1) The expected net benefit is determined: The net consumer surplus, or net resource value, is equal to the total avoided supply costs (fixed and variable) minus the total cost of the DSM programs.
2) DSM costs are recovered: To reduce the risk of implementing DSM programs the total cost of the programs was to be recovered by the utility at the end of the year incurred.
3) The reward: A portion of the net benefit is distributed to the utility. For both Narragansett Electric (NE) and Granite State Electric (GSE) the reward incentive was 10% of the net resource value (to encourage cost-effective DSM) plus 5% of the total avoided cost (an incentive to pursue all DSM opportunities, and not just "cream-skimming" those offering the greatest marginal net value). NE was allowed to earn the incentive on all savings beyond 50% of the goal net resource value. GSE on the other hand earned the incentive on all savings, not just those in excess of 50%, but only once a threshold was exceeded.
4) Lost Revenues: By definition DSM reduces the growth of sales. In the case of NEES the revenue lost through decreased sales volume was accounted for in the wholesale rates set by the Federal Energy Regulatory Commission (FERC) which allowed NEES a reasonable return on investment.
|Avoided utility supply costs|
|Utility DSM program expenditures|
|Estimated customer contribution|
|Net resource value|
|DSM expenditures as a percent of utility revenues|
|Total incentive as a percent of DSM program expenditures|
|Total incentive as a percent of utility program cost and customer contribution|
|Source: PG&E, 1991; and Hutchinson, 1991; within Eto, Joseph; Alan Destibats and Donald Schultz, 1992.|