be 
subject to litigation and delay. I think we will end up with 
standards that reflect the differences between the States.
    The Chairman. Mr. Nadel, do you have a thought on how we 
solve this problem of fair treatment of people who have done 
the right thing?
    Mr. Nadel. We like the concept of banking so that if the 
States are already doing it, they are saving right now. They 
come bank a lot of savings that will make it easier.
    We have looked at even the utilities that are doing a lot. 
There are opportunities for at least 10 percent more saving 
beyond what they are saving. So we think they could achieve it.
    The Chairman. Presumably the banking suggestion and the 
description that Mr. Centolella gave about Ohio where they 
allow banking, the banking starts when the requirement is 
imposed, so you've got to still meet the--whatever it is, 15 
percent, 10 percent reduction or improvement in efficiency from 
that day forward, and I'm concerned that perhaps there are 
States that have already--not States, but utilities, for 
example, that have already dramatically improved efficiency, 
and we are now saying to them, ``OK. We are imposing the same 
requirement on you that we are imposing on the utility.''
    Mr. Nadel. OK. Banking is giving them a partial credit, if 
you will, because the targets ramp up so slowly, these more 
active States will easily exceed the targets in the early years 
and they can bank those extra. Alternatively, you can give them 
credit for early action, if you will, but that does reduce the 
target.
    The Chairman. Are there States that have done that and been 
given credit for early action?
    Mr. Nadel. I mean the States usually, they give credit as 
of when the law passes. I can't think of any, but I have to 
check back for anybody who has done early action before the law 
got passed.
    Mr. Skains. Senator, I think it's a broader, more difficult 
question, too. It just doesn't apply to States that have gone 
to the EERS standards. Our industry, the natural gas industry 
is leading the way with efficiency in the markets without these 
standards and without penalties, and as Steve mentioned, there 
are only three States that have natural gas standards in place 
today.
    The residential natural gas consumer has reduced its 
consumption of natural gas per degree by 30 percent from 1980 
to 2006. In North Carolina, that's 34 percent from 1980 to 
2008. We don't have any the EERS standards. So these actions 
have taken place even without these types of laws in place and 
without the threat of penalties, and we are very troubled about 
the penalty aspect of the legislation.
    The Chairman. Senator Cantwell, go right ahead.
    Senator Cantwell. Thank you, Mr. Chairman. I actually know 
that the Northwest has done a lot in this area. I want to 
figure out how to create an equitable baseline, I guess, if you 
will. I want to go back to the Smart Grid element and all of 
this and the efficiencies. You have all done a great deal of 
articulating on how important efficiency is. So I hope we are 
also sold on this as well. But the efficiency savings from the 
Mackenzie report, basically saying--basically negating the 
future production of coal power plant. They are huge 
CO2 reductions, but we are still stymied by this 
effort of trying to move forward.
    So I want to ask, why don't we look at this issue from the 
utility commission perspective and the utility investment 
perspective? So we would be, the Federal Government, would be 
willing to put a low interest, long amortized periods, 30-year 
periods of funding of these sufficiency and Smart Grid projects 
on the table as a way to help in the economics of getting the 
projects implemented, and everyone can benefit. The ray payers 
would benefit from this. We are doing this all the time with 
other areas of government, where we are getting financing for 
projects in a cost affordable rate to try to pass on the 
savings. So either of the panel?
    Mr. Manning. I can start. Certainly this is part of the 
discussion around renewables because there is great enthusiasm 
for renewables. Renewable capacity is not always located in the 
center of law. So not only is it Smart Grid, but you are also 
looking at a new and additional transmission. There are two 
issues around that, one, which is cost. Who pays? The other, of 
course, is siding.
    I would argue the only way to get this done is for Federal 
action, perhaps on both counts. The lack of long-term 
contracts, which used to exist years ago, makes financing more 
difficult.
    So the availability to financing will certainly be a great 
benefit there, and of course the McKinsey study demonstrates 
that there is so much that we can do, which is very affordable, 
without changing our lifestyle.
    What it's not doing is it's not addressing the challenge of 
driving additional renewables in terms of the solution. It just 
indicates there is much more that can be done in terms of 
reducing the carbon intensity generation. It also points out, 
Mr. Chairman, in terms of your earlier question, it's quite a 
good analysis. It entertains in terms of the cost in the 
various regions of the country, it demonstrates how much 
CO2 abatement you could achieve at a set price 
across the country. It's highest in the Northeast and it's 
lowest in the South. So that would be helpful to your staff.
    There is some analysis which helps you documents the early 
action issue, which has to be addressed. But we can't let that 
prevent us from striving toward great efficiency.
    Senator Cantwell. So how about it, if we drive down the 
cost of financing, will that help get the green light for these 
projects approved?
    Mr. Centolella. Senator, I believe that any kind of Federal 
financing or co-funding is helpful. We have certainly worked 
with our utilities and encourage them to go after some of the 
funding that is in the Recovery Investment Act with respect to 
their Smart Grid contract. That is very helpful in terms of 
getting that issue on the table with some of our utilities and 
moving forward. So certainly additional financial help from the 
Federal Government, additional incentives, I think would be 
quite valuable.
    I do want to pick up just a moment on what Mr. Manning said 
about transmission and just offer a couple of cautions about 
how you may proceed with transmission sections of the energy 
legislation.
    It's important to realize----
    Senator Cantwell [continuing]. You should know that we have 
separate hearing on that and will probably have at least ten 
more hearings on that. Go ahead.
    Mr. Centolella. OK. I will keep this very short. Just two 
overall things to recognize is that there are substitution for 
transmission in terms of what we do with energy-efficiency, 
demand response generation----
    Senator Cantwell [continuing]. Distributed generation----
    Mr. Centolella [continuing]. Even a central station plant 
is located near a city or another load center. I mean, those 
are all, in effect, substitutes for building long line 
transmission. So it's important that we look at that in an 
integrated context to decide what is cost-effective. What makes 
economic sense?
    This is why States do integrated resource planning in order 
to consider those kind of tradeoffs and back that kind of 
information to a regional level.
    Second, as you look at this, I think you need to understand 
that there is an essential element to planning a transmission 
system. An AC electric transmission system is very different 
than a gas pipeline, because the AC system is not a switch 
network. It runs on a contingency basis. It is possible, in 
fact, to build a 765 KV AC line that actually may reduce the 
transfer capability between the two points that it connects, 
and you have to be very careful to make sure that what you're 
building in terms of transmission fits into a broader regional 
plan, that it is actually accomplishing the objective that you 
want to accomplish.
    So if you go forward in this area, it become important to 
set criteria about how that the transmission is, in fact, 
improved.
    Senator Cantwell. I agree, but I think that we shouldn't 
allow more argument on transmission, which is important to 
negate the fact that there are efficiencies in Smart Grid 
technology that can be implemented on existing corridors, and 
that that savings is a huge potential in saying you don't have 
to build this coal-fired power plant, and not only that, but 
the United States has to be a leader of this. This is 
technology that we could get to world leaders that would use 
it, and get China to reduce their CO2 emissions, if 
they build a plant in a week. Now it's critically important.
    Mr. Chairman, I thank you. I know we are going to have a 
hearing on the finance side that will be included in this, so I 
need to introduce legislation to really--I think you're looking 
at the efficiency goal and thinking about this with the RES and 
all that, but I think it's important that we think about Smart 
Grid in this mix as well, and that it is part of the efficiency 
goal that we reach, that it has a role to play here in helping 
us get there in that particular--whatever it is, whatever the 
number is that we come up with. I actually think the 
administration has hit on a very good number.
    Mr. Manning. Just very briefly, I think a lot of discussion 
on renewables is capacity. Some States don't feel that they 
have the capacity for renewables that other States enjoy, and 
that I would suggest is a transmission opportunity. So with all 
due respect to my friend, I do think there is great 
opportunity, a lot of technology, a lot of innovation going on 
in terms of materials, in terms of diagnostics.
    So there are transmission opportunities which will not 
negate a tremendous effort in terms of energy-efficiency.
    The Chairman. Thank you, Ms. Hoffman, let me ask you. You 
make a point about we need these good evaluation measurement 
and verification protocols. If we were to enact a renewable 
electricity standard that says you can meet part of the 
standard, 45 percent or so, through efficiency, we need those 
protocols; do we not?
    Ms. Hoffman. Yes.
    The Chairman. So the development of the protocols, would be 
required regardless, and I guess I would like to know, is this 
a significant obstacle? I guess 19 States already have these. 
Presumably they have some protocols in place.
    Mr. Centolella, is there any a big disagreement about 
whether or not people are fudging the books here? In Ohio you 
adopted this very aggressive requirement for improvements in 
efficiency, are you confident that you can measure and verify 
what the people are meeting?
    Mr. Centolella. We are. We have included in our rules as 
part of the compliance statute that each of them must file. 
They must a report by an independent measurement and evaluation 
contractor that verifies the savings that they have achieved.
    The Chairman. You think that does the job?
    Mr. Centolella. Yes.
    The Chairman. You are confident that it does as well, Mr. 
Nadel?
    Mr. Nadel. Yes. There are a number of folks that work at 
the State level. There are small differences. It will be 
similar to getting uniform national protocol that people argue 
out of the points of difference, but it's not a dramatic amount 
of work. I mean, not a dramatic amount of work.
    The Chairman. Again, Ms. Hoffman, as I understood Mr. 
Centolella's comments, he is suggesting that we give more 
decisionmaking to the States, that is allow States to actually 
determine what is the maximum achievable cost-effective level 
for energy-efficiency improvements, as I understand, instead of 
setting a national standard, we should essentially direct the 
State to set that standard and comply with it once the 
commission of that State determines what they think that is. 
What is your reaction to that?
    Ms. Hoffman. The Department doesn't have an official 
position but the legislation itself does give flexibility to 
the States if they want to implement the program within their 
States. Regardless of the standard, I think the objective 
should be to encourage more energy-efficiency at the State 
level. The actual standard could probably be debated, but the 
legislation does allow flexibility for the States to take over 
implementation.
    The Chairman. I think his suggestion is not just the States 
would be allowed to implement it, his suggestion was States be 
allowed to set the standard. Mr. Nadel, did you have a reaction 
to that?
    Mr. Nadel. Yes, I do. I think States should be permitted to 
set higher targets, but I worry that if we allow them to set 
lower target, many of the States that are not doing much just 
set very low targets.
    My home State of Maryland, the utility argued that there 
was no money to be saved because it no longer owned power 
plants. The commission said, ``Sure, and for 10 years you 
didn't do any programs.''
    These are often political decisions. I worry if we give the 
States flexibility, we will decimate the program.
    The Chairman. What's your reaction to that, Mr. Centolella?
    Mr. Centolella. I think that is a more cynical attitude 
toward State regulation than perhaps I do.
    The Chairman. That comes from living in Washington.
    Mr. Centolella. We have States that are very committed to 
doing energy-efficiency. I look around my region, for example. 
A little over a year ago we had nine State Governors sign a 
greenhouse gas platform that said that they supported, 2 
percent annual improvements in energy efficiency in their 
State, starting in 2015 and every year thereafter.
    There are many, many States out there that are ready to be 
very aggressive on this, and I think that the benefit of 
engaging State regulators and engaging stakeholders and 
consumers that would participate in the State process outweighs 
any risk that some States might fall behind.
    I will also note that I think that where there are 
typically differences among the States, it is because they 
apply a different standard about what is cost-effective, and I 
think it would be appropriate for the legislation to define 
cost effectiveness in a way that embodies Congress' intent to 
achieve significant energy-savings.
    Mr. Nadel. He and I agree that many States will do an 
excellent job. I worry about those other ten or 20 States, not 
all 50 of them.
    The Chairman. OK. I think all of this has been very useful 
testimony. We appreciate you all coming, and we will try to 
understand the issue with and figure out what to do. Thanks.
    [Whereupon, at 11:35 a.m. the hearing was adjourned.]
                                APPENDIX

                   Responses to Additional Questions

                              ----------                              

   Responses of David J. Manning to Questions From Senator Murkowski
    Question 1a. The push to enact a separate RES and EERS calls into 
question the goals of these standards--is to promote certain 
technologies, or to reduce greenhouse gas emissions?
    If energy efficiency is incorporated into an RES, it would seem to 
me that utilities would have a much better chance of meeting their 
requirements instead of facing penalties for noncompliance. Wouldn't it 
be better to give them greater flexibility to succeed by adopting a 
single standard?
    Question 1b. If Congress decides to enact an RES instead of an 
EERS, should we allow an unlimited amount of the renewables mandate to 
be met through energy efficiency measures?
    Answer. National Grid believes that the U.S. needs a balanced 
approach to energy overall--all options must be on the table. We need 
more expansive, robust energy efficiency programs. We need significant 
new sources of renewable energy: wind, solar, biomass and geothermal. 
We need a comprehensive strategy to address our transmission 
infrastructure, including policies that will enable us to bring 
renewable energy resources, which are often isolated, to dense urban 
areas and other load centers. We need smart grid technology and smart 
meters to maximize the potential of current and future energy 
efficiency technologies to automate the most efficient use of energy 
and to remotely scale back energy use during peak use and pricing 
periods. These actions, combined with clean, no-or low-emitting base-
load power generation such as nuclear, hydroelectric, natural gas and 
emerging clean coal technologies, will lower emissions, lower 
customers' bills and play an important role in an effective national 
energy policy.
    Three energy policies currently under discussion--climate change 
cap-and-trade, RES and EERS--each emphasize a different aspect of what 
we need for a balanced energy policy. While an EERS will undoubtedly 
produce significant climate change benefits, its unique value is 
spurring investment in technologies and practices that reduce overall 
energy consumption and result in benefits beyond reducing greenhouse 
gases, as outlined in my written testimony. For that reason, we 
appreciate the efforts of Senator Schumer and others to shine the 
spotlight directly on energy efficiency with EERS legislation.
    At the same time, cap-and-trade, EERS and RES policies are rightly 
viewed as mutually reinforcing tools for achieving a balanced national 
energy policy. This may present opportunities to combine elements of 
the policies, such as including energy efficiency as a resource under a 
federal RES. National Grid could support such an approach if it is 
designed in a way that adequately addresses the need to provide 
appropriate investment incentives for both renewable energy and energy 
efficiency.
    Question 2. This bill appears to provide only penalties, and no 
incentives, to facilitate compliance with the proposed federal 
standard. Please describe what other measures, if any, you think should 
be incorporated to encourage distributors to reach energy savings 
goals.
    Answer. Incentives are an important mechanism to encourage 
utilities to deliver high quality efficiency programs that consistently 
meet customers' needs and maximize benefits. The incentives should be 
tied to the achievement of established goals such as energy savings, 
cost-effectiveness and comprehensiveness of the range of installed 
measures in customers' facilities.
    Question 3. I am concerned that requiring distribution utilities to 
develop and administer new energy efficiency programs, or obtain new 
technology will be expensive--especially for consumer-owned non-
profits. The penalty payments called for by this legislation are very 
high, and there is also the likelihood of ``layered'' costs from an 
EERS, RES, and climate change legislation. How can we implement cost 
control mechanisms to keep costs for distributors--and therefore 
businesses and consumers--as low as possible?
    Answer. National Grid believes that adequately addressing consumer 
cost is a critical aspect of designing workable energy legislation, and 
we support mechanisms that will fund consumer rebate and energy 
efficiency programs. Accordingly, we support distributing a significant 
share of the overall allowances under a federal cap-andtrade program to 
local distribution companies (LDCs) and requiring them to auction the 
allowances in a transparent, timely manner. LDCs would be required to 
use the proceeds to provide rebates to low-and middle-income consumers 
and small business as well as offer consumers incentives for energy 
efficiency upgrades and distributed generation resources. These 
mechanisms will offer immediate financial support to consumers as well 
as a long-term reduction in consumer energy costs. Similarly, we 
support returning any alternative compliance payments made under an RES 
or and EERS to LDCs with a requirement that the funds be used for 
consumer rebates and efficiency programs.
    Additionally, several mechanisms may be adopted to control costs to 
both utilities offering efficiency programs and to participating 
customers. First, all services and products delivered through the 
programs should be secured through a competitive bid process. Second, 
caps can be placed on the administrative costs for programs to ensure 
the majority of costs are incurred for the purchase of energy 
efficiency equipment and services for customers. Third, financing 
options for the customer's copayment for efficiency projects can spread 
costs out over a number of years, thereby reducing costs in any one 
year.
    Question 4. The proposed EERS legislation would calculate a 
utility's ``business-as-usual'' energy use by averaging its consumption 
levels in the 2 years prior to enactment. Utilities that are already 
making great efforts to reduce energy consumption--whether through a 
state-level EERS or their own initiative--may have a tougher time 
complying with the federal mandate due to their early action on energy 
efficiency. Should a federal EERS be designed to avoid disadvantaging 
those utilities, particularly compared to those who have taken no 
action?
    Answer. A national policy should recognize that many utilities, 
like National Grid, have already invested heavily in energy efficiency 
and no longer have the low-hanging fruit available in other parts of 
the country. To address this disparity and avoid punishing forward-
looking companies, an EERS should be designed to equitably credit early 
actors. Among the options to consider are the following:

   Changing the start date for when electricity savings can 
        begin counting toward a company's compliance obligation. The 
        current EERS bills only allow measures implemented after the 
        date of enactment to count. This could be easily modified to 
        allow credit for prior year activities, e.g. any measure 
        implemented after January 1, 2005. This could be combined with 
        an option to ``bank'' forward excess electricity savings above-
        and-beyond the level of their goal.
   Specify a standard conversion factor for energy efficiency 
        spending (e.g., $50/MWh). Utility companies would calculate 
        their average annual energy efficiency spending in 2006-2008 
        (this is actually reported to EIA). The spending levels would 
        then be converted to MWh savings using the standard conversion 
        factor. These ``early action'' savings could then be counted 
        toward your annual compliance obligation.
   Cap the standard based on a company's per capita electricity 
        consumption. A company that has driven down its customers' 
        energy use to a very low level should not be subject to the 
        same standards that apply to a company that has done little to 
        reduce its customers' energy use.

