I. Executive Summary

This report responds to a legislative resolve directing the Public Utilities Commission to study alternative means to increase the efficiency of the electric appliances used by Maine residents. The report reviews the alternative methods of using voluntary incentive programs and/or establishing in law minimum energy efficiency standards. The report recommends that the Legislature implement minimum efficiency standards for nine different products. In addition, the report recommends that the Commission be directed to conduct a biennial review of the development of standards in other states and, when certain prescribed conditions exist, adopt those standards through a major substantive rule.

II. Introduction

Resolve, Chapter 119, “Resolve, To Direct the Public Utilities Commission To Examine Certain Issues Relating to Energy Efficiency” (the Standards Resolve) adopted by the 121^st Maine Legislature, directs the Commission to “investigate the feasibility and design of a program that would provide incentives to residential and commercial consumers to purchase and install energy-efficient appliances or that would establish energy efficiency standards.”[1] The directive grew out of proposed legislation that would mandate minimum efficiency standards for a number of residential and commercial products.^[2] The purpose of the original bill was to “establish minimum energy efficiency standards for certain products sold or installed in the State of Maine” in order to:

(1) “sav[e] consumers money on utility bills,”

(2) “save energy and thus reduce pollution,” and

(3) “make electricity systems more reliable… and reduce or delay the need for new power plants, power transmission lines and power distribution system upgrades.”[3]

The resolve also directs the Commission to analyze “which energy efficient products should be included in any program; possible incentive mechanisms such as rebates, grants, low-interest loans or other financial incentives; program costs and benefits; funding sources; and the advantages and disadvantages of implementing any recommended program.”

This report responds to the Resolve. Section III presents the Commission’s view of the framework for reviewing programs or standards. Section IV discusses the Commission’s investigation into programs and incentive mechanisms. Section V discusses appliance efficiency standards in general and describes the standards proposed in L.D. 1187/1261 and their relationship to products already covered by the Efficiency Maine programs. Section VI explores the relationship among incentive programs, market transformation activities, and standards. Section VII discusses options for achieving the legislative objectives, and Section VIII recommends a course of action. Section IX discusses implementation issues and Section X provides our conclusion.

III. Critical Components for Decision Making When Designing Efficiency Programs or Developing Standards

A. Societal Impact: Energy efficiency programs or minimum efficiency standards should only be implemented after examining whether the societal benefits resulting from the program or standard are greater than the costs imposed (i.e. that the program or standard is “cost effective” from a societal perspective). Determination of the costs and the benefits should reflect any quantifiable economic changes brought about as a result of the program or standards. Costs that are usually included in the calculation are the incremental cost of the more efficient products purchased as a result of the program or standard, increases in equipment O&M (if any), and any administrative costs incurred. Benefits include the financial value of the energy savings[4] and any decreases in equipment O&M. Because there is little consensus on their financial value, environmental benefits are often expressed in pounds or tons of emissions avoided.[5] Though the economic consequences of the avoided pollutants are not explicitly quantified, the societal benefits are well understood and are one of the main reasons for adopting efficiency standards (e.g. Maine Climate Action Plan, recommendation number 26).

B. Equity Issues: Energy efficiency programs can be cost effective without being fair if people who pay for the programs do not have an opportunity to benefit from them. For example, there would be equity issues if all of the money in the conservation fund were used to finance a program for just a few customers. An ideal program provides an opportunity for everyone who pays extra for conservation to participate in some feature of the program and also delivers benefits to the broader base of ratepayers regardless of whether they participate. From this perspective, building codes and appliance standards may be the fairest way to impose efficiency because the individuals who receive the financial benefits from reduced energy use are also the ones who pay any extra costs that may accompany the higher efficiency.

C. Effect on Consumers: Mandatory minimum efficiency standards should include consideration of the effects such standards will have on consumers. Issues to be considered include:

Whether the energy cost savings from items that meet the standard make up for any increases in the purchase cost.

Whether the standard would unduly limit customer choice among products.

Whether the standard creates scarcity conditions and higher product prices by shutting too many producers out of the market.

