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“Features of Good Utility-Initiated Energy Assistance,” Energy Policy, April 2020.

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Original Posting 

Kenneth W. Costello,
Features of good utility-initiated energy assistance,
Energy Policy,
Volume 139,
2020,
111345,
ISSN 0301-4215,
https://doi.org/10.1016/j.enpol.2020.111345.
(https://www.sciencedirect.com/science/article/pii/S0301421520301026)

Abstract: This paper identifies criteria that public utility regulators can apply to assess the effectiveness of initiatives in making utility service more affordable to low-income households. It discusses the major features of energy-assistance (EA) actions that tend to make then successful from a societal perspective. Smart regulation demands that EA initiatives have favorable benefit-cost ratios. Regulators should strive to assure that each dollar expended returns the highest possible dividend, and that EA initiatives interfere minimally with other regulatory objectives; for example, minimal adverse effect on economic efficiency.
Keywords: Energy assistance; Affordability; Ability to pay; Economy efficiency; Smart energy assistance; Ratemaking mechanisms


Introduction

This paper starts with the premise that the affordability of electricity and natural gas to all households demands some form of energy assistance (EA) funded by utilities and their non-poor customers. According to the National Energy Assistance Directors Association (NEADA),

In 2018 nearly six million low-income households received grants from the federal Low-Income Home Energy Assistance Program (LIHEAP), which pays part of the utility bill for struggling households with children, disabled members, or impoverished senior citizens … [P]rior to receiving a LIHEAP grant nearly a third of recipients had their heat shut off, could not pay for fuel delivery, or could not afford to fix a broken heating system. As a result, they had no main source of heat in the year preceding the grant. Almost half of these households had a member over 60; half had a disabled resident, and over a third had children under 18. To cope, about a third of these households closed off part of their home and used the kitchen stove for heat; 7 percent left their homes altogether for relatives’ or friends’ couches; some 6 percent wound up in public shelters. As many as half the households went without food for at least a day or declined necessary medical or dental care to keep the heat on.2

Taxpayer-funded programs helping low-income households are more tenable from an economics perspective. But the reality, at least in the U.S., is that legislatures and executive branches of government require utilities to assume some responsibility in making their service more affordable to low-income households.3 While economic efficiency pays little attention to income distribution (namely, the allocation of economic surplus between firms and their customers and within customer groups), public policy gives it top priority.

Utility programs are common in the U.S.4 Public utility regulators are on the front lines in evaluating these initiatives and approving them, conditioned on legal, economic and other constraints, that best serve the public interest. This paper can also benefit the legislative and executive branches of government to the extent they influence the structure of energy-assistance initiatives.

Smart policymaking demands that EA initiatives have favorable benefit-cost ratios. In the U.S., it is usually state utility regulators who would try to assure that each dollar expended returns the highest possible dividend. This would require that EA initiatives interfere minimally with other regulatory objectives, particularly economic efficiency.

This paper emphasizes that in requiring utilities to provide monetary assistance to low-income households, several questions arise: (1) How much assistance should a utility provide in view of governmental and non-utility private assistance (e.g., the number of dollars offered to eligible households)? (2) Who should pay for this assistance (e.g., residential customers, all customers, utility shareholders)?5 (3) How should the utility collect the money in rates? (4) What constitutes an appropriate financial effect on subsidizing customers? and (5) How should the utility distribute the assistance to eligible households (e.g., discounted electricity rate, lump-sum payment)?

This paper identifies criteria for assessing the effectiveness of EA initiatives. It discusses features of EA that are likely to make them successful from a societal perspective. Overall, the paper recommends that utilities and policymakers review existing EA initiatives to determine whether they are achieving the goal of utility-service affordability: (1) most effectively and (2) with minimal adverse effects on other stated goals, such as fairness6 and utility financial viability.

Section snippets

The rationale for affordable utility service

Whether utilities should assure the affordability of their service for low-income customers is a question that has occupied policymakers since its earliest days. Political pressures and legislative mandates have compelled energy utilities with the support of their regulators to implement programs that protect low-income households from unaffordable utility bills. Some observers view these programs as “taxation by regulation” that require slightly higher rates to the majority of customers to pay

Six primary questions

In assessing utility-funded EA, regulators should first ask themselves six fundamental questions. Answers to these questions would permit regulators to make better decisions on the design, administration, and implementation of EA actions:

What is the rationale for utilities offering EA to low-income customers?

    1. The combination of outside assistance, such as the Low Income Home Energy Assistance program (LIHEAP),

12

Overview

In dealing with an “energy affordability” problem, policymakers can apply one of three broad approaches: (1) increase the incomes of poor households, (2) lower the share of the utility bill for which the customer is responsible for paying, and (3) reduce the customer’s energy usage. EA actions (i.e., in-kind assistance) focus on the latter two approaches while cash supplements with no strings attached falls under the first approach. With each approach, energy becomes more affordable, either by

Seven criteria for determining effectiveness

Regulators and other policymakers should identify the criteria for socially desirable EA initiatives. No single EA action comes out favorably in meeting all criteria. Some actions perform superbly in satisfying certain criteria while satisfying others less well.

The following list contains seven criteria for evaluating the effectiveness of EA initiatives. Regulators should consider any action that satisfies the vast majority of these criteria as positive. They should be wary of actions, on the

What regulators can do to improve the effectiveness of EA

To say whether a particular EA initiative has been successful depends on the criteria applied to evaluate it, which the last section identified. Because different initiatives have varying effects, it is difficult to say unequivocally that regulators should impute greater value to some actions than others. Weatherization is attractive as a long-term remedy for the affordability problem, yet its effect might not help those customers who are in immediate need of assistance to help pay past unpaid

Conclusion and policy implications

Regulators should review utility EA initiatives to determine whether they are achieving the goal of utility-service affordability: (1) most effectively and (2) with minimal adverse effects on other goals; for example, interfere minimally with economic efficiency.

An important requisite of effectiveness is maximizing the benefits to targeted households relative to the funding provided by other utility customers. This helps to assure that each dollar expended returns the highest possible dividend.

CRediT authorship contribution statement

Kenneth W. Costello: Funding acquisition.

Declaration of competing interest

The authors declare that they have no known competing financial interests or personal relationships that could have appeared to influence the work reported in this paper.

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