    Question 5. Under Senator Schumer's bill, the federal EERS would 
require electricity savings of 15 percent, and natural gas savings of 
10 percent, over the course of a decade. For the sake of comparison, 
can any of you provide the percentage savings that were achieved by 
these distributors over the course of the past ten years?
    Answer. Over the past ten years (ending in 2008), the cumulative 
savings from National Grid's energy efficiency programs in New England 
have decreased electricity usage by seven percent. Our gas energy 
efficiency programs are newer, so we do not have ten years worth of 
data. Our longest running gas program, in Massachusetts, has been in 
place for five years and to date the cumulative savings from this 
program are approximately three percent.
    Question 6. You caution that creating the right baseline for 
measuring energy savings can often raise difficult design issues. 
Baseline certainty is critical to both the planning and the success of 
a program. S. 548 directs DOE to issue regulations based on ``Business 
As Usual'' forecast and to use a rolling baseline. What are the issues 
associated with using a ``Business As Usual'' approach and do you 
believe DOE has the expertise to properly measure a rolling baseline 
and verify savings?
    Answer. Establishing a ``business as usual'' baseline is an inexact 
science but is required to set the benchmark against which energy 
savings can be reasonably measured. Baselines are most often set at 
levels of standard practice for the installation of efficient 
equipment. For example, T-8 lighting with electronic ballasts is now 
standard practice for lighting in commercial buildings and is often 
required by state building codes. Lighting equipment with efficiencies 
greater than this standard is used to calculate incremental energy 
savings. The challenge with baselines is that they often vary across 
different regions of the country, change frequently and are difficult 
to calculate for some end-uses such as more complex HVAC and industrial 
equipment.
    National Grid has extensive experience in developing baselines and 
believes there is sufficient information in the marketplace to 
determine reasonable baselines for an EERS. DOE's experience 
establishing efficiency standards for specific end-uses in recent years 
provides a strong foundation for setting baselines.
    Question 7. You note that a ``one-size-fits-all'' approach to an 
EERS could unfairly penalize early actors like National Grid, which 
have already invested heavily in energy efficiency and no longer have 
the ``low-hanging fruit available in other parts of the country.'' Am I 
correct in interpreting this statement to mean that higher levels of 
energy efficiency have diminishing returns? How difficult would it be 
for National Grid to achieve the savings required by this legislation?
    Answer. As explained in my answer to Question 4, National Grid 
believes that an EERS should equitably credit the work done by early 
actors. For utilities such as National Grid that have implemented 
energy efficiency programs over the past 20 years, much of the low cost 
energy savings has been achieved. However, there remains substantial 
energy savings to be achieved at lower costs such as lighting in 
commercial buildings that will represent a significant portion of the 
additional savings that must be achieved under an EERS. At the same 
time, to meet EERS goals, all cost-effective efficiency must be tapped 
which will naturally lead to higher cost savings associated with more 
costly measures such as heating, cooling and ventilation equipment. 
Utilities must work with customers to pursue more complex efficiency 
measures to ensure no opportunities are overlooked.
    Question 8. You state that the EERS should be combined with 
appropriate rate-setting mechanisms such as decoupling to address the 
inherent tension between a utility's financial interest in encouraging 
energy efficiency measures, which results in less energy sold, and the 
consumer's desire to lower their bills via energy efficiency actions. 
Please elaborate.
    Answer. National Grid believes that decoupling utility revenues 
from volumetric sales is essential to support and expand investment in 
energy efficiency for all consumers--and in so doing, help them reduce 
how much they pay in their overall energy bills.
    Without revenue decoupling, there is an inherent tension between 
utility companies' financial interest in encouraging their customers to 
use more energy and those customers' own interest in lowering their 
utility bills through energy efficiency actions. Decoupling benefits 
customers by alleviating this tension and it works in combination with 
energy efficiency programs to help consumers lower their monthly 
utility bills.
    How does ``decoupling'' accomplish this? Decoupling changes an 
important element in the way that utility rates have traditionally been 
set. Without decoupling, traditional utility ratemaking creates 
financial incentives for utilities to discourage--or at least not to 
encourage or support--energy efficiency. Under the more traditional way 
that rates are regulated, when a utility sells less of its product 
(e.g., electricity or gas), it typically means lower utility revenues. 
Utilities have historically depended on these revenues to fund 
investment in needed infrastructure between rate cases. Decoupling is a 
rate mechanism that removes this link between sales and revenues. 
Decoupling allows companies to be financially indifferent as to whether 
to sell electricity to customers or to rely on energy efficiency as a 
tool to help consumers lower their own energy bills.
    Decoupling is not about charging ``low income consumers more'' so 
that ``utility companies can maintain their profit margins.'' In fact, 
when consumers, including low income consumers, have access to and 
participate in energy efficiency programs, their overall bills will be 
lower and they can actually save money. Therefore, the weatherization 
and other efficiency programs introduced by the American Recovery and 
Reinvestment Act, combined with decoupling, provide power support to 
consumers, workers, and the economy overall.
    Customers benefit from lower utility bills, more stable rates (as a 
result of less frequent rate cases) and the utility's ability to fund 
investment needed to serve them well. While decoupling potentially 
increases the utility's delivery charge in the near term, it lowers 
total customer bills in the long term, as reduced energy usage can 
reduce the need to investment in infrastructure than would otherwise be 
the case in the absence of energy efficiency programs. In fact, for 
customers who participate in energy efficiency programs of delivery-
only utilities (like National Grid), decoupling can result in immediate 
bill reductions. These customers avoid paying the larger portion of 
their bills (60%-70%) related to power supply, which more than offsets 
the slight increase in the part of the customer bill (30%-40%) that 
makes up the delivery charge.
    Question 9. I want to clarify a figure in your written testimony. 
You state that National Grid has spent $1.5 billion on efficiency 
technologies. Can you provide an estimate of the total cost of those 
improvements, including any local, state, and federal funding that was 
provided in the form of incentives, grants, and so forth?
    Answer. The savings achieved through National Grid's programs have 
been funded solely with funds provided by the on-bill energy efficiency 
charge or systems benefit charge. The company takes credit only for 
efficiency measures for which it has paid a rebate from the above 
funds.
    Question 10. You list the Regional Greenhouse Gas Initiative as one 
impetus for energy efficiency improvements in the northeast. How do you 
think these efforts in those states would fare without that initiative? 
At the federal level, how effective do you think an EERS can be without 
climate change legislation?
    Answer. Funds generated through the sale of allowances resulting 
from the Regional Greenhouse Gas Initiative will enable National Grid 
to accelerate its efficiency programs beyond what is possible under the 
existing energy efficiency charge or systems benefit charge. RGGI funds 
help minimize the increase in customers' electric rates that would 
otherwise result from an increase in budgets required to fund the ramp 
up anticipated for National Grid's programs. Significantly increasing 
the magnitude of efficiency budgets would be difficult without RGGI 
funds because of the likely opposition resulting from specific customer 
segments such as the large commercial/industrial sector.
    Responses of David J. Manning to Questions From Senator Shaheen
    Question 1. As today's witnesses have noted, energy efficiency 
measures are incredibly important to address our nation's energy 
challenges. I think it is important to craft federal policies that 
incentivize investments in energy efficiency.
    One of the concerns that I am aware of with an EERS, however, is 
that of market manipulation. Under an energy efficiency credit trading 
program, we may be giving credit for actions that would have already 
been taken regardless of an EERS mandate.
    Many NE states are implementing policies to require utilities to 
procure all costeffective energy efficiency. These least cost 
procurement policies, for example, require that a distribution company 
obtain all cost effective energy efficiency up to the electric supply 
cost. The goals seem the same as an EERS, with an emphasis on cost-
effective measures, and seem to avoid some of the issues of market 
manipulation.
    Would you care to comment on least cost procurement policies and 
how they compare to an EERS?
    Answer. Least cost procurement of energy efficiency can be an 
effective tool for achieving savings under an EERS. The least cost 
procurement legislation that dictates the level of energy savings 
National Grid must achieve in Massachusetts and Rhode Island will 
likely result in energy savings levels comparable to or greater than 
those required under a federal EERS.
    Question 2. In New Hampshire, we are addressing efficiency and 
energy conservation by taking auction revenues from RGGI, the United 
States' first cap-and-trade program for greenhouse gases, and investing 
those revenues in these energy saving and conservation efforts. In your 
view, is it more cost effective and efficient to establish an EERS 
mandate or invest auction revenues in efficiency and conservation 
measures? What are the trade-offs?
    Answer. National Grid views a cap and trade program as a means to 
fund additional energy efficiency that may be required through an EERS. 
A cap and trade program and an EERS are not mutually exclusive and can 
work closely in tandem to achieve both carbon reduction and energy 
savings goals.
    Question 3. It has often been said by those seeking to address 
climate change that the single most important thing we can do to 
address climate is put a price on carbon. A price on carbon will, in 
turn, incentivize renewable electricity and energy conservation 
measures. Is a national EERS necessary to deploy energy conservation 
and efficiency improvements if we enact a cap-and-trade program in the 
US?
    Answer. National Grid agrees that the single most important thing 
we can do to address climate change will be to put a price on carbon. 
However, we must also promote technologies and business practices that 
will enable consumers and businesses to meet greenhouse gas reduction 
goals cost effectively in both the short-term and the long-term. 
Complementary policies--like an EERS, RES, CAFE standards, or CCS 
incentives--are justified in order to promote technologies with broader 
societal benefits and to address market failures that discourage 
households or businesses from responding to a price signal and adopting 
cost-effective reduction measures like energy efficiency.
    Question 4. There have been some who suggest an EERS will reduce 
the cost of a cap-andtrade program. A report by ACEEE states that, 
``energy efficiency reduces the cost of cap-and-trade because less new 
energy facilities are needed and also because a smaller portion of 
existing facilities need to be upgraded to help meet emissions 
ceilings.'' By some estimates, electricity prices under cap-and-trade 
legislation may be 15 percent less if an EERS as well as an RES are 
also in place. Do you agree with this assessment?
    Answer. Energy efficiency investments offer some of the most cost-
effective options for reducing greenhouse gas emissions. For example, 
U.S. EPA's preliminary analysis of the Waxman-Markey Discussion 
Draft\1\ forecasts reduced allowance prices and reduced energy prices 
by dedicating a portion of allowance value to energy efficiency 
programs. EPA evaluated a scenario in which energy efficiency programs 
reduced electricity demand from reference case values by 4 percent in 
2020, 5 percent in 2030, and 4 percent in 2050. These investments 
resulted in an average 10 percent reduction in allowance prices and a 2 
percent reduction in electricity prices. EPA has not yet completed a 
full evaluation of the Waxman-Markey Discussion Draft, including the 
EERS and RES. Its preliminary analysis was limited to the cap-and-trade 
proposal. So while we can not comment specifically on the degree to 
which an EERS might reduce electricity prices, we do believe that 
energy efficiency investments and programs to promote energy efficiency 
investments will generally reduce the impacts of meeting a GHG 
emissions cap.
---------------------------------------------------------------------------
    \1\ http://www.epa.gov/climatechange/economics/
economicanalyses.html#wax
---------------------------------------------------------------------------
    Question 5. A key goal of U.S. energy policy is lessening our 
dependence on foreign oil. One way to achieve this goal would be a 
conversion of the transportation sector from petroleum to electricity 
through the phased-in and widespread use of hybrid cars, plug-in hybrid 
cars and fully electric cars. While this will lessen our dependence on 
foreign oil, it may put additional strains on our electricity system 
which may require additional generation investments.
    I am interested to hear your thoughts on how does the EERS will 
affect en electrification of the transportation sector? How would these 
two important policy goals work together?
    Answer. An EERS should be designed to promote beneficial 
technologies, such as smart meters which could assist vehicle 
electrification, that will shift energy consumption towards lower 
carbon options. Analysis by EPA indicates that if 10 percent of all 
passenger vehicles were plug-in hybrids and other electric vehicles, 
electricity demand could increase by over 1 percent. Although 
beneficial, this shift to electric vehicles would make it marginally 
more difficult to meet an EERS. The simplest way to accommodate the 
growth of electric vehicles in an EERS would be to net out electricity 
used to power vehicles from a utility's EERS baseline. If actual 
vehicle consumption data were unavailable, utility baselines could be 
credited based on the number of customers reporting ownership of an 
electric vehicle or electric vehicle sales within the utility's service 
territory.
    Question 6. How are other countries addressing energy efficiency 
and conservation? Have other countries adopted an EERS, or a similar 
mandate?
    Answer. National Grid's international experience is focused in the 
United Kingdom, where we own and maintain the high-voltage electricity 
transmission system in England and Wales and operate the entire system 
across Great Britain. On the gas side, National Grid owns and operates 
the National Transmission System throughout Great Britain and owns and 
operates a significant gas distribution network throughout the heart of 
England. Presently, the UK does not have an EERS, but has adopted an 
``Energy Efficiency Action Plan,'' which has a target to reduce energy 
consumption by nine percent by 2016. The full plan can be accessed at 
http://ec.europa.eu/energy/demand/legislation/doc/neeap/uk_en.pdf. 
National Grid's UK energy efficiency efforts are largely directed 
towards its low-income assistance programs, such as our award winning 
``Affordable Warmth Programme,'' which addresses fuel poverty by 
integrating a range of overlapping stand-alone funded energy efficiency 
programs and activities.
                                 ______
                                 
