Excerpt from Chapter 3 of Poverty & the Public Utility: Building Shareholder Value through Low-Income Initiatives by Kevin Monte de Ramos, now available at www.PennWellBooks.com.
Building a business case for low-income utility programs
Over the past decade, many companies invested millions to better identify and track their customers. Yet, even today, most public utilities cannot identify a growing customer segment that purchases $43 billion of home energy annually. What other industry would require regulatory coercion to develop special programs to address a market segment of this size?
The public utility should not be an exception. Just look at the following statistics. The customer segment to which we refer is comprised of the 35 million low-income households across the United States. To put this number into proper perspective, 1 home in every 3 shelters a low-income family. These households translate to 47 million individuals living within 125% of the federally established guidelines to determine poverty level (referred to here as being within 125% of poverty).
With nearly 17% of the U.S. population living in financial distress, the low-income problem can seem daunting and appear hopeless. This is especially true for those who consider the poor to be a persistent group of deadbeats without any realistic prospect of self-sufficiency. Yet, a deeper look at poverty statistics will reveal that this perception is a myth.
According to the 2002 statistical abstract, 11 million individuals were recently unemployed and 2 million were disenfranchised. Although it may take an individual several months to reenter the workforce, we rarely hold any contempt for these individuals. We simply understand that it takes time for an individual to rise from such a setback.
The same is true for those living in poverty. Often time is all that is needed to overcome poverty. According to the September 2003 Current Population Report on Consumer Income, 80% of individuals rise from poverty in just 12 months! While individuals may transition into and out of poverty, the fact that households can achieve self-sufficiency, if only temporarily, should encourage even the greatest skeptic.
The public utility struggling to serve the low-income sector should look closely at the population as a viable market segment. According to the 2001 IRS tax filings, 7794 utility companies had business receipts in excess of $1 trillion, with $159 billion in residential sales. Using these estimates, low-income energy consumption accounts for 6% of gross annual sales and 28% of residential energy sales.
To better understand the low-income energy market, consider the energy consumption of LIHEAP-eligible households. In total, households eligible for energy assistance consume 2.7 quadrillion BTU (quads) annually; again, 28% of the residential total. On average, low-income households consume 80 million BTU (MMBTU) and spend $1264 on home energy annually. In terms of typical fuel use, the average low-income household consumes the equivalent of 8832 kilowatt-hours (kWh) of electricity, 640 CCF of natural gas, or 553 gallons (gal) of fuel oil annually. When compared to the energy use of the average American household (10,596 kWh, 700 CCF, or 589 gal, respectively), another myth is dispelled. Low-income consumers are no more wasteful of our energy resources than the general population.
A latent energy reserve
In August 2003, parts of the United States and Canada experienced a severe disruption in electric service. Although the cause of the blackout resulted primarily from faults in FirstEnergy’s distribution system, the event reminded us that energy resources are limited. When utilities are confronted with unexpected energy demand, both voluntary and involuntary service interruptions can significantly impact utility revenues. Investments in new power plants and storage facilities can also affect revenues. For this reason, utilities invest in energy efficiency and appliance cycling programs.
Where load demand can be shifted from residential accounts in adequate amounts, service interruptions to commercial and industrial segments can be avoided. Where transmission constraints are an issue, targeted usage reduction programs can forestall costly power outages.
Participants in existing home weatherization programs can easily achieve a 20% reduction in home energy use. If the 35 million low-income households were weatherized, a reduction in energy demand would total 540,000,000 MMBTU annually, or 10.8 quads of energy over the 20-year expected life of measures. Using the standard point-of-use heat rate, the savings potential for low-income weatherization is the equivalent of an 18-GW power plant. As such, energy inefficient homes represent a significant energy reserve, while weatherized homes represent an energy source.
Funding for low-income programs
Historically, low-income programs were expensed by the utility. Program expenditures were simply rolled into the operational budget. To recover program costs, utilities were simply reimbursed for program expenses by other residential ratepayers. This approach proved problematic.
Utilities considering low-income assistance programs needed to initiate rate filings to cover program costs. Because rate filings involve a downside risk and many hours of effort, the development of a single program would not justify such an action.
Another problem was that program expenditures were not disclosed to the general consumer. Buried by other operational costs, even mandated programs added to the basic residential rate. With asynchronous adoption of low-income initiatives, some utilities would have artificially higher rates. Even within a regulated environment, the added competitive pressure of higher utility rates was undesirable. As a result, valuable initiatives could be delayed for years.
With deregulation pending in many states, industry participants looked towards the telecommunications industry for guidance. Funding for universal service and emergency systems came from surcharges added to customer bill. Separated from the basic rates, surcharges avoided problems highlighted in the previous paragraphs. Because surcharges remove barriers for emerging initiatives, this funding mechanism has become the preferred funding mechanism for utility demand-side management programs.
While utility surcharges have been favored, they are not without issue. Line items on utility bills are distinct and quantifiable, aiding organized opposition. As such, they can be targeted for added scrutiny. In a time when new taxes are heavily scrutinized, proposed surcharges do not pass without notice.
This is excerpt number two of a three-part series from the book. The next excerpt will be released in our next e-newsletter, on February 22, 2005.