LA Utility's Historic Energy Efficiency Action Will Reverberate Nationwide

I begin with a sentence that would have been unimaginable when I began my work at NRDC more than three decades ago: today I write in praise of the Los Angeles Department of Water and Power.

This month the nation’s largest public utility, LADWP, took a historic step in embracing a revenue mechanism that supports energy efficiency, displaying leadership that will reverberate across the 2,900 other non-profit utilities serving rural and urban America.

The Los Angeles City Council’s approval last week of “revenue decoupling” reform never before achieved in the history of public power, along with the Department of Water and Power’s largest-ever energy efficiency investments, also represents a monumental shift in outlook.

Commending LADWP was unimaginable when I began my work with NRDC more than three decades ago. It was a giant and mysterious institution that environmentalists loved to hate, with encroaching tentacles pulling millions of pounds of coal from surrounding states and millions of gallons of water from a dwindling Mono Lake and Colorado River.  

Its management seemed aloof and indifferent to these environmental concerns. For example, the utility is one of the villains of “Cadillac Desert: The American West and Its Disappearing Water,” the magnificent history of Western environmental battles penned by my former NRDC colleague Marc Reisner a quarter-century ago.

This started to change in the 1990s with the improbable arrival of a general manager with a Tennessee accent, a white cowboy hat, and a known environmental bent. By the time Dave Freeman left town, Mono Lake was refilling and LADWP had begun to change its resource mix, with an emphasis on renewable energy and energy efficiency. But it took a Seattleite named Ron Nichols to make history at the helm of the largest U.S. municipal utility last week.

The City Council’s approval of his proposals will more than double LADWP's energy efficiency incentives, to about $265 million over the next two years. That’s important and overdue news that will move it closer to parity with California’s large investor-owned utilities (Sempra, Southern California Edison, and PG&E). LADWP customers should realize net benefits totaling a much larger number, given a huge city-wide opportunity to save electricity at lower cost than building new power plants that spew pollution into our air.

At the same time, the new revenue decoupling mechanism will ensure that LADWP's financial health no longer relies on increased electricity sales; should consumption trend modestly downward, rates will automatically adjust to prevent a shortfall in recovery of the Department's authorized non-fuel costs. Although LADWP is a nonprofit venture, it still needs to hit revenue targets in order to meet obligations to its bondholders and its municipal treasury.

Without revenue decoupling, any reductions in electricity use – including those from increased energy efficiency efforts -- would jeopardize the utility’s ability to do that. Decoupling also prevents the utility from securing a windfall if electricity sales surge for any reason (like extreme heat); those excess revenues go right back to customers in the form of rate reductions. Revenue decoupling isn’t a “cost adder”; it’s a guarantee that recovery of costs already approved won't be affected by fluctuations in electricity use, and it opens the way for utility bill reductions in the form of accelerated energy efficiency improvements.

For both investor-owned and nonprofit utilities, revenue decoupling keeps the enterprise “whole” when electricity use drops or grows more slowly than expected -- without appreciably reducing customers’ rewards for saving energy.

Few would disagree with that goal, but until the Los Angeles Department of Water and Power embraced revenue decoupling, nonprofit utilities weren’t achieving it, and too many are lagging in energy efficiency commitments as a result. Since nonprofit utilities account for about a quarter of the nation’s electricity sales, that represents a huge obstacle to energy efficiency progress.

The Los Angeles Department of Water and Power has now shown the way forward. It’s time for all publicly owned utilities to embrace energy efficiency fully as the best to reduce their customers’ bills today and ensure a healthier environment for all of us tomorrow.