     Responses of Steven Nadel to Questions From Senator Murkowski
    Question 1a. The push to enact a separate RES and EERS calls into 
question the goals of these standards--is to promote certain 
technologies, or to reduce greenhouse gas emissions?
    If energy efficiency is incorporated into an RES, it would seem to 
me that utilities would have a much better chance of meeting their 
requirements instead of facing penalties for noncompliance. Wouldn't it 
be better to give them greater flexibility to succeed by adopting a 
single standard?
    Answer. On the one hand, energy-efficiency is widely available in 
all 50 states, and is also generally less expensive than renewable 
energy. Based on these considerations, yes utilities would have a 
better chance of meeting requirements if energy efficiency is included. 
But on the other hand, there are problems with combining the EERS and 
RES. First, the RES regulates ``load serving entities'' while the EERS 
regulates ``distribution utilities''. While these are often the same, 
where independent power companies supply power, they are different. We 
think that distribution utilities can generally do a better job 
delivering energy efficiency services than independent power companies. 
Second, most proposals to combine the RES and EERS use energy 
efficiency as a small ``safety valve'' with efficiency capped at 4-5% 
of sales by 2020. Energy efficiency can and should do much more than 
that and should not be capped at such a low percentage. We are much 
more open to combining an EERS and RES if efficiency targets of 10-15% 
are added to appropriate RES targets. Third, most proposals to combine 
the RES and EERS deal only with electricity; we think that natural gas 
needs to be addressed as well through its own EERS. Finally, the 
purpose of an RES is to promote use of renewable energy. We leave it to 
renewable energy advocates to comment on this further, but we know that 
they are concerned that the renewable targets would be too low if an 
EERS and RES are combined.
    Question 1b. If Congress decides to enact an RES instead of an 
EERS, should we allow an unlimited amount of the renewables mandate to 
be met through energy efficiency measures?
    Answer. Allowing unlimited efficiency in an RES would be good for 
efficiency, but depending on the overall target, could undermine the 
goal of promoting use of renewable energy. We think a combined EERS-RES 
is generally better than no EERS, but such a combination needs 
meaningful targets so that both efficiency and renewables are promoted 
beyond business-as-usual levels.
    Question 2. This bill appears to provide only penalties, and no 
incentives, to facilitate compliance with the proposed federal 
standard. Please describe what other measures, if any, you think should 
be incorporated to encourage distributors to reach energy savings 
goals.
    Answer. ACEEE believes that incentives have an important 
complementary role to play. We hope that energy legislation will also 
include incentives, such as some of the programs included in S. 661 as 
well as incentives for comprehensive retrofits to homes and commercial 
buildings, along the lines of the program in H.R. 1778. We also support 
allocating a portion of cap and trade emissions allowances to local 
distribution companies for the explicit purpose of helping to fund 
energy efficiency programs. Provisions along these lines were included 
in the Boxer-Liberman-Warner and Dingell-Boucher bills from the last 
Congress. Furthermore, S. 548 counts efficiency savings from codes and 
standards and we support several bills that would increase these 
savings such as S. 598 on appliance standards (sponsored by Senators 
Bingaman and Murkowski) and building code provisions and incentives 
that are now being developed by Committee staff.
    Question 3. I am concerned that requiring distribution utilities to 
develop and administer new energy efficiency programs, or obtain new 
technology will be expensive--especially for consumer-owned non-
profits. The penalty payments called for by this legislation are very 
high, and there is also the likelihood of ``layered'' costs from an 
EERS, RES, and climate change legislation. How can we implement cost 
control mechanisms to keep costs for distributors--and therefore 
businesses and consumers--as low as possible?
    Answer. From our analyses, an EERS is an important cost control 
mechanism, helping to moderate energy cost increases and also reducing 
the cost of carbon emissions allowances, if cap and trade legislation 
is enacted. This is illustrated by the graphs on p. 16 of my written 
testimony. A similar finding is made in a just-released study by the 
National Renewable Energy Laboratory which found that the combination 
of an EERS and RES results in lower electricity prices than the 
basecase or an RES alone (see http://www.nrel.gov/docs/fy09osti/
45877.pdf ).
    Furthermore, to ensure that costs are not too high, S. 548 includes 
alternative compliance payments of 5 cents per kWh or 50 cents per 
therm of natural gas. The intent of these payments is to encourage 
utilities to operate energy efficiency programs that cost less than the 
alternative compliance payment. Preliminary results from ACEEE research 
now underway indicates that the average electric efficiency program 
costs about 3 cents per lifetime kWh saved, while natural gas programs 
cost an average of 29 cents per therm saved. If the ACP is reduced to 
be less than the average cost of programs, then many utilities will 
choose to pay the ACP and not operate programs. In addition, under S. 
548, money from the ACP generally goes to the states to operate energy 
efficiency programs, so these funds will remain in-state. However, 
since the average cost of programs is about 2 cents per kWh and 20 
cents per therm higher than the ACP, there may be room to lower the ACP 
a little, but we would recommend going no lower than 4 cents per kWh 
and 40 cents per therm.
    One other point regarding ACP's is worth mentioning--the ACP for an 
RES and for an EERS should probably be different, with the EERS ACP 
higher than that for the RES. This is the case because with energy 
efficiency investments, when energy is saved, less power needs to be 
purchased, so even 5 cents per kWh energy efficiency saves money when 
power costs 6 or more cents per kWh. With renewable energy, the ACP is 
in addition to the underlying cost of power, so if conventional power 
costs 6 cents per kWh, utilities will be willing to pay up to 11 cents 
per kWh to avoid a 5 cents per kWh ACP (6+5=11). A 5 cents per kWh ACP 
for efficiency saves consumers money, unlike a similar ACP for 
renewable which costs money.
    Question 4. The proposed EERS legislation would calculate a 
utility's ``business-as-usual'' energy use by averaging its consumption 
levels in the 2 years prior to enactment. Utilities that are already 
making great efforts to reduce energy consumption--whether through a 
state-level EERS or their own initiative--may have a tougher time 
complying with the federal mandate due to their early action on energy 
efficiency. Should a federal EERS be designed to avoid disadvantaging 
those utilities, particularly compared to those who have taken no 
action?
    Answer. On the one hand, utilities that have active programs have 
already picked some ``low hanging fruit'' and will have to dig a little 
deeper to achieve the necessary savings. On the other hand, utilities 
with active programs already have the infrastructure in place and will 
not have to ramp-up as much, permitting them to achieve more savings in 
the early years than is required. We favor an approach whereby these 
utilities can ``bank'' extra savings achieved in early years and apply 
these to savings targets in later years. We think this is fair way to 
address this issue.
    I should also note that our studies find that there is a cost-
effective opportunity for about 30% electricity savings throughout the 
country, and so if some states have already achieved 10% savings, they 
still have about another 20% savings left, leaving a 15% savings target 
very feasible. Furthermore, the pool of available savings keeps 
increasing as new technologies are developed, such as LED lighting and 
improved heating/cooling controls.
    Question 5. Under Senator Schumer's bill, the federal EERS would 
require electricity savings of 15 percent, and natural gas savings of 
10 percent, over the course of a decade. For the sake of comparison, 
can any of you provide the percentage savings that were achieved by 
these distributors over the course of the past ten years?
    Answer. Energy efficiency savings achieved by electric and natural 
gas distributors range enormously from essentially zero to fairly 
significant savings. For example, Efficiency Vermont, which operates 
statewide programs under contract with the Vermont utility commission, 
has achieved approximately 9% electricity savings over the 2000-2008 
period.\1\ While I do not have the exact figures, my understanding is 
that savings in California and the Pacific Northwest have been even 
higher on a cumulative basis, but they have needed a longer period of 
time. For natural gas utilities, data ACEEE has compiled from utilities 
for a forthcoming report indicates that savings from Vermont Gas 
programs total 7.8% of 2006 sales. Vermont Gas began programs in 1999. 
Similarly, Iowa gas utilities have saved 8.2% of 2006 sales from 
programs operated over the 1996-2006 period.
---------------------------------------------------------------------------
    \1\ Derived by ACEEE from: http://www.efficiencyvermont.com/stella/
filelib/EVT_2008_Savings_Claim_Final.pdf.
---------------------------------------------------------------------------
    Question 6. You support an amendment to S. 548 to make clear that 
DOE should factor in growth in electric and natural gas vehicle sales 
when setting post-2020 targets. Does the bill, as drafted, make any 
allowance for an increase in economic activity? I'm concerned that 
while this bill claims to mandate ``efficiency,'' it really focuses on 
reducing total ``consumption,'' and these are two different things. 
Increases in energy consumption can result from an increase in economic 
activities, especially in manufacturing, even when new use is highly 
efficient.
    Answer. The bill requires that a specific level of energy savings 
be demonstrated relative to a rolling baseline. It does not use a fixed 
baseline, such as sales in 2008. By using a rolling baseline, in 
rapidly growing areas, sales can still grow with an EERS, they just 
grow a little more slowly. This is illustrated by the graph on p. 6 of 
my written testimony. Under the bill, there is no cap on consumption, 
just a requirement to demonstrate efficiency savings through program 
evaluations.
    Question 7. In March 2005, ACEEE submitted a statement to the 
record after this committee held a hearing on ``Power Generation 
Resource Incentives and Diversity Standards.'' At that time, your 
organization endorsed a credit trading system to help utilities meet 
their requirements. In this Congress, however, that credit trading 
compliance option has been replaced by a different option--bilateral 
agreements--that appear much more limited. Please explain.
    Answer. We worked with many other organizations to develop this 
year's legislation. Some of these organizations were concerned about 
the time and resources needed to establish and oversee a national 
trading market. They were also concerned about opportunities for 
markets leading to some perverse results, as has happened recently in 
some financial markets (e.g. derivatives). Bilateral trades are simpler 
and can be overseen by state regulators. Also, our studies show that 
large efficiency opportunities are available in all regions, and 
therefore there is less need for trading with efficiency credits than 
with other types of credits now being discussed in Congress (e.g. 
emissions allowances and renewable energy credits).
    Question 8. In that same statement, your organization also noted 
that an EERS could be combined with a Renewable Portfolio Standard. 
ACEEE also offered several suggestions for how a ``Clean Energy 
Resource Standard'' could be enacted--a standard that could have 
included energy efficiency, renewable energy, combined heat and power, 
and even clean coal and nuclear. Does your organization no longer 
support the enactment of such a standard?
    Answer. The proposed EERS does include combined heat and power. We 
are neutral on whether other clean resources are added to an EERS and 
RES provided that as additional resources are included, the targets 
need to increase so that they still promote substantial cost-effective 
efficiency investments. However, we note that adding additional 
resources increases support by some members but loses support from 
other members. We leave it to Congress to find the ``sweet spot'' where 
support is maximized.
    Question 9. Your organization released two reports on the federal 
EERS last month. The first projects consumer savings of $168 billion 
over the standard's lifespan. The second lists decoupling as one of the 
most important factors in achieving ``future higher'' energy efficiency 
goals. Does your $168 billion estimate take into account the need for--
and spending that could be associated with--decoupling?
    Answer. ACEEE believes that decoupling is a useful complement to an 
EERS. However, there are also other ways to improve the business case 
for utility investments in energy efficiency. The EERS bill 
deliberately leaves decisions on how best to handle these issues to 
state utility commissions. Therefore, we did not include any costs 
associated with decoupling in our savings estimates. That said, our 
savings projections use very conservative estimates of future 
electricity costs prepared by EIA. Most other forecasts predict higher 
electricity prices, which would increase the value of savings relative 
to our forecast. So even if decoupling were to modestly reduce savings, 
this would be compensated by the fact that electricity savings are 
likely to be more valuable than EIA predicts.
    Question 10. This bill appears to provide only penalties, and no 
incentives, to facilitate compliance with the proposed federal 
standard. Please describe what other measures, if any, you think should 
be incorporated to encourage distributors to reach their energy savings 
goals.
    Answer. This is the same question as question # 2.
    Question 11. I'm intrigued by ``Efficiency Vermont,'' which is the 
non-profit, statewide provider of energy efficiency services in 
Vermont. This is a very different structure than what S. 548 calls for, 
but I understand it's has been very successful so far--the savings 
being achieved in Vermont are now among the highest levels of any 
state. Can any of you discuss ``Efficiency Vermont'' in greater detail, 
and what the pros and cons of a similar approach at the federal level 
would be?
    Answer. Efficiency Vermont is a statewide program coordinated by 
the Vermont Public Service Commission, and operated by a private non-
profit organization--the Vermont Energy Investment Corp. (VEIC). VEIC 
was selected through a competitive request for proposals. The 
Efficiency Vermont budget is funded through a charge on electric bills 
by participating utilities. Efficiency Vermont began operations in 2000 
and has developed a broad range of efficiency programs to serve many 
different sub-markets, which is illustrated in the graphic on p. 11 of 
my written testimony. Their programs have been well received, and in 
recent years, the Commission has increased their budget. This in turn 
has allowed them to dramatically increase their annual savings, as 
shown in the graph on p. 12 of my written testimony. Additional 
information can be found in their annual report, available at: http://
www.efficiencyvermont.com/stella/filelib/AR07Revised_Exec%20Summ_MW.pdf
    The Efficiency Vermont model works very well due to their excellent 
staff, good planning and management, substantial budget, statewide 
operation, and a good working relationship with regulators. While this 
model has worked very well in Vermont, and a variation on this model is 
working in Oregon, it may not work everywhere. For example, Delaware 
has been trying to replicate the Vermont model but has been having 
difficulty due to a limited budget and the lack of a good in-state 
organization to run the programs. From our review of the different 
states, other models for operating programs can also work. For example, 
Connecticut, Iowa, Massachusetts and Rhode Island have achieved very 
good results with utility-run programs. And in New York a state 
``authority'' (a quasi-independent state agency) does a good job 
running programs. In all these cases, the successful program operators 
are well managed, believe in what they are doing, have good in-state 
staff, have had strong budgets for multiple years, are not impeded by 
too many bureaucratic rules, and have good regulatory support. These 
criteria can be met under a variety of models and we don't believe any 
single model is ``the answer'' in all states. Based on these findings, 
we believe the decision on whether to follow the Vermont model, or 
whether to use another model, should be made at the state level and not 
the federal level.
      Responses of Steven Nadel to Questions From Senator Shaheen
    Question 1. As today's witnesses have noted, energy efficiency 
measures are incredibly important to address our nation's energy 
challenges. I think it is important to craft federal policies that 
incentivize investments in energy efficiency.
    One of the concerns that I am aware of with an EERS, however, is 
that of market manipulation. Under an energy efficiency credit trading 
program, we may be giving credit for actions that would have already 
been taken regardless of an EERS mandate.
    Many NE states are implementing policies to require utilities to 
procure all cost-effective energy efficiency. These least cost 
procurement policies, for example, require that a distribution company 
obtain all cost effective energy efficiency up to the electric supply 
cost. The goals seem the same as an EERS, with an emphasis on cost-
effective measures, and seem to avoid some of the issues of market 
manipulation.
    Would you care to comment on least cost procurement policies and 
how they compare to an EERS?
    Answer. Least-cost procurement policies can work well where the 
utilities do a good job considering energy efficiency as a resource and 
where regulators have the skills and interest to oversee these 
analyses. These factors generally apply in New England, where many 
states are using least-cost procurement. But in some other regions, 
utilities are not very interested in considering energy efficiency on a 
par with other resources, and utility commissions may lack the staff, 
skills or interest to hold these utilities accountable. In my home 
state of Maryland, in the 1990s the utilities claimed that there was no 
efficiency resource that was cost-effective for utilities to pursue and 
the Commission did not challenge this. It took a new Governor and a 
legislated EERS to change the situation and only now are programs 
beginning. Furthermore, planning processes take time, delaying the 
start of programs by several years. An EERS can be enacted and programs 
quickly begun. Such an EERS should be based on levels of energy 
efficiency found to be achievable and cost-effective in a variety of 
states. States can then conduct planning processes to see if higher 
savings are achievable and cost-effective. For example, Connecticut has 
an EERS requiring 1% additional electricity savings each year, and they 
then conducted a planning process which is recommending much higher 
levels of efficiency savings.
    Question 2. In New Hampshire, we are addressing efficiency and 
energy conservation by taking auction revenues from RGGI, the United 
States' first cap-and-trade program for greenhouse gases, and investing 
those revenues in these energy saving and conservation efforts. In your 
view, is it more cost effective and efficient to establish an EERS 
mandate or invest auction revenues in efficiency and conservation 
measures? What are the trade-offs?
    Answer. The two policies are complimentary. An EERS sets savings 
targets. Use of auction revenue can help fund programs to reach those 
targets. Ideally both will be done. We believe it is important to set 
savings targets, so that progress can be monitored and programs 
encouraged to maximize savings per dollar invested. The goal is 
achieving savings, and spending money is just a means toward that end. 
If just funds are provided, it is unclear how much savings will be 
achieved and whether cost-effectiveness will be maximized.
    Question 3. It has often been said by those seeking to address 
climate change that the single most important thing we can do to 
address climate is put a price on carbon. A price on carbon will, in 
turn, incentivize renewable electricity and energy conservation 
measures. Is a national EERS necessary to deploy energy conservation 
and efficiency improvements if we enact a cap-and-trade program in the 
US?
    Answer. There are many market barriers that impede energy 
efficiency investments, as discussed in my written testimony. Due to 
these market barriers, many cost-effective efficiency investments are 
not being pursued today. Adding a carbon price will modestly increase 
energy prices and modestly increase efficiency investments. To more 
dramatically increase efficiency investments, supportive programs and 
policies are needed. In our view, an EERS is probably the most 
important of these policies.
    Question 4. There have been some who suggest an EERS will reduce 
the cost of a cap-and-trade program. A report by ACEEE states that, 
``energy efficiency reduces the cost of cap-and-trade because less new 
energy facilities are needed and also because a smaller portion of 
existing facilities need to be upgraded to help meet emissions 
ceilings.'' By some estimates, electricity prices under cap-and-trade 
legislation may be 15 percent less if an EERS as well as an RES are 
also in place. Do you agree with this assessment?
    Answer. Yes, we wrote that assessment and we agree with it. I 
assume this question is more for the other witnesses and therefore will 
not elaborate further.
    Question 5. A key goal of U.S. energy policy is lessening our 
dependence on foreign oil. One way to achieve this goal would be a 
conversion of the transportation sector from petroleum to electricity 
through the phased-in and widespread use of hybrid cars, plug-in hybrid 
cars and fully electric cars. While this will lessen our dependence on 
foreign oil, it may put additional strains on our electricity system 
which may require additional generation investments.
    I am interested to hear your thoughts on how does the EERS will 
affect en electrification of the transportation sector? How would these 
two important policy goals work together?
    Answer. Electrification of the transportation sector is in its 
infancy and therefore will have little effect on EERS targets in the 
early years. As noted in my written testimony, we recommend that DOE 
monitor the success of efforts to electrify the transportation sector, 
and consider increased electricity sales from transportation, and 
opportunities for efficiency improvements in transportation, when 
setting future EERS targets. If efforts to electrify the transportation 
sector are effective, we would expect this to have a significant effect 
on future targets.
    Question 6. How are other countries addressing energy efficiency 
and conservation? Have other countries adopted an EERS, or a similar 
mandate?
    Answer. EERS-like policies are becoming common in Europe. These 
policies are often called ``white certificates'' in Europe, while 
renewable energy standards are generally called ``green certificates''. 
The United Kingdom has had residential energy savings targets since 
2002 and is now in their third three-year implementation period. 
Utilities exceeded targets for the first two implementation periods. 
Italy, France, Denmark and the Flanders region of Belgium are all 
implementing white certificate programs and our understanding is that 
targets are being met. For example, in Italy the targets apply to 
electric and gas utilities and are expressed in tons of oil equivalent 
(TOE). In Italy, the 2005-2007 target was 1.1 TOE, but utilities and 
third-party providers together achieved 2.0 TOE of savings. In 
addition, Poland is now developing a program. Furthermore, the entire 
European Union (EU) has adopted the ``Energy Services Directive'' which 
directs all member states to develop policies to achieve 20% energy 
efficiency savings by 2020. The various member-states have prepared 
initial plans and are now refining their plans and starting to 
implement them.\2\
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    \2\ Information on many of the European programs can be found at: 
http://re.jrc.ec.europa.eu/energyefficiency/events.htm
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                                 ______
                                 
