Florida Power and Light Company1This case is a short version

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ln October 1980 Tom Petillo, director of marketing and energy conservation of the EnergyManagement Department for Florida Power and Light Company (FPL), was examining thecompany's Energy Management Plan for the 1980s, which would be reviewed by seniormanagement prior to its submission to the Florida Public Service Commission (FPSC). The plan

1had been developed in response to the Florida Energy Efficiency and Conservation Act, which

required FPL over the next 10 years to limit the growth rate of overall energy consumption to 85percent of the expected customer growth rate and the growth rate of peak energy demand to72.25 percent of the expected customer growth rate. Specific goals for each Florida electric utilitydiffered according to the demographics of their particular customer base. Many other states hadintroduced similar laws to cope with the tightened energy situation.

Background on the Electric Utility Industry

Electric utilities generated electricity from natural energy resources-either coal, oil, nuclearenergy, or hydro-energy (produced by moving water). Modern utility systems were composed of(1) generating facilities which converted primary energy resources into electric current, (2)transmission facilities which delivered the current from the generator to the dispersed substations,and (3) lower voltage distribution networks which reached consumers.

An electric utility was required by law to provide electricity for practically ail the demands placedon it by its customers. Most utilities had diverse customer bases that included residential,commercial, and industrial users. As shown in Exhibit 1, each group had a characteristic dailyusage pattern. Because a utility had to fulfil ail of its customer demands, the utility wasconcerned with the composite of ail the demands of its customers. The times when the totaldemand for electricity was at a maximum were known as peak demand

1 *This case was prepared by Kathryn B. Smith, Research Associate, under the direction of Neil H. Borden, Jr., Reynolds Professorof Business Administration. Copyright 1982 by the Sponsors of The Colgate Darden Graduate School of Business Administration,University of Virginia.

Exhibit 1 - Typical Electric Utility Daily Usage Pattern

.II- 15 . ·.·.s10 1.2 :2 iIi

A.M. Noon

6:4

G;ô'

5;$'

Plant capacity

1

Class-Ioad curves

system peak daytypical company 1

1

1

1

1

1

1

1

1,1

1

~Peak hour,1

1

1

1

1

•·.·<.• ·~'~.<~1...'..n..,d••U.. S•t.r.i••.a.1

I·'~- •.•,-....,,,,,..• ,.•....•.•........ ~

.~~~ ,.

1 •••• ~ •...•••••, ....~' . -

Residential ' .

6' .~ 1ŒL12

P.M.

Because electricity could not economically be stored in large quantities, utilities had to invest incapa city to cover most of the peak demands. The refore , generators lay idle until demand rose.Power grids, which were arrangements between utilities to buy and sell electricity, attempted toaccommodate the periodic imbalance of capacity and demand. The peak demand/plant capacityproblem resulted in an investmentlsales ratio almost six times higher than that of the typicalmanufacturing industry. As this investment was typically financed by bond issues, a large portionof an electric utility's income was used for debt service. As a result, 65 percent of total industrycosts were fixed.

2

Exhibit 2 - Typical Electric utility Cost Allocation by Customer Group

Allocation of costs

Residential service Commercial service Industrial service

Rates charged to utility customers were generally set by the Public Utility Commission (PUC) andwere designed to provide an adequate retum on capital invested. This retum had to be fair toexisting investors, enable the utility to attract new capital in the free market, and enable thecompany to maintain a good credit position.

ln determining a rate structure, efforts were made to recover costs from customers in proportionto costs incurred. Costs could be broken down into three groups: Customer costs varied with thenumber of customers. They included such costs as meter reading, record keeping, and billing.Demand costs were incurred in the provision for the system load and included interest,depreciation, and taxes. Energy costs (such as fuel cost) varied with the amount of energygenerated. Exhibit 2 shows the characteristic proportion of each type of cost for three utilitycustomer groups.

