How does a company that sells energy continue to turn a profit and meet shareholder expectations at a time when energy conservation is becoming official policy? And how does that company implement a new model for tallying revenue when profits are falling?
That is the situation Central Hudson Energy Group faces as the summer peak demand season nears, with the company still seeking state approval of its plan for an energy conservation strategy that decouples customer use from company profits.
The traditional utility equation says lower sales volume translates to lower profits and higher sales means higher profits. But with rapidly rising costs for fuel and discussion about combating climate change through reducing greenhouse gas emissions, energy efficiency is increasingly seen as a win-win option for consumers and the environment. The prospect is one of the reasons regulators and energy companies are considering ways to decouple revenue from sales.
Officially, the bid for a new business model called a revenue decoupling mechanism (RDM) originated from an order by the state Public Service Commission issued in April 2007 for companies to submit RDM plans. Central Hudson sent an RDM proposal to the state in September. “The time has come for Central Hudson to use its energy expertise to not just deliver energy, but to help our customers use it more wisely,” said Lant, in announcing the initiatives last September.
In simplest terms an RDM sets a floor beneath which profits can”™t decrease and a ceiling beyond which profits would not rise. If profits tumble below the floor, customer bills for the delivery charges controlled by Central Hudson would be modified to make up the difference in future billing cycles. Likewise if profits exceeded the agreed upon ceiling, bills would be modified to return the excess profit to customers.
Under the plan, Central Hudson would spend about $22 million over three years on its RDM program to establish energy efficiency programs, such as conducting energy audits and recommending use of more efficient motors, energy-saving fixtures and greater use of insulation, for example. The company would continue the program at roughly $7.5 million annually, assuming regulatory approval. If the program goes well, or regulators require it, investment in efficiency measures could be increased.
At least initially, its incentives and marketing would primarily be aimed at residential customers and small-l to medium-sized businesses, said company spokesman John Maserjian.
Industrial and large commercial users are being targeted for energy conservation programs initiated and administered by NYSERDA, the New York State Energy Research and Development Authority.