  Responses of Paul A. Centolella to Questions From Senator Murkowski
    Question 1a. The push to enact a separate RES and EERS calls into 
question the goals of these standards--is to promote certain 
technologies, or to reduce greenhouse gas emissions?
    If energy efficiency is incorporated into an RES, it would seem to 
me that utilities would have a much better chance of meeting their 
requirements instead of facing penalties for noncompliance. Wouldn't it 
be better to give them greater flexibility to succeed by adopting a 
single standard?
    Question 1b. If Congress decides to enact an RES instead of an 
EERS, should we allow an unlimited amount of the renewables mandate to 
be met through energy efficiency measures?
    Answer. Ohio has an aggressive Energy Efficiency Standard which is 
separate from our Renewable Energy Standard. Such a separate efficiency 
standard is appropriate because it addresses a failure of the market to 
produce an economically efficient outcome and improves overall economic 
productivity independent of concerns related to greenhouse gas 
emissions. There is compelling evidence that utility efficiency 
programs can reduce the total cost of providing energy services. Ohio's 
electricity law includes a strong Energy Efficiency Standard and 
provides flexibility with respect to the use of surplus energy 
efficiency savings, in excess of those required to meet annual Energy 
Efficiency Standard benchmarks. In addition to its Energy Efficiency 
and Peak Demand Reduction Standards, Ohio has an Alternative Energy 
Standard. By 2025, twenty-five percent of electricity sales must be 
provided by Alternative Energy Resources. Alternative Energy includes 
both Renewable Energy and Advanced Energy Resources. A minimum of fifty 
percent of Ohio's Alternative Energy Standard, or 12.5% of 2025 retail 
sales, must come from Renewable Energy Resources. Additionally, there 
are escalating annual Renewable Energy and Solar Energy Resource 
benchmarks. The remaining portion of the Alternative Energy Standard, 
up to fifty percent, can be met using either Advanced Energy Resources 
or Renewable Energy Resources. Utilities may elect either to bank 
surplus energy savings and apply them to meet future Energy Efficiency 
Standard benchmarks; or they may elect to apply energy savings in 
excess of their Energy Efficiency benchmarks to their Advanced Energy 
requirement, that is the non-renewable portion of Ohio's Alternative 
Energy Standard. Energy efficiency savings cannot be double counted for 
purposes of complying with more than one standard.
    If Congress decides to provide additional flexibility for RES 
compliance, it should do so directly, not by combining the RES and an 
Energy Efficiency Standard. For example, Ohio's RES authorizes 
reductions in a utility's RES benchmark if the total expected cost of 
generation to consumers while satisfying the requirement exceeds the 
comparable cost to consumers without meeting the benchmark by more than 
three percent.
    Current proposals, which address energy efficiency only as a means 
to meet Renewable Energy Standards, are unlikely to significantly 
increase energy savings. Other witnesses have testified that existing 
state Energy Efficiency Standards could produce an amount of energy 
savings equal to or greater than the ceiling on the use efficiency to 
comply with the RES in such proposals.
    If Congress were to adopt an RES, without an Energy Efficiency 
Standard, and allow the unlimited participation of energy efficiency 
for meeting RES requirements, the effects would be different in 
different states depending on state energy efficiency standards, the 
impact of different market structures on utility incentives to support 
energy efficiency, and state Commission policies related to utility 
efficiency programs. This approach would not provide the same catalyst 
to increasing energy savings as would be provided under a separate 
Energy Efficiency Standard.
    Removing limits on the extent to which energy efficiency can be 
used to comply with an RES also could mean less renewable energy 
development in some regions. In deciding whether to adopt such an 
approach, Congress should consider the potential economic benefits of 
an RES. The key economic arguments for an RES include that:

   In some cases, an RES may tend to reduce the costs to 
        consumers of achieving greenhouse gas reductions and may 
        mitigate the impact of greenhouse gas regulation on competitive 
        electric prices. This result can occur, in part, because most 
        renewable energy resources have very low operating costs, 
        reduce the need to run generating units with higher variable 
        operating costs, and allow energy prices in organized 
        electricity markets to be set by lower cost units. Other 
        strategies for reducing carbon emissions based on changes in 
        generating capacity have significant costs.
   An RES could allow manufacturers to achieve economies of 
        scale and drive down the cost of clean, renewable energy.

    The Ohio General Assembly enacted separate energy efficiency and 
renewable energy standards and gave the Ohio Commission flexibility to 
administer the standards in a reasonable manner without unduly 
penalizing utilities and consumers or compromising the achievement 
energy efficiency and renewable energy benchmarks. This is a sound 
model for structuring such standards.
    Question 2. This bill appears to provide only penalties, and no 
incentives, to facilitate compliance with the proposed federal 
standard. Please describe what other measures, if any, you think should 
be incorporated to encourage distributors to reach energy savings 
goals.
    Answer. Utility regulation inherently involves a combination of 
both rules, which must be backed by penalties for non-compliance, and, 
insofar as may be possible, aligning utility incentives with public 
policy objectives.
    Congress has on several occasions directed the States to consider 
regulatory policies that would better align utility incentives with 
encouraging distribution utilities to promote energy savings. For 
example, in the Public Utility Regulatory Policies Act, 16 U.S.C. 
Sec. 2601(d) (8) and (9), Congress required State Commissions to hold 
hearings and consider adoption of the following standards:

          (8) Investments in conservation and demand management.--The 
        rates allowed to be charged by a State regulated electric 
        utility shall be such that the utility's investment in and 
        expenditures for energy conservation, energy efficiency 
        resources, and other demand side management measures are at 
        least as profitable, giving appropriate consideration to income 
        lost from reduced sales due to investments in and expenditures 
        for conservation and efficiency, as its investments in and 
        expenditures for the construction of new generation, 
        transmission, and distribution equipment. Such energy 
        conservation, energy efficiency resources and other demand side 
        management measures shall be appropriately monitored and 
        evaluated.
          (9) Energy efficiency investments in power generation and 
        supply.--The rates charged by any electric utility shall be 
        such that the utility is encouraged to make investments in, and 
        expenditures for, all cost-effective improvements in the energy 
        efficiency of power generation, transmission and distribution. 
        In considering regulatory changes to achieve the objectives of 
        this paragraph, State regulatory authorities and nonregulated 
        electric utilities shall consider the disincentives caused by 
        existing ratemaking policies, and practices, and consider 
        incentives that would encourage better maintenance, and 
        investment in more efficient power generation, transmission and 
        distribution equipment.

    Congress took further action in the Energy Independence and 
Security Act of 2007, requiring the States to consider the following 
standard:

          (17) Rate Design Modifications to Promote Energy Efficiency 
        Investments.

          (A) In General--The rates allowed to be charged by any 
        electric utility shall--

                  (i) align utility incentives with the delivery of 
                cost-effective energy efficiency; and
                  (ii) promote energy efficiency investments.

          (B) Policy Options--In complying with subparagraph (A), each 
        State regulatory authority and each nonregulated utility shall 
        consider--

                  (i) removing the throughput incentive and other 
                regulatory and management disincentives to energy 
                efficiency;
                  (ii) providing utility incentives for the successful 
                management of energy efficiency programs;
                  (iii) including the impact on adoption of energy 
                efficiency as 1 of the goals of retail rate design, 
                recognizing that energy efficiency must be balanced 
                with other objectives;
                  (iv) adopting rate designs that encourage energy 
                efficiency for each customer class;
                  (v) allowing timely recovery of energy efficiency-
                related costs; and (vi) offering home energy audits, 
                offering demand response programs, publicizing the 
                financial and environmental benefits associated with 
                making home energy efficiency improvements, and 
                educating homeowners about all existing Federal and 
                State incentives, including the availability of low-
                cost loans, that make energy efficiency improvements 
                more affordable.

    And, the American Recovery and Reinvestment Act of 2009 made the 
receipt of certain energy efficiency grants conditioned upon the 
Governor in each state obtaining necessary assurances that:

          The applicable State regulatory authority will seek to 
        implement, in appropriate proceedings for each electric and gas 
        utility, with respect to which the State regulatory authority 
        has ratemaking authority, a general policy that ensures that 
        utility financial incentives are aligned with helping their 
        customers use energy more efficiently and that provide timely 
        cost recovery and a timely earnings opportunity for utilities 
        associated with cost-effective measurable and verifiable 
        efficiency savings, in a way that sustains or enhances utility 
        customers' incentives to use energy more efficiently.\1\
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    \1\ American Recovery and Reinvestment Act of 2009, Sec. 410(a)(1)

    Many States based on their own State policies and in response to 
these Federal standards have taken actions to align electric 
distribution utility incentives with the achievement of energy savings 
objectives.
    One of the lessons from Congress' past efforts to address this 
issue is that it is not possible to legislate an effective incentive 
mechanism that will be applicable in all states. For example, in the 
recent past, some proposed requiring States to ``decouple'' a utility's 
recovery of fixed costs from sales levels. While this can be a valuable 
reform, some utilities have rate structures that are not cost based and 
others have already adopted rate designs which appropriately recover 
fixed costs through fixed charges. And, in the case of a utility 
holding company that is selling generation at FERC approved market-
based rates, it may not be possible to fully align the company's 
incentives with achieving energy savings targets. For such a company, 
energy savings, at least in the short run, could mean lower prices for 
all of its generation sales. This issue can be addressed, in some 
cases, through third party program administration. However, as these 
examples illustrate, there is no single way in which utility incentives 
become aligned with reaching energy savings goals.
    Question 3. I am concerned that requiring distribution utilities to 
develop and administer new energy efficiency programs, or obtain new 
technology will be expensive--especially for consumer-owned non-
profits. The penalty payments called for by this legislation are very 
high, and there is also the likelihood of ``layered'' costs from an 
EERS, RES, and climate change legislation. How can we implement cost 
control mechanisms to keep costs for distributors--and therefore 
businesses and consumers--as low as possible?
    Answer. An Energy Efficiency Standard that is based on achieving 
the maximum cost effective potential under a Total Resource Cost 
test\2\ will reduce costs to consumers and businesses. Additionally, it 
will significantly reduce the costs of achieving reductions in 
greenhouse gas emissions. This is why it is important to adopt a 
national energy efficiency standard which will either provide a 
catalyst for the remaining States to adopt comparable state standards 
or take effect in the absence of appropriate State action.
---------------------------------------------------------------------------
    \2\ ``Total resource cost test'' means an analysis to determine if, 
for an investment in energy efficiency or peak-demand reduction measure 
or program, on a life-cycle basis, the present value of the avoided 
supply costs for the periods of load reduction, valued at marginal 
cost, are greater than the present value of the monetary costs of the 
demand-side measure or program borne by both the electric utility and 
the participants, plus the increase in supply costs for any periods of 
increased load resulting directly from the measure or program adoption. 
Supply costs are those costs of supplying energy and/or capacity that 
are avoided by the investment, including generation, transmission, and 
distribution to customers. Demand-side measure or program costs 
include, but are not limited to. the costs for equipment, installation, 
operation and maintenance, removal of replaced equipment, and program 
administration, net of any residual benefits and avoided expenses such 
as the comparable costs for devices that would otherwise have been 
installed, the salvage value of removed equipment and any tax credits. 
In the Matter of the Adoption of Rules for Alternative and Renewable 
Energy Technology, Resources, and Climate Regulations, Public Utilities 
Commission of Ohio Case No. 08-888-EL-ORD, Opinion and Order (April 15, 
2009) at Section 4901:1-39-01(W).
---------------------------------------------------------------------------
    As indicated in my prepared testimony, States should have the 
flexibility to opt out of a Federal efficiency standard by adopting a 
State standard with an equivalent basis, where:

   The State has set, in any form, clearly defined energy 
        efficiency benchmarks;
   Utilities or the State periodically assess the maximum 
        achievable cost-effective level of energy efficiency 
        improvements and that assessment is subject to public review;
   The State certifies to the Secretary of Energy that the 
        State has implemented energy efficiency standards and policies 
        designed to achieve maximum achievable cost effective energy 
        efficiency improvements; and
   The state periodically reports progress toward achieving its 
        benchmarks.

    For purposes of the exemption, cost effective measures and programs 
may be defined by Federal statute as based on a total resource cost or 
societal test.
    Ohio has adopted a total resource cost test for purposes of 
identifying cost-effective energy efficiency improvements. We would be 
happy to work with the Committee to craft an opt-out provision for 
States that have implemented or will implement standards consistent 
with achieving maximum cost-effective energy efficiency improvements.
    To further reduce any negative cost impact, I also have 
recommended:

   To the extent that a State does not develop its own 
        benchmarks, but adopts and administers the proposed Federal 
        standard, Federal legislation should authorize the State 
        commission to modify a utility's benchmarks where the utility 
        is unable to meet the benchmark due to regulatory, economic, or 
        technological reasons beyond its reasonable control and has 
        exhausted all reasonable compliance options.
   A national standard authorizing the banking of surplus 
        energy savings for use in meeting any subsequent year's savings 
        benchmark.

