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The Montana Power Company perspective.

The following was adapted from remarks made last April to the Pacific Northwest Regional Economic Conference in Kennewick, Washington.

About 10 years ago, one of our long-time employees retired. He recalled what he saw as the "golden years" of the electric utility: selling appliances to customers, setting up street-lighting districts, pushing all-electric homes, and seeing rates go down every time a new central station generator went into service. And then he recalled the advent of conservation in the late 1970s and early 1980s. With a touch of frustration, he said: "I never thought that when I retired, I'd be retiring from the Department of Sales Prevention."

That's not the first--or last--time conservation and demand-side efforts have been attributed to "The Department of Revenue Reduction," or "The Department of Political Posturing." But such dismissive mindsets won't help us face today's complicated reality, a reality of increasing competition in a regulated industry.

Today, the Montana Power Company is facing that reality, and acquiring electric resources through demand-side management and conservation. Let me briefly explain our rationale.

First, our loads are increasing, and we are legally obligated to serve them.

Second, our resource base is shrinking: Some purchase contracts are expiring; and, barring additional investment, some of our firm generating resources such as thermal plants in Billings and hydroelectric facilities on the Missouri River will have to be retired. Third, our resource mix must result in the lowest total cost to society over time; this goal not only satisfies the best interest of our customers and shareholders, it has been mandated by our regulators.

For all of these reasons, we must influence the efficient use of electricity, restrain costly demand, and work to minimize the total societal costs for energy services. To the extent that we delay the need for additional, more costly supply-side resources through cost-effective conservation, we are slowing down the cost-increase curve. The benefit of cost containment flows to customers and shareholders.

What, exactly, is the Montana Power Company trying to do?

I don't want to fall into the same trap as the professor who taught "History of the 20th Century" by going back to the time when apes first stood upright. But we do need some perspective.

It begins with the goal of integrated resource planning: The identification and acquisition of a set of resources that minimizes total societal cost, and is balanced through the use of a multi-attribute decision rule.

That means we consider several kinds of costs in our planning process:

* the utility's direct cost;

* the cost borne by customers;

* costs and benefits borne by society in general, including environmental costs;

* the potential cost of risks and uncertainties that are part of the options we're considering;

* and the impact of various alternatives on the utility's financial performance.

To the extent that our demand-side management efforts have reduced electric load, we have acquired electric resources. But these efforts have to be cost effective. And that means our total demand-side-management program costs must be less than our avoided cost, or the cost of acquiring the next-best alternative.

This is how we create a level playing field when considering electric resources. Ultimately, we must be indifferent to whether our resources are supply-side or demand-side. However, our regulators have determined that demand-side resources should receive preferential treatment to help overcome market and institutional barriers. Montana regulators have given demand-side management a 15 percent cost-effectiveness advantage for this purpose.

The Montana Power Company offers two types of demand-side programs under the umbrella of Efficiency Plus, or E Plus: commercial-industrial and residential. Our residential programs start with Efficiency Plus audits, and include free weatherization to income-qualified customers, ground-source heat pumps, and "Super Good Cents" construction where natural gas is not available.

One of our most interesting programs in 1992 focused on residential lighting. We used the lighting program as an educational and awareness vehicle, and as a way of acquiring conservation resource. Nearly 12,000 (6 percent) of our residential customers purchased a total of 52,000 bulbs. The average energy saved with this high-visibility program was about a third of a megawatt, with savings of about 2 megawatts at peak.

Our E Plus commercial and industrial programs brought in the bulk of our resource acquisition in 1992. Again energy audits are the starting point. They open the door to other programs, such as motor rebates, lighting rebates, and our "Business Partners" program.

Business Partners is our heavyweight. This custom incentive program brought in 1.3 megawatts of average energy, and 3.3 megawatts of capacity. We deal with both new and existing facilities, including design assistance for new structures. We co-fund heating and air conditioning, lighting and motor retrofits, variable speed drives, heat recovery, waste energy generation, refrigeration retrofits, energy management systems and heat pump systems.

Here are results from the last two years, measured against our average energy loads of about 1,000 megawatts, and peak of 1,500 megawatts.

In 1991, Montana Power acquired 1.6 megawatts of average energy and 2.1 megawatts of capacity. In 1992, all efforts resulted in 3.8 megawatts of average energy, and 10.4 megawatts of capacity. We've moved our targets a little higher for this year, to 7 megawatts of energy, and 12 megawatts of capacity.

Monitoring and evaluation of our demand-side programs is very important. Over the longer term, we plan to spend up to 5 percent of our program costs to assure ourselves, our regulators, and other interested parties that we've acquired the demand-side resources we set out to acquire--and that those resources continue to produce savings. We've just selected a contractor to handle monitoring and evaluation, using a methodology that includes both statistical and engineering models.

Besides energy savings, our demand-side efforts have provided an opportunity to build bridges with our customers. Earlier this year, the Northwest Power Planning Council recognized the Montana Power Company's particularly creative successes with two customers. In one case, we helped an industrial customer rework its cement-making process to make sizeable energy savings. Also, we helped a motel developer install heating and cooling systems that play off piping already supplying cold water for fire-suppression sprinklers and hot water for showers and sinks. We've patented this process, and it's being used for the fourth time in the construction of a motel.

So we've seen demand-side benefits beyond acquiring cost-efficient resources.

But overall, the ease with which we can control our costs depends on the scope of our target audience. If we're reaching out to a mass audience to buy energy-efficient lighting, we'll have a bigger challenge in controlling the response, and therefore the costs. But to the extent that we have more constricted targets, we'll be better able to exercise controls. Because we are very conservative in estimating our costs, we're on more solid ground for cost control than if we were playing fast and loose with our estimates.

What about compensation for what we've done? To what extent do regulators recognize our costs and our lost revenues?

We've been discussing this subject for some time in Montana. Our regulators encourage so-called "right behavior" for utilities. Based on discussions the interested players in Montana have had on "decoupling" and "lost-revenue adjustments," we believe we'll be treated positively.

The proof of the pudding comes when we file requests to increase rates and address these subjects in our filings. We made the filing in June 1993, and the Public Service Commission will reach a decision early in 1994.

Bob Gannon is president and chief operating officer of the Montana Power Company.
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Title Annotation:The New Energy Economics in Montana & the Region
Author:Gannon, Bob
Publication:Montana Business Quarterly
Date:Sep 22, 1993
Previous Article:The regulatory compact.
Next Article:More perspectives on Montana's economy.

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