Whether the State’s economy will suffer because neighboring states have not adopted similar measures.

D. Advantages and Disadvantages of Incentive Programs and Minimum Efficiency Standards: There are several factors to consider when deciding whether efficiency standards, voluntary programs, or some combination of each are the most appropriate method for increasing the overall efficiency with which society uses energy.

1. How the financial consequences are distributed: Products purchased by those who pay for the energy used by the more efficient device, such as lights and clothes washers, are good candidates for an incentive program. Incentive programs that reduce the incremental cost of products that lower energy costs can influence consumers to buy them.

Products such as cable boxes, for which the purchaser will consider initial price but not annual operating costs[6] are poor candidates for incentive programs. Incentive programs will not work in this kind of a “split incentive”[7] situation unless the incentive can make up the entire cost difference between the efficient and inefficient products.

2. The size of the savings: Consumers may be more easily convinced to take advantage of an incentive program if the product replacement will result in a large reduction in their energy costs.

3. Product availability: Efficient products with low market adoption may be candidates for voluntary incentive programs. The programs can increase consumer awareness of such products and help to drive up market demand. Products that have a higher market adoption should not be included in incentive programs because people who would purchase the efficient product on their own – i.e. “free riders” – can deplete the available incentive funds without creating any efficiency gains beyond what would have occurred without the program. Where market adoption is high enough, it may make sense to set a floor or minimum efficiency standard.

4. Transfer payments: While incentive programs offer many societal benefits, they also transfer money from all consumers to those who participate in the programs. Program participants benefit further from lower energy costs. Efficiency standards have no transfer payments. The cost of the higher efficiency products is paid by consumers who will benefit from lower operating costs.

IV.Incentive Program Review

During its 2002 investigation (in Docket 2002-162) in response to 35 M.R.S.A. § 3211-A, the Commission established conservation program goals and objectives and reviewed virtually every residential and commercial use of electricity to estimate the amount of cost effective energy efficiency available. Based on this review, the Commission adopted a conservation assessment that is the maximum allowed by current law - equivalent to $.0015 per kilowatt-hour. The Commission then developed its Conservation Program Plan,[8] which identifies the efficiency programs the Commission will implement to obtain the maximum amount of energy efficiency possible within the limits of available funding, while honoring the requirements of the Conservation Act.[9]

As a result of the program investigation and its associated Orders, the Commission developed a plan that captures the most cost effective energy efficiency available given current funding limitations. Expanding this program to include other products can only be accommodated by reducing or eliminating existing programs, or by expanding program funding.

V. Appliance Efficiency Standards

A. Background and Federal Activity: The movement to appliance efficiency standards began with the states in the 1970s. At that time, several states, including most prominently California, were adopting appliance efficiency standards. In December 1975, Congress passed the Energy Policy and Conservation Act (EPCA), the primary purpose of which is to "conserve energy by enabling consumers purchasing appliances to compare the energy usage of competing models" (US Federal Trade Commission, The Appliance Labeling Rule, 1997). EPCA required that Energy Guide labels be placed on certain new home appliances, including refrigerators, refrigerator-freezers, freezers, water heaters, clothes washers, dishwashers, furnaces, room air conditioners, central air conditioners, and heat pumps. These appliances are “covered” under EPCA because their energy costs can vary greatly, depending on their construction and design. EPCA also required standards and labeling for humidifiers and dehumidifiers, clothes dryers, direct heating equipment, kitchen ranges and ovens, and television sets. The Federal Trade Commission (FTC), which shares responsibility with the United States Department of Energy (US DOE) for EPCA's implementation, did not include these products in the labeling program, because, in its view, there were insufficient differences in energy efficiency among different models.