    Many consumer-owned non-profit utilities have been leaders in 
promoting energy efficiency. Cost-effective energy savings should have 
comparable benefits for consumers and businesses served by these 
utility cooperatives.
    Question 4. The proposed EERS legislation would calculate a 
utility's ``business-as-usual'' energy use by averaging its consumption 
levels in the 2 years prior to enactment. Utilities that are already 
making great efforts to reduce energy consumption--whether through a 
state-level EERS or their own initiative--may have a tougher time 
complying with the federal mandate due to their early action on energy 
efficiency. Should a federal EERS be designed to avoid disadvantaging 
those utilities, particularly compared to those who have taken no 
action?
    Answer. There are many factors, including but not limited to past 
initiatives, which can impact a utility's maximum achievable cost-
effective energy savings. It is precisely these differences which can 
be effectively addressed by the modifications to S. 548 proposed in my 
prepared testimony.
    Question 5. Under Senator Schumer's bill, the federal EERS would 
require electricity savings of 15 percent, and natural gas savings of 
10 percent, over the course of a decade. For the sake of comparison, 
can any of you provide the percentage savings that were achieved by 
these distributors over the course of the past ten years?
    Answer. The U.S. Energy Information Administration collects and 
publishes data on energy savings from electric utility energy 
efficiency and other demand-side management programs. I am not aware of 
comparable data on gas utility energy savings.
    Incremental energy savings\3\ from electric utility demand-side 
management programs peaked in 1993 at 8,980 gigawatt hours or 0.3% of 
annual retail sales. In 1993, electric utilities spent $2.74 billion 
implementing demand-side management programs. With an increased focus 
on retail competition policy, demand-side management spending by 
electric utilities and the resulting annual energy savings fell in the 
mid-to late-1990s and the early part of this decade.\4\ Utility 
expenditures and savings began to recover in 2005. In 2007, the most 
recent year for which national figures are available, U.S. electric 
utilities spent $2.53 billion on demand-side management programs and 
incremental energy savings from electric utility programs equaled 7,821 
gigawatt hours or 0.2% of total retail sales.\5\
---------------------------------------------------------------------------
    \3\ Incremental energy savings are the effects caused by new 
program participants and new demand-side programs during a specific 
year. They do not reflect the total impact of given year's program 
expenditures as energy savings can persist for many years based on the 
life of the efficiency measure.
    \4\ U.S. Energy Information Administration, U.S. Electric Utility 
Demand-Side Management: Trends and Analysis (1995), available at: 
http://www.eia.doe.gov/cneaf/pubs_html/feat_dsm/contents.html
    \5\ U.S. Energy Information Administration, 2007Electric Power 
Annual (January 21, 2009).
---------------------------------------------------------------------------
    Question 6. The Ohio law gives your Commission the flexibility to 
address changing and unanticipated conditions. For example, the law 
allows a utility to file an application to amend the standard if they 
cannot meet it due to regulatory, economic, or technological reasons 
beyond reasonable control. The law further allows the PUC to reduce a 
utility's baseline to account for new economic growth. Shouldn't any 
federal EERS program have similar flexibilities built into it?
    Answer. As indicated in my prepared testimony, where a State adopts 
and administers the proposed Federal standard, S. 548 should be 
modified to authorize the State commission to modify a utility's 
benchmarks where the utility is unable to meet the benchmark due to 
regulatory, economic, or technological reasons beyond its reasonable 
control and has exhausted all other reasonable compliance options. This 
is consistent with the provision in Ohio's efficiency standard. It 
ensures that utilities are required to pursue only cost-effective and 
reasonably achievable efficiency improvements.
    The provision in Ohio's law permitting the Commission to adjust a 
utility's baseline for new economic growth provides an additional 
element of flexibility, but is expected to have limited application. As 
the Commission stated in adopting its Rules on the efficiency standard:

          We expect that any baseline adjustments made to account for 
        economic growth typically will be temporary, and will address 
        circumstances in which unanticipated increases in the overall 
        rate of growth have made full compliance infeasible. We also 
        expect that any adjustments will account not only for positive 
        economic growth, but also negative economic growth. This is 
        clearly pertinent to the economic conditions that have 
        developed since SB 221 went into effect.\6\
---------------------------------------------------------------------------
    \6\ In the Matter of the Adoption of Rules for Alternative and 
Renewable Energy Technology, Resources, and Climate Regulations, Public 
Utilities Commission of Ohio Case No. 08-888-EL-ORD, Opinion and Order 
(April 15, 2009).

    The Commission has interpreted this provision of the statute in a 
manner consistent with provisions on baseline normalization which 
require any proposed adjustments to be made in a consistent manner from 
year to year.
    Question 7. According to a recent article in the Wall Street 
Journal, ?customers of Duke Energy in Cincinnati will see a monthly fee 
for gas service jump to more than $25 in June from $6 in 2008, in 
addition to a charge based on the amount of gas consumed, to make up 
for reduced gas usage.? Other utilities in Ohio are also assessing fees 
on their customers. Can you discuss the importance of decoupling, from 
the perspective of a utility, and the ultimate impact that it could 
have on the level of ``savings'' projected by ACEEE?
    Answer. It is important to note that volumetric rates are being 
reduced along with the increase in the fixed charge such that the 
average customer is paying no more than under a more traditional rate 
design. The distribution rate increase is being phased in over two 
years. An average Duke residential customer using 810 hundred cubic 
feet (ccf) of gas each year will see their total bill increase $3.40 
per month in year one and another 60 cents per month in year two. The 
increase on the average customer's bill is a result of the rate 
increase, not the change to a levelized rate structure. The PUCO 
redesigned the rates so that most of the fixed costs will be charged in 
a flat monthly rate. There will be a significant reduction in the part 
of the bill that varies with the amount of gas used. After accounting 
for the higher flat rate and the lower usage-based rate, the total 
increase is minimal. The Commission also directed Duke to undertake a 
program that mitigates impacts of the increased fixed charge for low 
income, low use consumers.
    So, while an average residential customer using 810 ccf of gas a 
year will see a small increase in rates due to the overall rate 
increase, that customer will see no impact from the change in rate 
design. That's because the decrease in the usage-based part of the rate 
offsets the increase in the flat monthly charge over the course of the 
year for the average consumer. This has the added benefit of spreading 
out the delivery costs more evenly throughout the year, so customers 
aren't paying more of the fixed costs during the winter months, when 
bills are already the highest.
    It is wrong to characterize the move to more recovery through the 
fixed charge as an additional ``monthly fee''. From a natural gas 
utility's perspective, it is not realistic for that utility to 
undertake investments in energy efficiency without addressing the 
impact that investment will have on the Company's recovery of its 
largely fixed distribution and administrative costs. Historically, 
utilities such as Duke recovered a large portion of their fixed costs 
for gas distribution through rates charged on a volumetric (per ccf) 
basis. We have seen reductions in per customer gas usage in recent 
years as a response to increasing commodity prices. One cannot expect a 
utility to actively accelerate a decline in its ability to recover 
fixed costs through energy efficiency programs without mitigating the 
revenue erosion that would result from the Company's prior rate design. 
That decoupling can be done through a Decoupling Rider, through 
directly compensating the utility for the energy efficiency program 
impacts (i.e. ``lost revenues''), or through appropriate rate design as 
Ohio has chosen to do in this case.
    Question 8. That same article also states that ``Duke's electricity 
business implemented a program that allows it to get reimbursed by the 
state if it loses revenue for encouraging energy efficiency.'' How much 
does the State of Ohio expect to spend on that program? At the federal 
level, could a similar program put the government on the hook for 
unprecedented new levels of spending?
    Answer. The Wall Street Journal article is not entirely accurate in 
that there will be no expenditure of State funds associated lost 
revenues for Duke Energy Ohio's energy savings programs. The article 
appears to be referring to a provision, which was stipulated to by a 
broad range of parties and adopted by the Commission, permitting Duke 
to recover from ratepayers the lost margin associated with rate designs 
that recover a portion of fixed distribution costs through rates based 
on kWh sales. This provision does not change the utility's total 
allowed revenue requirements. It allows the utility to adjust rates 
based on verified energy savings only to the extent that some of the 
Company's fixed distribution costs are being recovered through charges 
based on kWh sales. This provision will have a small impact on rates. 
Our Order further provided, consistent with the agreement of the 
parties, that, ``if the Commission adopts a decoupling or straight 
fixed variable rate design, Duke will discuss and implement an 
appropriate adjustment to its recovery of lost margins. . . ''\7\
---------------------------------------------------------------------------
    \7\ In the Matter of the Application of Duke Energy Ohio, Inc., for 
Approval of an Electric Security Plan, Public Utilities Commission of 
Ohio Case No. 08-920-EL-SSO, Opinion and Order (December 17, 2008).
---------------------------------------------------------------------------
    Question 9. Last Congress, Senator Schumer's EERS legislation 
included a provision to establish a system of tradable credits to help 
facilitate compliance. You've indicated your support for that type 
system, but it isn't part of the legislation we're currently 
considering. Can you describe the differences you see between tradable 
credits and their replacement in this bill, bilateral transactions?
    Answer. In certain circumstances, S. 548 permits bilateral 
transfers of savings among utilities in a single state or electric 
utilities in a single power pool. As a condition of using purchased 
savings under S. 548, the State commission that regulates the 
purchasing utility would have to oversee the measurement and 
verification of savings achieved by the transferring party. And, S. 548 
permits the Secretary of Energy to limit the proportion of energy 
savings benchmarks that can be met by such purchases.
    The development of a well designed energy efficiency credit program 
could lead to a more open and transparent market for energy savings. It 
could help ensure that the most cost-effective efficiency improvements 
are undertaken first.
    A more flexible energy efficiency credit trading program would 
require the independent application of standard measurement and 
verification protocols and provisions to ensure that savings are not 
inappropriately double counted toward meeting multiple requirements. 
However, State or power pool limitations on trading, requirements that 
measurement and verification be overseen by the regulatory authority in 
the purchasing State, and potential limits on the proportion of savings 
that can be met by purchases are not necessary terms of an energy 
savings credit trading program. A more precise comparison would depend 
on the terms and conditions of any authorized energy efficiency credit 
trading program.
    The Ohio Commission has not had the opportunity to review detailed 
proposals for energy efficiency credit trading. In adopting the rules 
governing Ohio's efficiency standard, our Commission stated that, 
``While the Commission is open to the construct of energy efficiency 
credits, we are unaware of any accreditation regime currently operating 
in Ohio. The energy efficiency rules adopted herein do not prevent or 
preclude the use of energy efficiency credits and should such a regime 
be created, we may reconsider [this] suggestion.''\8\
---------------------------------------------------------------------------
    \8\ In the Matter of the Adoption of Rules for Alternative and 
Renewable Energy Technology, Resources, and Climate Regulations, Public 
Utilities Commission of Ohio Case No. 08-888-EL-ORD, Opinion and Order 
(April 15, 2009).
---------------------------------------------------------------------------
    Question 10. Can you describe, in greater detail, the importance of 
allowing excess savings to be ``banked''? What will happen if an EERS 
is passed without a ``banking'' provision for retail distributors?
    Answer. First, banking provides an incentive for early reductions 
that might not otherwise be implemented. In the absence of banking, 
utilities could have an incentive to plan programs that will meet, but 
not exceed, annual benchmarks or to suspend programs each year when 
benchmarks have been met. Program suspensions undermine the ability of 
consumers and trade allies, such as contractors and equipment vendors, 
to rely on programs and will tend to make programs more costly and less 
effective.
    Second, banking will provide utilities additional flexibility in 
complying with the standards in later years. Early surplus energy 
savings will permit utilities, if necessary, to stretch the transition 
to meeting increasingly aggressive annual benchmarks.
    Third, the availability of banking will tend to deter litigation 
designed to delay the application of the standards, as such litigation 
will also defer or eliminate the opportunity to bank early surplus 
energy savings.
   Responses of Paul A. Centolella to Questions From Senator Shaheen
    Question 1. As today's witnesses have noted, energy efficiency 
measures are incredibly important to address our nation's energy 
challenges. I think it is important to craft federal policies that 
incentivize investments in energy efficiency.
    One of the concerns that I am aware of with an EERS, however, is 
that of market manipulation. Under an energy efficiency credit trading 
program, we may be giving credit for actions that would have already 
been taken regardless of an EERS mandate.
    Many NE states are implementing policies to require utilities to 
procure all cost-effective energy efficiency. These least cost 
procurement policies, for example, require that a distribution company 
obtain all cost effective energy efficiency up to the electric supply 
cost. The goals seem the same as an EERS, with an emphasis on cost-
effective measures, and seem to avoid some of the issues of market 
manipulation.
    Would you care to comment on least cost procurement policies and 
how they compare to an EERS?
    Answer. Least cost procurement policies are a valuable complement 
to an Energy Efficiency Standard. The annual benchmarks in Ohio's 
Energy Efficiency Standard are the minimum levels of energy savings 
that electric utility efficiency programs must achieve. Our 
Commission's rules require Ohio electric utilities to evaluate the 
technical, economic, and achievable potential for energy savings and to 
propose a comprehensive portfolio of energy efficiency and demand 
reduction programs.\9\ The provisions of Ohio's electricity law on cost 
recovery for new generating facilities require a prior determination of 
need by the Commission, which finding would be made in an Integrated 
Resource Planning proceeding.\10\
---------------------------------------------------------------------------
    \9\ In the Matter of the Adoption of Rules for Alternative and 
Renewable Energy Technology, Resources, and Climate Regulations, Public 
Utilities Commission of Ohio Case No. 08-888-EL-ORD, Opinion and Order 
(April 15, 2009).
    \10\ Section 4928.143(B)(2)(b) and (c), Ohio Revised Code.
---------------------------------------------------------------------------
    In proposing an exemption from the proposed Federal standard for 
States meeting specific requirements, my prepared testimony 
recommended, among other conditions, that the State certifies it has 
implemented energy efficiency standards and policies designed to 
achieve maximum achievable cost effective energy efficiency 
improvements. This recommendation is intended to help ensure that 
States would both adopt efficiency standards and pursue procurement 
policies designed to achieve any additional efficiency savings that are 
cost-effective.
    Question 2. In New Hampshire, we are addressing efficiency and 
energy conservation by taking auction revenues from RGGI, the United 
States' first cap-and-trade program for greenhouse gases, and investing 
those revenues in these energy saving and conservation efforts. In your 
view, is it more cost effective and efficient to establish an EERS 
mandate or invest auction revenues in efficiency and conservation 
measures? What are the trade-offs?
    Answer. First, this is not necessarily an either / or choice. One 
could have an efficiency standard and choose to fund some efficiency 
programs through auction revenues.
    Second, auction revenues may fall short of or exceed optimal 
investment levels in energy efficiency. A better approach is to 
incorporate the price of greenhouse gas emissions set by the auction in 
the benefit / cost equation governing investment in energy efficiency. 
Because we have observed market failures in achieving economically 
efficient levels of investment in energy efficiency, mandated 
investments by utilities based on an appropriate benefit / cost test 
will achieve a more efficient result than relying on an external 
mechanism such as auction revenues to set the level of investment.
    Third, the question of who should administer efficiency programs is 
potentially related, but can be separated from a decision to use of 
auction revenues versus a more broadly applied utility charge to fund 
efficiency programs. In some instances, planning and administration of 
utility funded efficiency programs has been delegated to independent 
third party administrators. Utilities tend to approach efficiency 
programs with greater knowledge about consumer energy usage and 
established relationships with their customers. Third party 
administrators, in some instances, can achieve state-wide coordination 
and scale that would not be available through individual utility 
programs. And, third party administration may be appropriate option 
where it is not possible to readily align utility incentives with the 
achievement of cost-effective energy savings.
    Finally, whether it would be more economically efficient and fair 
to fund efficiency programs through auction revenues or a charge on 
utility bills depends largely on how auction revenues otherwise would 
be used. Utilities typically fund efficiency programs through broadly 
based charges to energy consumers.\11\ Allowance auction revenues could 
be used to mitigate the impacts of greenhouse gas regulation on 
businesses and consumers, compensate for the impacts of such regulation 
on international trade, reduce economically inefficient or regressive 
taxes, cut the Federal deficit, or pay for a range of public 
investments, including investments in energy efficiency. Energy 
efficiency improvements will provide a foundation for growth in the 
U.S. economy. However, given the many demands on federal revenues, 
significant reliance on utilities to support energy efficiency programs 
through the enactment of an Energy Efficiency Standard is a reasonable 
policy choice.
---------------------------------------------------------------------------
    \11\ For a detailed analysis of the appropriate allocation of 
efficiency program costs, see: P. Centolella, et al., Cost Allocation 
for Electric Utility Conservation and Load Management Programs 
(Washington, D.C.: National Association of Regulatory Utility 
Commissioners, 1992).
---------------------------------------------------------------------------
    Question 3. It has often been said by those seeking to address 
climate change that the single most important thing we can do to 
address climate is put a price on carbon. A price on carbon will, in 
turn, incentivize renewable electricity and energy conservation 
measures. Is a national EERS necessary to deploy energy conservation 
and efficiency improvements if we enact a cap-and-trade program in the 
US?
    Answer. Experience has shown that price signals alone have not led 
to the adoption of all cost-effective efficiency measures. Increasing 
energy efficiency is the single most important step that can be taken 
to lower the cost of reducing greenhouse gas emissions for businesses 
and consumers. A cap and trade program designed to achieve meaningful 
reductions in greenhouse gas emissions would provide an additional 
incentive for States to pursue more aggressive energy efficiency 
policies. However, a national Energy Efficiency Standard, with the 
modifications proposed in my prepared testimony, could provide a 
significant further catalyst for State and utility actions, 
particularly where utilities face inherent market pricing disincentives 
to reducing demand or have not seen improving the efficiency with which 
consumers use energy as part of their core business.
    Question 4. There have been some who suggest an EERS will reduce 
the cost of a cap-and-trade program. A report by ACEEE states that, 
``energy efficiency reduces the cost of cap-and-trade because less new 
energy facilities are needed and also because a smaller portion of 
existing facilities need to be upgraded to help meet emissions 
ceilings.'' By some estimates, electricity prices under cap-and-trade 
legislation may be 15 percent less if an EERS as well as an RES are 
also in place. Do you agree with this assessment?
    Answer. While I have not reviewed the details of the ACEEE 
estimates cited in this question, I would agree that cost-effective 
utility energy efficiency programs could significantly lower the costs 
of achieving greenhouse gas reductions.
    Question 5. A key goal of U.S. energy policy is lessening our 
dependence on foreign oil. One way to achieve this goal would be a 
conversion of the transportation sector from petroleum to electricity 
through the phased-in and widespread use of hybrid cars, plug-in hybrid 
cars and fully electric cars. While this will lessen our dependence on 
foreign oil, it may put additional strains on our electricity system 
which may require additional generation investments.
    I am interested to hear your thoughts on how does the EERS will 
affect en electrification of the transportation sector? How would these 
two important policy goals work together?
    Answer. Increased electricity use by vehicles will increase the 
base quantity, as defined in Section 610(a)(4)(A) of S. 548, to which a 
savings percentage is applied when calculating the required energy 
savings under the bill. However, S. 548 proposes a rolling, rather than 
an historical, baseline for calculating utility efficiency savings. As 
a result, the proposed standard does not require a MWh-for-MWh offset 
of energy savings for increases in electricity usage by vehicles. 
Ohio's efficiency standard takes a similar approach using a three year 
rolling average baseline.
    My prepared testimony includes recommendations that would provide 
States and utilities additional flexibility, consistent with achieving 
cost-effective energy efficiency improvements. These proposed 
modifications could alleviate any remaining concern regarding the 
potential for conflicts between vehicle electrification and an Energy 
Efficiency Standard.
    Electric vehicles may represent a source-to-wheels efficiency 
improvement over conventional vehicles. Whether and how to recognize 
this potential improvement is an issue that has not been addressed by 
the Ohio Commission.
    Policies to promote energy efficiency and electrification of the 
transportation sector work together in two important ways. First, 
energy efficiency will reduce electricity usage and electricity prices, 
freeing up additional generating capacity to support electrification of 
transportation at a lower cost to consumers. Second, both energy 
efficiency and electric vehicles will benefit from the development of a 
smart power grid. The foundation of a smart grid is an open-
architecture communications system which, first, provides a common 
platform for implementing distribution automation, advanced metering, 
time-differentiated and dynamic pricing, home area networks, advanced 
building energy management systems that continuously improve building 
performance, systems to manage electric vehicle charging, and other 
applications and, second, integrates these applications with existing 
systems to improve reliability, reduce costs, and enable consumers to 
better control their electric bills. The Ohio Commission has approved 
smart grid deployment plans for American Electric Power and Duke Energy 
Ohio. Smart grid proposals for Ohio's other electric utilities are 
currently pending before the Commission.
    Question 6. How are other countries addressing energy efficiency 
and conservation? Have other countries adopted an EERS, or a similar 
mandate?
    Answer. It is my understanding that there are energy efficiency 
standards in place for retail suppliers or distributors in a number of 
European countries, including Italy, France, and Great Britain. 
Additionally, the European Union Directive on Promotion of Energy 
Efficiency and Energy Services obligated E.U. countries to develop 
national energy efficiency action plans with specific savings targets. 
We have not looked at these standards or plans in sufficient detail to 
permit me to offer an opinion regarding the similarities and 
differences with the standards proposed in S. 548.
                                 ______
                                 