Florida Power and Light Company Background

ln 1980 FPL was the fifth largest investor-owned utility in the nation. It was incorporated in 1925following the merger of a number of small and widely scattered businesses engaged in the sale oruse of electricity. It operated in 35 counties, serving an area of almost 27,650 square miles. FPL

-\-serviced an area with an estimated population of 5 million and ha~.3 million bill able customer;JSelected operating statistics are shown in Exhibit 3.

FPL was the largest of the 36 electric utilities in Florida in terms of kwhr sold and size of the

-\- customer base. FPL owned 44.5 percent of the state's total electricitv-generatina capacity andalmost 73 percentbf its nuclear-power capacity. ---

3

Based on what FPL had estimated to be its share of the statewide demand and energy goalsthroughout the 1980s, FPL estimated that its present facilities would be able to meet peakdemand goals until 1985 and energy goals through 1982, as Exhibit4 shows.

Exhibit 3 - Selected Financial and Operating Data

1980

1979197819771976

Selected operaling stalislics: Customers-year end

2,247,6882,140,5872,032,2981,927,6681,840,043

Kwhr/per customer-residenlial

11,47311,35411,79011,37010,968

Kwhrlsales (OOOs)

44,707,61341,965,81040,602,07637,529,39734,929,541

Revenue per Kwhr-residenlial

5.31~4.66~4.10~3.96~3.50~

Employees-year end

11,08410,3379,7509,4159,865

Net warm weather capability, kw-year end

11,738,00010,955,00010,941,00010,644,0009,740,000

Peak load, winter, kw-60-minute

9,732,0008,791,0008,617,0008,606,0007,287,000

Peak load, summer, kw-60-minute

9,623,0008,650,0008,345,0007,841,0007,598,000

Reserve capability percentage at lime of summer peak

13.8%26.7%30.4%23.0%13.8%

Cost of oil bumed (per barrel)

23.26$17.47$12.33$12.94$11.62$

Percent of Energy: Oil

49.6%54.6%51.7%48.2%55.9%

Natural gas

17.918.519.619.922.3

N uclear

27.725.630.433.022.8

CoaVoii mix test

0.9

Interchange

3.91.3(1.7) (1.1)(1.0)

Source: 1980 Annual Report

Exhibit 4 - Predicted FPL demand and Energy shortfall

Summer Peak Demand

, 4,OCIJ

- F{lrëCSS~ ~~/f:ti!i!h)

-- .•..•.- -Sha.re ~ goa 1(1(I••••.ft1%'h~

4

- Fore.cast [Iov.ihign)

ro..ooo ~ _ - _ SMI'e or ûœliboYlhigl1)

....--- --------- ..•-

11i81

Note: The two lines to reach forecast represent a range of expected demand (energy quantities. As long as thedotted line range lies in the upper half of the forecasted range, FPL expects to have a better than 50 percent chance ofmeeting that forecasted demand and energy. Therefore. FPL's banded demand forecast encompasses at ail times itsbanded share of the statewide demand goals. This is true for the net energy goals only until mid-I 983.Source: Company records.

Florida and the FPL Market for Electric Power

ln 1979 Florida consumed 78,724 millio electricity or a roximatel 4 percent of the

ri nation's electricity consumption. L nerated 56 ercent of this amou FPL's entire)( customer base had grown at a rate of 5 2 Dercent nv~r the PS1it for Ir YR::m:; FPL's customer base,

like ail privately held Fïërida utilities, was primarily residential. These consumers, however, usedonly 53 percent of FPL's power generation, somewhat at variance with electricity consumption byclasses of utility customers in'Florida as a whole :

State of Florida FPL

Number of

Kwhr Number ofKwhrPercentageofType of

CustomersConsumedCustomersConsumedRevenuesCustomer

Residential

89.4%49.1% 89.4%53.4%53.3%Commercial

10.0%28.5% 9.8%36.5%37.8%Industrial

.6%19.6% .7%8.0%6.6%Other

-.8% .1%2.1%2.3%---- ------

Total 100%98% 100%100%100%

5

Consumption of electricity by industrial users was increasing at a rate of 6.3 percent incomparison to 4.8 percent for the other two groups. Exhibit 5 provides additional data on thehistorie electricity consumption patterns of Floridians.

