[Watchdogs] Fwd: The Definition of "Benefit" and Its Effect on Benefit/Cost Ratios and Cost-Effectiveness Calculations at PEC

[Milton Hawkins]

Linda Kaye,

Your message appears to have activated the list serve.  Here's a real test.

Regards,

Milton

---------- Forwarded message ----------
From: Milton Hawkins <milton.hawkins at gmail.com>
Date: Thu, Mar 29, 2012 at 3:11 PM
Subject: The Definition of "Benefit" and Its Effect on Benefit/Cost Ratios
and Cost-Effectiveness Calculations at PEC
To: "R.B. Sloan" <rbsloan.ceo at peci.com>
Cc: Larry Landaker <larry.landaker at gmail.com>, Chris Perry <
cperry15 at earthlink.net>, Patrick Cox <patrickcox7 at gmail.com>, Ross Fischer <
pec.district5 at gmail.com>, Cristi Clement <clemoore at gmail.com>, Kathy
Scanlon <kathryn.scanlon at peci.com>, William Boggs <william.boggs at peci.com>,
Luis Garcia <luis.garcia at peci.com>, Aisha Hagen <aisha.hagen at peci.com>,
Pete Slover <pete.slover at peci.com>, Dale Jones <dale.jones at peci.com>, Brent
Bailey <Brent.Bailey at peci.com>, Clara O'Rourke <corourke at statesman.com>,
Bob Ochoa <roundup.editor at gmail.com>, Frank Skube <frank.skube at peci.com>,
Milton Hawkins <milton.hawkins at gmail.com>, "Rep. Jason Isaac" <
jason.isaac at house.state.tx.us>, Senator Troy Fraser <
troy.fraser at senate.state.tx.us>, Janice McCoy <
Janice.McCoy at senate.state.tx.us>


Dear Mr. Sloan:

According to the introduction of its report, Frontier Associates, LLC
(Frontier) was hired "to address a PEC Board resolution to achieve
reductions of . . . its members’ future energy requirements."  In so doing,
Frontier utilized a standard test of cost effectiveness, the Program
Administrator Cost Test.

The report defines one of the terms used in this test, the word *benefits*,
as follows:

The benefits for the Program Administrator Cost Test are defined as
the *avoided
supply costs of energy* *and demand*. [my emphasis]

A paired term, the word *costs*, is also defined:

The costs are considered to be program costs incurred by the utility, the
incentives paid to the customer, and any increased supply costs.

Then we have a statement explaining the significance of benefit-cost ratios:

A benefit-cost ratio greater than 1.00 in the Program Administrator Cost
Test would indicate that *the value of saved energy is greater than the
program costs*, making that program cost-effective from the perspective of
the utility.  [my emphasis]

As a result of this definition of *benefits*, a definition with which I
certainly do not quarrel, Frontier, and thus the management of the
cooperative, and thus its Board, are all able to claim cost-effectiveness
test results that look very favorable, with Benefit/Cost Ratios ranging
from 7.07 to 7.43 for the 2010 Residential HVAC Program (Appendix A) to
3.97 to 4.46 for the Full Recommended Portfolio (Table 3).  Very impressive.

I'm wondering, however, what we would see were the word *benefits *defined
differently, i.e., if another type of test were run.

Since as I understand it, the cooperative runs on the basis that its
owner-members pay, on an individual basis, for the energy they consume,
plus an additional amount to cover basic operations and the charitable
giving by the directors, "avoided supply costs of energy and demand" do *not
*result in *actual increases* in the cooperative's bank balances.  Put
another way, the "value of saved energy," while it can be calculated, is *not
*credited to the cooperative's bank account in dollars and cents.

Further, as I understand the program, it is the *participants, not the
cooperative or all the owner-members, *who reap the benefit of the "avoided
supply costs of *energy*" achieved through the HVAC rebate/incentive
program.  If there is a return of $4 for every dollar invested by the
cooperative in this program, it is the *participant*, not the *cooperative*,
that enjoys the savings (gets to keep more of his or her own money).

In contrast, the *costs *associated with this program are real, and they
result in actual withdrawals from the cooperative's bank account.  The
money for rebates and incentives is taken from all members and given to a
subset of the membership.  Bank balances are affected.

Some avoided supply costs of *demand* can indeed be considered *benefits*,
for these demand costs are borne to some considerable extent by the
membership at large, that is, *by the cooperative*, and not primarily or
exclusively by the individual members.  The use of the provided
rebate/incentive by the individual reduces his or her consumption, and thus
overall demand, and thus associated demand costs, a reduction from which
all members benefit.

All that being the case, if we want a more accurate picture of cost
effectiveness, should we not *separate *the benefit resulting from avoided
supply* *costs of *energy*, a benefit that the* individual member* using
the rebate/incentive enjoys, from the benefit of avoided *demand *costs, a
benefit that *all of the members* *of the cooperative* enjoy?

I.e., why not calculate the cost effectiveness *for the cooperative*, not
the individual?  Why not consider the "savings" that the *cooperative *would
realize from the cost *it*, not the *individual*, would have paid but for
the reduction?

Suppose that the costs for the program remained the same, but we *removed *the
avoided supply cost of *energy* ("the value of saved energy") as a *benefit
*and considered *only *the avoided supply cost of *demand* as a *benefit*.
What would the Benefit/Cost Ratio be then?

Would these programs still be cost effective?

Best regards,

Milton

-- 
Milton Hawkins  milton.hawkins at gmail.com
P.O. Box 1502
Johnson City, Texas 78636-1502
830-868-9075



-- 
Milton Hawkins  milton.hawkins at gmail.com
P.O. Box 1502
Johnson City, Texas 78636-1502
830-868-9075
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