   Responses of Thomas E. Skains to Questions From Senator Murkowski
    Question 1a. The push to enact a separate RES and EERS calls into 
question the goals of these standards--is to promote certain 
technologies, or to reduce greenhouse gas emissions?
    If energy efficiency is incorporated into an RES, it would seem to 
me that utilities would have a much better chance of meeting their 
requirements instead of facing penalties for noncompliance. Wouldn't it 
be better to give them greater flexibility to succeed by adopting a 
single standard?
    Answer. Proposals for a Renewable Energy Standard (RES) would 
require electric load serving entities to purchase a certain proportion 
of their electric supply from renewable sources. To our knowledge, none 
of these proposals would seek to impose similar requirements upon 
natural gas utilities. Nevertheless, I do believe that as a general 
matter when government creates a mandate for the energy industry we are 
best served by providing for maximum flexibility and simplicity in 
compliance options.
    Question 1b. If Congress decides to enact an RES instead of an 
EERS, should we allow an unlimited amount of the renewable mandate to 
be met through energy efficiency measures?
    Answer. Please see the answer to the preceding question.
    Question 2. This bill appears to provide only penalties, and no 
incentives, to facilitate compliance with the proposed federal 
standard. Please describe what other measures, if any, you think should 
be incorporated to encourage distributors to reach energy savings 
goals.
    Answer. As indicated in my testimony before the Committee, one of 
our primary concerns with the Energy Efficiency Resource Standard 
(EERS) proposal is its focus on after-the-fact penalties for natural 
gas utilities if their customers do not meet designated energy savings 
targets. Emphasis should instead be placed on providing tools and 
incentives to customers to help them reduce their energy consumption. 
Utilities have a demonstrated record of helping customers access the 
tools necessary for them to change their energy consumption habits. 
Over the last thirty years, natural gas utilities have worked with 
their residential and commercial customers to reduce their overall 
consumption by approximately one-third.
    This impressive trend has principally resulted from increased 
appliance efficiency standards, improved building codes, and efficiency 
programs. Energy efficiency programs administered by utilities, local 
governments, non-profits and third party service companies provide 
refunds, rebates, low-cost loans, and other incentives for customers to 
increase the efficiency of their energy use. These programs are often 
funded by surcharges on utility rates or by general governmental 
revenues (sometimes received by state and local government from the 
federal government). Enhancing the resources available for these types 
of programs would be a far more effective means of meeting energy 
efficiency objectives than relying on penalties.
    As we move forward, we believe that state regulators should also 
consider programs that permit their utilities to earn a return on 
effective energy savings programs as well as to offer energy services 
to homes and businesses--installing and operating natural gas-powered 
combined heat and power, district energy or solar powered energy 
solutions.
    Finally, building codes and standards are important in this regard. 
Some areas have very outdated requirements, while some have none at 
all. Modernizing building codes and standards which integrate a full 
fuel cycle assessment of the efficiency and green house gas emissions 
of energy use is a relatively low cost means to achieve significant 
energy reductions.
    Question 3. I am concerned that requiring distribution utilities to 
develop and administer new energy efficiency programs, or obtain new 
technology will be expensive--especially for consumer-owned non-
profits. The penalty payments called for by this legislation are very 
high, and there is also the likelihood of ``layered'' costs from an 
EERS, RES, and climate change legislation. How can we implement cost 
control mechanisms to keep costs for distributors--and therefore 
businesses and consumers--as low as possible?
    Answer. The penalty payments called for by the EERS are indeed very 
high, and I find that a cause for concern. Unfortunately, under the 
EERS the utility will not know until after the fact whether its actions 
have led to compliance with the targets set by EERS. Should a utility 
not be deemed to be in compliance with the EERS requirements, it will 
be assessed a penalty of $10 or $5 per MMBtu. For a large utility these 
penalties could be measured in millions of dollars. These costs would, 
necessarily, be passed on to the customers of the utility.
    Although I wholeheartedly endorse the goals of maximizing energy 
efficiency and minimizing carbon emissions, adopting a cap-and-trade 
carbon regulation program together with an EERS would be ``layered'' as 
you have indicated. Indeed, the government would be layering one 
program aimed at reducing consumption on top of another. This may lead 
to unintended consequences. Moreover, it could readily lead to 
utilities and their customers being assessed twice for the same failure 
in reducing energy consumption.
    Residential and commercial natural gas customers have demonstrated 
during the past four decades that they can and will use natural gas 
with increasing efficiency--resulting in reduced greenhouse gas (GHG) 
emissions. For example, while the number of homes served with natural 
gas increased from 38 million in 1970 to more than 65 million today, 
the overall energy use and GHG emissions for these customers is 
virtually the same today as it was nearly 40 years ago. This startling 
statistic is the result of very effective programmatic measures that 
have been utilized--tighter homes, more efficient natural gas 
appliances and a variety of conservation and efficiency related 
utility-sponsored programs and practices. Federal policy should 
recognize this demonstrated success and focus on supporting these 
programmatic measures for residential and commercial natural gas.
    A programmatic approach--ramping up building codes, appliance 
standards, and customer incentives--can provide the same emission 
reductions as would a cap-and-trade approach and similar energy 
efficiency as intended by a federal EERS, while shielding consumers 
from the extraordinary cost of emissions allowances and penalties for 
failure to meet EERS targets. We are convinced that even without the 
cost of allowances, consumer costs will be pushed upward by the 
legislation as more and more natural gas is used to produce 
electricity, particularly in the first two decades of a control program 
when other generating options--including coal with carbon capture, 
nuclear power, solar and wind--are not available in sufficient 
quantities. Federal funding for a programmatic approach is crucial.
    Question 4. The proposed EERS legislation would calculate a 
utility's ``business-as-usual'' energy use by averaging its consumption 
levels in the 2 years prior to enactment. Utilities that are already 
making great efforts to reduce energy consumption--whether through a 
state-level EERS or their own initiative--may have a tougher time 
complying with the federal mandate due to their early action on energy 
efficiency. Should a federal EERS be designed to avoid disadvantaging 
those utilities, particularly compared to those who have taken no 
action?
    Answer. The ``business as usual'' concept at the core of the EERS 
provision is particularly troublesome. It will essentially require 
every utility to forecast energy prices, market penetration, economic 
growth, future efficiency programs, and a host of other variables as 
well. At some point, after the fact, this forecast will be reviewed 
either by Department of Energy or state officials. The utility will be 
measured against this ``business as usual'' forecast (unless these 
officials opine after the fact that the business as usual forecast was 
flawed) in determining whether a utility has served a ``significant 
role'' in meeting the EERS-mandated energy efficiency targets. If it is 
determined that the utility has not done so, it will be assessed a 
penalty of $10 or $5 per MMBtu. This prospect causes me great concern, 
and it is at the heart of my difficulty with the EERS construct.
    Question 5. Under Senator Schumer's bill, the federal EERS would 
require electricity savings of 15 percent, and natural gas savings of 
10 percent, over the course of a decade. For the sake of comparison, 
can any of you provide the percentage savings that were achieved by 
these distributors over the course of the past ten years?
    Answer. Total consumption of all U.S. residential, commercial, and 
industrial natural gas consumers declined by 8 percent from 1999 
through 2008. Residential and commercial natural gas customers reduced 
their consumption per customer by over 9 percent from 1998 through 
2007. (Data through 2008 is not yet available for this measure.) We do 
not track data on industrial consumption per customer. I would further 
note that, unlike the draft carbon cap and trade legislation, natural 
gas utilities would be responsible for the consumption practices of 
large industrial customers under the proposed EERS bill. We oppose this 
construct and suggest that the industrial market should be treated 
separately under any energy efficiency standards and should not be the 
responsibility of local distribution companies.
    Question 6. In your testimony, you noted that ``approximately 90% 
of the energy value of natural gas is delivered to consumers.'' From 
the perspective of a natural gas utility, how difficult would it be to 
achieve energy savings of 10% over the course of a decade? Should a 
federal program recognize the savings already achieved by ``early 
actors''?
    Answer. We see such a target as achievable if framed with proper 
incentives for utilities and their customers. However, because of 
energy efficiency achieved to date, it will be increasingly difficult 
to achieve further reductions. As a consequence, continuation of this 
trend, as noted in my testimony before the committee and in answers to 
questions above, will require a significant commitment of resources. 
Moreover, a federal approach to increasing energy efficiency and 
reducing greenhouse gas emissions should recognize the significant 
reductions achieved by natural gas utilities and their customers to 
date, particularly relative to their electric counterparts. As noted in 
my testimony before the committee, residential natural gas customer 
have reduced their average annual consumption by 38% since 1970 while 
the average electric customer's consumption increased by 59% over the 
same time period. Natural gas customers will need access to new 
technologies to allow them to continue their current efficiency trend. 
Federal support for developing and commercializing high-efficiency, 
low-emissions natural gas end-use technologies will be important.
    Question 7. At the root of this new mandate is an incongruous 
requirement--utilities must convince their customers to use less of 
their product, or else be subject to penalties. While utilities can 
educate consumers, perform energy audits and provide incentives like 
rebates for efficient appliances, they simply cannot get ``behind the 
meter'' and control consumers' actions. Is the structure of an EERS 
inherently unfair?
    Answer. There appears to be some very elemental and irreconcilable 
tension between expectations that utilities will be effective 
proponents for energy efficiency and the reality that utilities do not 
actually make the ultimate decisions impacting energy use, consumers 
do.
    Question 8. This bill appears to provide only penalties, and no 
incentives, to facilitate compliance with the proposed federal 
standard. Please describe what other measures, if any, you think should 
be incorporated to encourage distributors to reach energy savings 
goals.
    Answer. Natural gas utility managers are increasingly aligning 
their businesses to help customers meet their energy needs by making 
increasingly efficient energy choices. This realignment is facilitated 
to a great degree by the progress that has been made to align natural 
gas utility shareholder and consumer financial interests through state 
regulator-approved rate mechanisms that separate the fixed cost revenue 
recovery from the volume of energy provided to customers--37 natural 
gas utilities in 21 states are serving 26 million residential customers 
under either decoupled or flat monthly fee rate designs, both of which 
make natural gas utilities indifferent to the amount of energy their 
customers consume.
    Increasingly, state regulators are implementing policies that 
prioritize energy efficiency and encourage natural gas utilities to 
move beyond ``indifference'' by providing opportunities to recover 
program costs and earn on the delivery of energy efficiency programs 
and services. Currently 19 utilities in 10 states receive either a 
return on investments in energy efficiency programs or a reward for 
exceeding energy efficiency program goals. Companies in these states 
may earn a financial reward for meeting program performance targets, 
have a shared savings incentive, or have the opportunity to earn a rate 
of return on their energy efficiency investments equal to other capital 
investments. These incentive structures vary from state to state as 
they reflect the policy goals set forward by governments and regulators 
in each jurisdiction.
    Finally, we know that customers will purchase more efficient 
appliances if the initial cost of more expensive high efficiency 
appliances is lowered and potential savings are communicated to 
customers. This can be done by rebates or tax credits. Without such 
tools it is very difficult to convince customers to purchase more 
expensive appliances with long payback periods.
    Responses of Thomas E. Skains to Questions From Senator Shaheen
    Question 1. As today's witnesses have noted, energy efficiency 
measures are incredibly important to address our nation's energy 
challenges. I think it is important to craft federal policies that 
incentivize investments in energy efficiency.
    One of the concerns that I am aware of with an EERS, however, is 
that of market manipulation. Under an energy efficiency credit trading 
program, we may be giving credit for actions that would have already 
been taken regardless of an EERS mandate.
    Many NE states are implementing policies to require utilities to 
procure all cost-effective energy efficiency. These least cost 
procurement policies, for example, require that a distribution company 
obtain all cost effective energy efficiency up to the electric supply 
cost. The goals seem the same as an EERS, with an emphasis on cost-
effective measures, and seem to avoid some of the issues of market 
manipulation.
    Would you care to comment on least cost procurement policies and 
how they compare to an EERS?
    Answer. This question appears to be geared more toward the 
electricity-related aspects of EERS, so we do not believe we are best 
qualified to answer.
    Question 2. In New Hampshire, we are addressing efficiency and 
energy conservation by taking auction revenues from RGGI, the United 
States' first cap-and-trade program for greenhouse gases, and investing 
those revenues in these energy saving and conservation efforts. In your 
view, is it more cost effective and efficient to establish an EERS 
mandate or invest auction revenues in efficiency and conservation 
measures? What are the trade-offs?
    Answer. There is a demonstrated record of success of natural gas 
utilities and their customers in achieving significant gains in the 
efficiency of energy use that spans four decades. For example, while 
the number of homes served with natural gas increased from 38 million 
in 1970 to more than 65 million today, the overall GHG emissions from 
these homes is virtually the same today as it was nearly 40 years ago. 
This startling statistic is the result of very effective programmatic 
measures that have been utilized--tighter homes, more efficient natural 
gas appliances and a variety of conservation and efficiency related 
utility-sponsored programs and practices. Federal policy should 
recognize this demonstrated success and focus on supporting these 
programmatic measures for residential and commercial natural gas. 
Although it is a bit difficult to generalize across so many customers 
and so many years, we believe that these savings have been the result 
of incentives rather than mandates.
    Question 3. It has often been said by those seeking to address 
climate change that the single most important thing we can do to 
address climate is put a price on carbon. A price on carbon will, in 
turn, incentivize renewable electricity and energy conservation 
measures. Is a national EERS necessary to deploy energy conservation 
and efficiency improvements if we enact a cap-and-trade program in the 
US?
    Answer. In many ways, it appears that the goals of a national 
approach to regulating greenhouse gas emissions and those of a federal 
EERS are overlapping, and the implementation mechanisms might produce 
conflicting results. For this reason, along with other concerns raised 
in this response and my testimony before the Committee, we recommend 
addressing natural gas end-use efficiency through programmatic means 
within a federal greenhouse gas emissions reduction framework rather 
than through a separate EERS structure.
    Residential and commercial natural gas customers have demonstrated 
during the past four decades that they can and will use natural gas 
with increasing efficiency and resulting in reduced GHG emissions. A 
programmatic approach can provide the same emission reductions as would 
a cap-and-trade approach, but it would not subject these small users to 
the extraordinary cost of emissions allowances. Natural gas utilities 
and other interested stakeholders would work with state public utility 
commissions to develop both the goals and programmatic mechanisms that 
would deliver real GHG emission reductions while taking advantage of 
the lower carbon emissions associated with the direct use of natural 
gas.
    Question 4. There have been some who suggest an EERS will reduce 
the cost of a cap-and-trade program. A report by ACEEE states that, 
``energy efficiency reduces the cost of cap-and-trade because less new 
energy facilities are needed and also because a smaller portion of 
existing facilities need to be upgraded to help meet emissions 
ceilings.'' By some estimates, electricity prices under cap-and-trade 
legislation may be 15 percent less if an EERS as well as an RES are 
also in place. Do you agree with this assessment?
    Answer. While we are not aware of similar estimates of cost-
effectiveness that would support an EERS applied to natural gas, we 
fully recognize, as do state utility commissions, the impact that 
increased efficiency of energy use can have in lowering the portion of 
consumer utility bills related to the cost of the natural gas 
commodity. Continuing the efficiency gains already realized by natural 
gas consumers will require investments in higher efficiency appliances 
and equipment. Ramping up the full potential in this area is a near-
term, cost-effective option for getting at the ``low hanging'' fruit 
many efficiency advocates suggest. However, progress will depend 
directly on the resources (e.g., increased funding for incentives and 
rebates) allocated.
    Question 5. A key goal of U.S. energy policy is lessening our 
dependence on foreign oil. One way to achieve this goal would be a 
conversion of the transportation sector from petroleum to electricity 
through the phased-in and widespread use of hybrid cars, plug-in hybrid 
cars and fully electric cars. While this will lessen our dependence on 
foreign oil, it may put additional strains on our electricity system 
which may require additional generation investments.
    I am interested to hear your thoughts on how does the EERS will 
affect en electrification of the transportation sector? How would these 
two important policy goals work together?
    Answer. As a representative of natural gas utilities, I do not have 
experience or expertise in this area.
    Question 6. How are other countries addressing energy efficiency 
and conservation? Have other countries adopted an EERS, or a similar 
mandate?
    Answer. We have no expertise to offer on the topic of 
implementation of international energy efficiency performance standards 
in other countries.
       Response of Thomas E. Skains to Question From Senator Burr
    Question 1. North Carolina is a growing area. Piedmont Gas is 
growing to meet the demand of customers. The direct use of natural gas 
is currently one of the most environmentally beneficial options to heat 
a home. Under an EERS program, would your company be able to meet 
growing demand while complying with required reductions in total 
consumption?
    Answer. I am concerned that the proposal as structured would not 
allow natural gas utilities to effectively meet the energy needs of 
what we hope will be a vibrant and expanding economy--not only in the 
Southeast but for the nation as a whole. As a starting point, goals 
measured on a use per customer basis (rather than on total energy 
consumption) may better allow for utilities to partner with 
policymakers to encourage greater efficiency in energy use overall 
while allowing for the growth in use necessary to meet the needs of a 
growing economy. Natural gas utilities and the customers they serve 
should not be penalized for facilitating economic expansion, growth and 
job creation by attracting and serving new customers (whether 
industrial, commercial or residential) in their service areas with a 
fuel that is lower carbon emitting than other energy sources. We 
believe the proposed EERS program as currently drafted would do just 
that.
                                 ______
                                 