By 1986, appliance manufacturers realized that uniform federal standards were better than the multiple state standards being developed because of a lack of federal leadership. The National Appliance Energy Conservation Act (NAECA) of 1987 amended EPCA by establishing minimum efficiency standards for all EPCA products. NAECA was a compromise among state governments, efficiency and environmental advocates, and product manufacturers. Manufacturers agreed to a national standards program in exchange for an agreement by states and environmental activists to accept federal pre-emption of individually set state standards on products covered by the act. NAECA established minimum efficiency standards for 13 classes of household appliances: refrigerators, refrigerator-freezers, and freezers; room air conditioners; fluorescent lamp ballasts; incandescent reflector lamps; clothes dryers; clothes washers; dishwashers; kitchen ranges and ovens; pool heaters; television sets (withdrawn in 1995); and water heaters. A 1988 NAEC amendment added fluorescent lamp ballasts. The Energy Policy Act of 1992 added general service fluorescent lamps and general service incandescent lamps, including reflector lamps. It also expanded EPCA to address water efficiency issues by specifying water flow labeling requirements for showerheads, faucets, water closets, and urinals. In 1994 the FTC extended its rule to include pool heaters and certain other water heater types.

NAECA requires the US DOE to upgrade standards on covered products to the maximum level of energy efficiency that is technically feasible and economically justified. DOE strives to establish standards that maximize consumer benefits and minimize negative impacts on manufacturers and others. Federal standards on covered products preempt state standards, unless the state standard is identical to the federal standard.

B. Standards Proposed for Maine: L.D. 1187[10] (the Standards Bill) proposed that Maine adopt appliance efficiency standards for products not covered by NAECA. Sponsors furnished estimates showing that the standards would result in 206,300 MWh of annual energy savings by 2010 and 306,200 MWh by 2020.[11] Table I below shows the products that were included in the proposed legislation along with their per unit average cost, the incremental cost for the more efficient products, the annual unit sales in Maine, their per-unit annual energy savings, the expected pay-back period, and their benefit to cost ratio.[12]

Table I

Product	Price of StandardProduct	Increase in Price of Efficient vs. Standard Product	Annual Unit Sales	Energy Savings (kWh/yr)	Simple Pay back Period	B/C Ratio
Torchiere Lamps	$25	$40	42,000	288 kWh	1.4 yrs.	3.7
Ceiling Fans	$65	$40	41,000	145 kWh	2.8 yrs.	2.9
Set-Top Boxes	$150	$5	98,000	175 kWh	.2 yrs.	3.2
Unit Heaters	$815	$277	430	268 therms	2.1 yrs.	N/A
Dry Transformers	$375	$45	5,000	255 kWh	2.2 yrs.	4.6
Traffic Signals[13]	N/A	$125	NA	431 kWh	1.4yrs.	3.7
Exit Signs	$60	$30	3,000	223 kWh	1.7 yrs.	6
Large Packaged Air Conditioners	$11,330	$1,813	50	8434 kWh	2.7 yrs.	6.7
Commercial Clothes Washers	$400	$139	900	985 kWh 9850 gal.	1.8 yrs	3.5
Commercial Refrigeration	$400 - $2,000	$115	579	540 kWh	2.7 yrs	2.3

As shown in the last column, all of the standards proposed are cost effective when judged by the criterion used to decide whether to implement a conservation program under the Conservation Act. The energy savings and economic and environmental benefits achievable through these standards are significant.[14] Table II below provides the estimated cumulative benefits available from imposition of the proposed standards. The table shows the annual energy savings available from the standards, net present value to consumers from their adoption, and the estimated annual reduction in air pollutants expressed in millions of tons.

Table II

Product	Energy Saved in 2020 (GWh)	Present Value of ConsumerNet Savings ($Millions)	Reduced CO₂ (MT)	Reduced NOx (MT)	Reduced SO₂ (MT)
Torchiere Lamps	121.7	88	15,500	13.3	59.6
Ceiling Fans	50.3	29	6,400	5.5	24.6
Set-Top Boxes & Digital cable converters	96.7	67.8	7,100	6.1	27.3
Unit Heaters	N/A	N/A	2,700	7.5	0
Dry Transformers	19.3	15.7	2,500	2.1	9.4
Traffic Signals[15]	N/A
Exit Signs	10.3	9.9	1,300