      Responses of Rich Wells to Questions From Senator Murkowski
    Question 1a. The push to enact a separate RES and EERS calls into 
question the goals of these standards--is to promote certain 
technologies, or to reduce greenhouse gas emissions?
    If energy efficiency is incorporated into an RES, it would seem to 
me that utilities would have a much better chance of meeting their 
requirements instead of facing penalties for noncompliance. Wouldn't it 
be better to give them greater flexibility to succeed by adopting a 
single standard?
    Answer. We don't have an expressed preference for one standard or 
two. We do have a preference for emphasizing energy efficiency in any 
standard Congress chooses to endorse.
    Question 1b. If Congress decides to enact an RES instead of an 
EERS, should we allow an unlimited amount of the renewables mandate to 
be met through energy efficiency measures?
    Answer. If Congress were to enact an RES, we would recommend that 
it allow energy efficiency to meet a certain percentage of the total 
obligation that represents a better than ``business as usual'' scenario 
for energy efficiency.
    Question 2. This bill appears to provide only penalties, and no 
incentives, to facilitate compliance with the proposed federal 
standard. Please describe what other measures, if any, you think should 
be incorporated to encourage distributors to reach energy savings 
goals.
    Answer. Dow believes that addressing climate change through a cap 
and trade program would, coupled with an EERS, provide significant 
incentives for energy efficiency. Other policies to promote energy 
efficiency in buildings and homes include tax incentives for homeowners 
to increase the energy efficiency, labeling programs for buildings and 
homes, and improved model building codes to emphasize energy 
efficiency.
    Question 3. I am concerned that requiring distribution utilities to 
develop and administer new energy efficiency programs, or obtain new 
technology will be expensive--especially for consumer-owned non-
profits. The penalty payments called for by this legislation are very 
high, and there is also the likelihood of ``layered'' costs from an 
EERS, RES, and climate change legislation. How can we implement cost 
control mechanisms to keep costs for distributors--and therefore 
businesses and consumers--as low as possible?
    Answer. It will be necessary to have a penalty that is higher than 
the cost of energy efficiency measures. ACEEE believes that energy 
efficiency measures can be implemented at a cost of $0.03 per kWh. The 
penalty provision in legislation should exceed this amount.
    Question 4. The proposed EERS legislation would calculate a 
utility's ``business-as-usual'' energy use by averaging its consumption 
levels in the 2 years prior to enactment. Utilities that are already 
making great efforts to reduce energy consumption--whether through a 
state-level EERS or their own initiative--may have a tougher time 
complying with the federal mandate due to their early action on energy 
efficiency. Should a federal EERS be designed to avoid disadvantaging 
those utilities, particularly compared to those who have taken no 
action?
    Answer. The answer depends on the meaning of the phrase 
``disadvantaging those utilities''. If utilities compete against each 
other for the same customers, then there would be a need to design the 
program so as not to penalize utilities for early action.
    Question 5. Under Senator Schumer's bill, the federal EERS would 
require electricity savings of 15 percent, and natural gas savings of 
10 percent, over the course of a decade. For the sake of comparison, 
can any of you provide the percentage savings that were achieved by 
these distributors over the course of the past ten years?
    Answer. We do not have data to be able to answer this question. 
However, Dow is a large energy user (and electricity producer), and we 
have exceeded these savings over the past ten years. Furthermore, our 
actions have saved us money as well as energy. Since 1994, Dow's energy 
efficiency and conservation program has resulted in significant 
cumulative energy, financial and GHG savings--approximately 1,600 
trillion Btus, $8.6 billion and 86 million metric tons of 
CO2.
    Question 6. According to the materials you provided with your 
testimony, Dow Chemical sells energy efficiency products. Does your 
company stand to profit from the enactment of a stand-alone federal 
EERS mandate?
    Answer. A portfolio standard will potentially benefit some Dow 
products through increased consumer demand. Such a standard will also 
likely increase the cost of purchased electricity and natural gas. 
Indirectly, an EERS will reduce demand for natural gas and help to 
lessen US natural gas prices, which is good for US manufacturers. 
Overall, we believe an EERS will be good for Dow. More importantly, an 
EERS is good for the country, as improving energy efficiency will help 
promote energy security, reduce GHG emissions, and lessen the price of 
energy for all Americans.
    Question 7. Do you believe an EERS should be combined with 
appropriate rate-setting mechanisms such as decoupling to address the 
inherent tension between a utility's financial interest in encouraging 
energy efficiency measures, which results in less energy sold?
    Answer. Dow believes it is important to align utility incentives to 
promote energy efficiency. We do not, however, know how decoupling can 
be implemented to best align utility incentives toward energy 
efficiency.
    Question 8. You state than an EERS should not apply to industrial 
users of energy. But Dow has made great strides in the energy 
efficiency arena. Why do you believe an exemption for industrial users 
is necessary?
    Answer. It is up to Congress to decide on the scope of any EERS. 
Because of the way certain state electricity markets are structured, a 
bill that focuses on retail electricity providers may impose a mandate 
beyond public utilities. We think it is important to point this out.
    If the focus on public utilities is to leverage their expertise and 
resources to help residential customers improve energy efficiency, then 
the bill should focus on public utilities. We note that industrial 
consumers of electricity and natural gas have every incentive to 
improve their energy efficiency, as Dow has done.
    Question 9. In your written testimony, you urge Congress to 
incorporate energy efficiency into the RES. Does Dow Chemical support a 
single, unified standard that includes both renewable energy and energy 
efficiency, or do you prefer separate standards?
    Answer. We have stated that if Congress were to enact only a single 
RES, we would prefer that energy efficiency be allowed to meet as much 
of the requirement as practicable, and that such an efficiency standard 
go beyond ``business as usual''.
       Responses of Rich Wells to Questions From Senator Shaheen
    Question 1. As today's witnesses have noted, energy efficiency 
measures are incredibly important to address our nation's energy 
challenges. I think it is important to craft federal policies that 
incentivize investments in energy efficiency.
    One of the concerns that I am aware of with an EERS, however, is 
that of market manipulation. Under an energy efficiency credit trading 
program, we may be giving credit for actions that would have already 
been taken regardless of an EERS mandate.
    Many NE states are implementing policies to require utilities to 
procure all cost-effective energy efficiency. These least cost 
procurement policies, for example, require that a distribution company 
obtain all cost effective energy efficiency up to the electric supply 
cost. The goals seem the same as an EERS, with an emphasis on cost-
effective measures, and seem to avoid some of the issues of market 
manipulation.
    Would you care to comment on least cost procurement policies and 
how they compare to an EERS?
    Answer. Dow does not have particular knowledge of procurement 
policies and how they might compare to an EERS.
    Question 2. In New Hampshire, we are addressing efficiency and 
energy conservation by taking auction revenues from RGGI, the United 
States' first cap-and-trade program for greenhouse gases, and investing 
those revenues in these energy saving and conservation efforts. In your 
view, is it more cost effective and efficient to establish an EERS 
mandate or invest auction revenues in efficiency and conservation 
measures? What are the trade-offs?
    Answer. Dow supports legislation to impose a price on carbon 
through an economy-wide program, the centerpiece of which is cap and 
trade. We have testified in support of an EERS as a complementary 
policy to an economy-wide program. We recommend this complementary 
policy in order to ensure significant emission reductions through 
energy efficiency in the early years of a cap and trade program. We 
don't view EERS as antithetical to a cap and trade program.
    Question 3. It has often been said by those seeking to address 
climate change that the single most important thing we can do to 
address climate is put a price on carbon. A price on carbon will, in 
turn, incentivize renewable electricity and energy conservation 
measures. Is a national EERS necessary to deploy energy conservation 
and efficiency improvements if we enact a cap-and-trade program in the 
US?
    Answer. A cap and trade program will provide incentives for meeting 
the compliance obligation in cost-effective ways, but it will not 
determine where emission reductions occur or how much reduction will be 
achieved by energy efficiency. Furthermore, there are features of 
current markets that discourage energy efficiency (asymmetric 
information, split incentives) to be deployed cost-effectively. For 
these reasons, an EERS can be an effective complementary policy to cap 
and trade as it will ensure significant emission reductions through 
improved energy efficiency in energy distribution and in buildings and 
homes.
    Question 4. There have been some who suggest an EERS will reduce 
the cost of a cap-and-trade program. A report by ACEEE states that, 
``energy efficiency reduces the cost of cap-and-trade because less new 
energy facilities are needed and also because a smaller portion of 
existing facilities need to be upgraded to help meet emissions 
ceilings.'' By some estimates, electricity prices under cap-and-trade 
legislation may be 15 percent less if an EERS as well as an RES are 
also in place. Do you agree with this assessment?
    Answer. The answer depends on the degree to which energy efficiency 
and other low-cost GHG emission-reduction options are chosen by those 
who have a compliance obligation under a cap and trade program versus a 
cap-and-trade program with an EERS.
    Question 5. A key goal of U.S. energy policy is lessening our 
dependence on foreign oil. One way to achieve this goal would be a 
conversion of the transportation sector from petroleum to electricity 
through the phased-in and widespread use of hybrid cars, plug-in hybrid 
cars and fully electric cars. While this will lessen our dependence on 
foreign oil, it may put additional strains on our electricity system 
which may require additional generation investments.
    I am interested to hear your thoughts on how does the EERS will 
affect en electrification of the transportation sector? How would these 
two important policy goals work together?
    Answer. This is an interesting and important question. To the 
extent that retail electric providers subject to an EERS would provide 
electricity for the transportation sector, then an EERS will encourage 
efficiency above and beyond what would otherwise occur in 
transportation from the use of electricity.
    Question 6. How are other countries addressing energy efficiency 
and conservation? Have other countries adopted an EERS, or a similar 
mandate?
    Answer. The UK Government imposed a similar mandate on utilities 
and this resulted in utilities supplying their customers hundreds of 
millions of Compact Fluorescent Light Bulbs (CFLs). One drawback, 
however, was the absence of a system for checking that the bulbs were 
used.
    There has been much more experience with an EERS from various state 
programs. It may be useful for Congress to consider lessons learned 
from individual states.
                                 ______
                                 
   Responses of Patricia Hoffman to Questions From Senator Murkowski
    Question 1. The push to enact a separate RES and EERS calls into 
question the goals of these standards--is to promote certain 
technologies, or to reduce greenhouse gas emissions?
    a. If energy efficiency is incorporated into an RES, it would seem 
to me that utilities would have a much better chance of meeting their 
requirements instead of facing penalties for noncompliance. Wouldn't it 
be better to give them greater flexibility to succeed by adopting a 
single standard?
    b. If Congress decides to enact an RES instead of an EERS, should 
we allow an unlimited amount of the renewables mandate to be met 
through energy efficiency measures?
    Answer. The Administration is currently reviewing its position on 
EERS and RES legislation and thus the Department does not have an 
official position. In general, any given GHG reduction target can be 
achieved most efficiently by providing the maximum flexibility to 
States and producers to meet the cap using the most cost-effective 
measures, which may include a mix of energy efficiency, renewable 
energy, carbon sequestration, and other measures.
    Question 2. This bill appears to provide only penalties, and no 
incentives, to facilitate compliance with the proposed federal 
standard. Please describe what other measures, if any, you think should 
be incorporated to encourage distributors to reach energy savings 
goals.
    Answer. S. 548 does not appear to prevent a state from adopting 
incentive policies. Therefore, for example, a state would be able to 
adopt different approaches to address lost revenue and profit 
opportunities for its private utilities, as some states have done, that 
can occur from reduced utility sales resulting from delivering 
efficiency measures to electric and gas ratepayers. Further a state may 
chose to implement improved building codes or equipment standards, as 
some have done for products that are not covered by Federal law. 
Language to make clear that states may continue to adopt these kinds of 
incentive policies could be considered. As the President has made 
clear, the core of a plan to encourage energy savings should be a cap-
and-trade program that puts a price on GHG emissions, thus creating 
incentives for energy efficiency and the development of low-carbon 
energy sources.
    Question 3. I am concerned that requiring distribution utilities to 
develop and administer new energy efficiency programs, or obtain new 
technology will be expensive--especially for consumer-owned non-
profits. The penalty payments called for by this legislation are very 
high, and there is also the likelihood of ``layered'' costs from an 
EERS, RES, and climate change legislation. How can we implement cost 
control mechanisms to keep costs for distributors--and therefore 
businesses and consumers--as low as possible?
    Answer. S. 548 and the RES discussion draft both exempt the 
majority of small utilities from their provisions, most of which are 
consumer-owned. For example, about 360 of the Nation's 3,200 
distribution electric utilities would be subject to S. 548. Utility-
administered energy efficiency programs do have direct costs, but 
utility and customer costs are at least partially offset by avoided 
energy supply costs.
    In general, the greater the flexibility to use the lowest-cost 
measures to achieve the standard, the lower the cost burden on 
utilities and their customers. It is noted that S. 548 provides other 
measures to increase flexibility and reduce costs. These include 
savings targets that can be met through a wide variety of different 
types of measures and policies, not just utility programs. Many states 
may opt to rely on a portfolio approach to achieve the EERS standard 
targets which includes energy efficiency programs, codes and standards, 
and distribution system savings.
    Question 4. The proposed HERS legislation would calculate a 
utility's ``business-as-usual'' energy use by averaging its consumption 
levels in the 2 years prior to enactment. Utilities that are already 
making great efforts to reduce energy consumption--whether through a 
state-level HERS or their own initiative--may have a tougher time 
complying with the federal mandate due to their early action on energy 
efficiency. Should a federal EERS be designed to avoid disadvantaging 
those utilities, particularly compared to those who have taken no 
action?
    Answer. A DOE-sponsored review of recent resource plans of 
utilities (or state energy plans) that have been among the ``leaders'' 
in energy efficiency suggests that these utilities and states are 
planning to continue to rely heavily on energy efficiency in the 
future, but to the extent that these utilities have already implemented 
some of the ``low hanging fruit,'' it may be more costly for them to 
achieve continued improvements in efficiency should new methods for 
achieving efficiency improvements no longer become evident. However, it 
would be technically challenging to design an EERS that allows states 
to claim savings from early action when the evaluation measurement and 
verification protocols required for the national HERS have not been 
developed or adopted.
    Question 5. Under Senator Schumer's bill, the federal EERS would 
require electricity savings of 15 percent, and natural gas savings of 
10 percent, over the course of a decade. For the sake of comparison, 
can any of you provide the percentage savings that were achieved by 
these distributors over the course of the past ten years?
    Answer. There is limited historical data available, at the level of 
individual electricity and gas distributors, on the combined energy 
savings achieved by utility-funded programs, as well as codes and 
standards, combined heat and power, and reduced distribution system 
losses, proposed by S. 548. If 2008 spending levels (i.e. in those 
states with their own HERS or similar policies, and absent a national 
EERS) on just electric utility-funded efficiency programs were extended 
over ten years, roughly 11 states could be expected to achieve 
cumulative savings of ten percent or more, and roughly 19 states could 
be expected to achieve cumulative savings of five percent or more. 
Added to these cumulative savings numbers would be any energy savings 
achieved through building energy codes, appliance efficiency standards, 
combined heat and power, and reduced distribution system losses that 
typically are not included in state EERS policies, but are included in 
S. 548 as options. Many of those states that have EERS or similar 
policies conducted ``achievable potential studies'' before enacting 
their requirements. Those studies showed that state-level efficiency 
targets similar to those in the proposed national EERS are achievable. 
Similar studies at the national level have reached similar conclusions.
    Question 6. If a federal mandate is put in place, ACEEE believes 
that most states will choose to administer their own EERS programs. 
Should that happen, the Department would only be responsible for 
drafting regulations and providing general oversight. But I'm curious 
as to what would happen if some states--for example, the 31 states that 
have not enacted an EERS--do not choose to do this due to cost or some 
other factor.
    a. Is the Department capable of implementing and administering a 
federal EERS?
    b. Would your answer change if Congress also passed a stand-alone 
RES?
    c. And, finally, what if both of those standards AND climate change 
legislation all pass--is the Department ready to meet its 
responsibilities under all three of those measures?
    Answer. The Department will be able to implement its 
responsibilities under any, or all, of the three measures that may be 
enacted. How the legislation defines the interaction between the 
measures is important for implementation. Also important is how each 
enacted measure interacts with comparable existing state requirements. 
The Department has gained considerable expertise from technical 
assistance it and its national labs provide states on the design and 
implementation of both state-level energy efficiency and renewable 
energy resources standards, including interactions between the 
different types of standards within and between states.
    Question 7. As we've learned from Commissioner Centolella, the Ohi 
o law provides the flexibility to address changing and unanticipated 
conditions. For example, the law allows a utility to file an 
application to amend the standard if they cannot meet it due to 
regulatory, economic, or technological reasons beyond reasonable 
control. The law further allows the FUC to reduce a utility's baseline 
to account for new economic growth. Shouldn't any federal EERS program 
have similar flexibilities built into it?
    Answer. In S. 548, the energy savings requirements for a retail 
electric or gas distributor in each year are based on its ``base 
quantity'', which is defined as the average retail sales delivered to 
customers in the two preceding years. The proposed approach has the 
advantage that it is a straight-forward, consistent, and 
administratively traceable approach to defining the base quantity from 
which savings targets are calculated, which can be applied across all 
states. The issues raised by Commissioner Centolella may provide 
additional flexibility, but are technically and administratively 
complex and introduce subjective judgment. One option is to allow DOE 
to address these issues as part of a rulemaking process, where the 
policy intent can be balanced against feasibility and workability.
    Responses of Patricia Hoffman to Questions From Senator Shaheen
    Question 1. As today's witnesses have noted, energy efficiency 
measures are incredibly important to address our nation's energy 
challenges. I think it is important to craft federal policies that 
incentivize investments in energy efficiency.
    One of the concerns that I am aware of with an EERS, however, is 
that of market manipulation. Under an energy efficiency credit trading 
program, we may be giving credit for actions that would have already 
been taken regardless of an EERS mandate.
    Many NE states are implementing policies to require utilities to 
procure all cost-effective energy efficiency. These least cost 
procurement policies, for example, require that a distribution company 
obtain all cost effective energy efficiency up to the electric supply 
cost. The goals seem the same as an EERS, with an emphasis on cost-
effective measures, and seem to avoid some of the issues of market 
manipulation.
    Would you care to comment on least cost procurement policies and 
how they compare to an EERS?
    Answer. An EERS can be implemented with or without tradeable energy 
savings credits, and S. 548 does not include a provision for energy 
efficiency credit trading. The bill does allow utilities to contract 
with other entities for energy savings; however, this provision does 
not appear to create any specific opportunities for gaming or market 
manipulation. In fact, adding an opportunity for tradeable credits as 
one compliance approach could allow national efficiency gains to be 
achieved at lower cost.
    With respect to a comparison between EERS and least-cost 
procurement policies, one establishes a quantity constraint and the 
other a price constraint. Which is better depends on the goal. If the 
goal is to ensure that a specific level of energy efficiency is 
achieved, then a quantity constraint (EERS) is more suitable. This can 
be made more efficient by allowing trading among utilities with 
different costs of achieving energy efficiency gains. If the goal is to 
ensure that only cost-effective measures are adopted, least cost 
procurement policies can provide a cap on the costs of the adopted 
measures.
    Question 2. In New Hampshire, we are addressing efficiency and 
energy conservation by taking auction revenues from RGGI, the United 
States' first cap-and-trade program for greenhouse gases, and investing 
those revenues in these energy saving and conservation efforts. In your 
view, is it more cost effective and efficient to establish an EERS 
mandate or invest auction revenues in efficiency and conservation 
measures? What are the trade-offs?
    Answer. Either approach could result in the implementation of cost-
effective policies and programs that support improvements in energy 
efficiency. The actual cost-effectiveness of such programs, however, is 
determined by factors such as program design, the commitment to 
rigorous program evaluation, including the use of sound techniques for 
measuring and verifying the resulting energy savings, and the 
willingness to use evaluation results to redesign policies and programs 
so as to maximize cost-effectiveness. The most cost-effective 
strategies for improving energy efficiency will generally be a mix of 
market mechanisms, such as cap and trade, and well focused policies and 
programs designed to overcome market barriers to cost-effective 
efficiency improvements. Such policies and programs could include 
efficiency standards, training and education, voluntary commitments, 
improved consumer information, and focused incentives for investment. A 
cap-and-trade program creates incentives to increase energy efficiency 
and conservation because of the carbon price signal that it sends to 
consumers, but market barriers often inhibit or prevent energy users 
from effectively responding to such signals. For this reason, the 
President has proposed to strengthen a broad range of other measures to 
encourage or require cost-effective efficiency improvements, including 
the use of a portion of cap-and-trade revenue for investments in clean 
energy technology and efficiency. An EERS mandate that allows varied 
responses by government agencies, as well as utilities, may be another 
way of producing similar benefits. An EERS mandate that allows varied 
responses by government agencies, as well as utilities, may be another 
way of producing similar benefits.
    Question 3. It has often been said by those seeking to address 
climate change that the single most important thing we can do to 
address climate is put a price on carbon. A price on carbon will, in 
turn, incentivize renewable electricity and energy conservation 
measures. Is a national EERS necessary to deploy energy conservation 
and efficiency improvements if we enact a cap-and-trade program in the 
US?
    Answer. Ensuring that electricity rates reflect the environmental 
and other costs of greenhouse gas emissions by putting a price on 
carbon would incentivize renewable electricity and energy conservation 
measures, but as a result of a wide range of market barriers, prices 
alone will not result in the implementation of many cost-effective 
efficiency measures. For this reason, other policies and programs have 
been developed and implemented to help remove or overcome the barriers 
to cost-effective efficiency investments. A Federal EERS might be one 
way of helping to spur such cost-effective efficiency investments in 
concert with a cap and trade program, however, such a mandate, if 
poorly designed or implemented, might also result in the adoption of 
energy efficiency measures that were not the most cost-effective means 
of meeting a specified greenhouse gas emissions cap.
    Question 4. There have been some who suggest an EERS will reduce 
the cost of a cap-and trade program. A report by ACEEE states that, 
``energy efficiency reduces the cost of cap-and-trade because less new 
energy facilities are needed and also because a smaller portion of 
existing facilities need to be upgraded to help meet emissions 
ceilings.'' By some estimates, electricity prices under cap-and-trade 
legislation may be 15 percent less if an EERS as well as an RES are 
also in place. Do you agree with this assessment?
    Answer. Cost-effective improvements in energy efficiency would help 
minimize the costs of achieving a greenhouse gas emissions cap, as well 
as reducing the costs of achieving a specific Renewable Energy Standard 
(RES). An Energy Efficiency Resource Standard (EERS), such as that 
proposed in S. 548, could provide a strong incentive for states and 
utilities to increase their support for a wide range of policies and 
programs that could lead to significant efficiency gains, though these 
might not always be the most cost-effective measures for meeting the 
cap. The effect that an EERS mandate would have on electricity prices 
and on the costs of achieving a greenhouse gas emissions cap depends on 
a number of different factors, such as the cost-effectiveness of the 
policies and programs undertaken, the cost of the generating capacity 
or fuel avoided because of the reduced demand, and the way in which 
these costs and savings are reflected in utility rates. If the 
efficiency measures undertaken are very cost-effective and the 
generating capacity and fuel costs avoided are substantially higher 
than average costs, then a EERS mandate could reduce the price impacts 
of achieving a greenhouse gas emissions cap. The impact of an RES on 
electricity prices and the costs of achieving a greenhouse gas 
emissions cap will be determined by the comparative costs of the 
renewable and non-renewable options for reducing greenhouse gas 
emissions. If a RES spurs the rapid development of less costly 
renewable energy generation technologies, it could also help reduce the 
overall costs of achieving greenhouse gas emission caps.
    Question 5. A key goal of U.S. energy policy is lessening our 
dependence on foreign oil. One way to achieve this goal would be a 
conversion of the transportation sector from petroleum to electricity 
through the phased-in and widespread use of hybrid cars, plug-in hybrid 
cars and fully electric cars. While this will lessen our dependence on 
foreign oil, it may put additional strains on our electricity system 
which may require additional generation investments.
    I am interested to hear your thoughts on how does the EERS will 
affect en electrification of the transportation sector? How would these 
two important policy goals work together?
    Answer. Encouraging the use of plug-in electric vehicles to reduce 
our dependence on oil, while simultaneously making significant 
reductions in total carbon dioxide emissions, will require new policies 
and technologies. While electric vehicles are more efficient at using 
energy than internal combustion engine vehicles, they will nonetheless 
place additional demand on electricity generation, transmission and 
distribution. Meeting this demand, while also reducing total greenhouse 
gas emissions, will require new, low-or no-carbon-emitting generation. 
Cost-effective improvements in the efficiency of electricity use would 
likely make meeting these dual challenges somewhat easier and less 
costly. EERS is one of several possible strategies for spurring further 
improvements in the end-use efficiency of electricity.
    Question 6. How are other countries addressing energy efficiency 
and conservation? Have other countries adopted an EERS, or a similar 
mandate?
    Answer. Other countries have pursued policies such as utility 
demand side management, building energy codes, appliance efficiency 
standards, and appliance labeling programs. Three European countries--
England, Italy, and France--have enacted EERS policies that apply to 
retail electricity and natural gas distributers.

                                    

      
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