Exhibit 5 - Electric Utility Industry: Number of Ultimate Customers and AverageConsumption per Customer by Class of Service in Florida, 1965 through 1977

Residential CustomersCommercial CustomersIndustrial and other Customers

Consumption

ConsumptioConsumptionnper Customer

perper Customer

CustomerYear

Number(kwhr)Number(kwhr) Number(kwhr)

1965

1,924.496 6,160222,63732,003 26,069331,390

1966

2,003,298 6,837230,88734,320 26,258371,011

1967

2,098,655 7,138239,20036,827 27,342395,692

1968

2,203,693 7,941252,28138,746 27,820408,483

1969

2,319,094 9,266258,84144,015 32,062373,339

1970

2.449.494 10,042274,83546,901 30,028423,971

1971

2,608,381 10,445291,81150,283 31,012430,994

1972

2,793,063 10,890310,86853,309 34,614414,3121973

3,088,166 11,254343,72259,112 23,099597,039

19743,253,444 10,453368,59858,145 35,019389,531

1975

3,350,196 10,568373,52161,884 36,827380,074

1976

3,473,633 10,527382,33562,401 40,648358,000

1977

3,563,098 10,857398,13656,312 25,495691,116

Note: Data for 1965 through 1973 and for 1977 trom the Edison Electric Institute. Data for 1974 through 1976 fram Federal Power

Commission forms 12 and 12A.

Source: State of Florida, Public Service Commission, Statistics o'the Florida Electric Utility IndusUy, 1960 through 1977,Prepublication release. Formerly published by state energy office.

Because of FPL's high percentage of residential customers, ML Petillo was particularlyconcerned about residential consumption statistics in relation to the Energy Management Plan,especially since FPL's rates appeared to be lower than those of other utilities. (See Exhibit 6.)

The annu al statewide load factor was expected to decrease slightly from 57.4 to 56.8 percent,lower th an the national average of 60.1 percent. FPL's load factor was 60 percent in 1980 andwas expected to increase to 65 percent by 1985.

Consumption of electricity depended on many variables, such as the climate, demographics,and economy of a particular region. Florida's climate determined much of the demographic andeconomic character of Florida and, indeed, its electricity consumption. Florida had relativelymild winters-an attraction to both retirees and vacationing Northerners. As shown in Exhibit 7,almost 19 percent of the energy consumed by Floridians was to heat or cool hotempe ratures change---------------------

6

Exhibit 6 - Privately owned Electric Utility Firms: Typical Monthly Electric bills forResidential Service of Firms in Florida, January 1, 1979.

Minimum

1002505007501,0001,5002,000

Utility

BillKwhrKwhrKwhrKwhrKwhrKwhrKwhr

Florida Power Corporation

$2.50$6.44$12.34$22.18$32.02$41.11$59.30$77.49

Florida Power and Light Company

3.206.4211.2719.3427.4036.8355.6874.53

Florida Public Utilities Company'Femandina Division

1.008.1015.7527.0038.0549.5072.0094.50

Marianna Division

5.008.9914.9924.9834.9744.9564.9384.90

Gulf Power Company+

5.008.7814.4623.9233.3742.8361.7580.66

Reedy Creek Utilities Company

2.857.6914.9227.0139.0850.1972.3994.60

Tampa Electric Company

3.658.0514.6525.6436.6447.0667.9288.77

• Femandina and Marianna have an off-peak water heating schedule.+ Summerlwinter rates in effect; winter rates are shown.

Note: Data excJude local taxes and franchise fees. January 1979 fuel adjustments are included.Source: Florida Statistical Abstract 1979.

The population of Florida had grown 43.4 percent since 1970 and continued to be one of thefastest grawing in the nation. With a population of 9.7 million people in 1980, Florida was theseventh largest state in the Union and was expected to be fourth by 1990, Since 1970 there hadalso been a 51 percent increase in the number of households in Florida. ln 1978 they numbered2.5 million.

Florida had 22.9 percent of its population over the age of 60. ln the last three decades this grauphad more than quintupled, primarily from migration fram the North. Between 8,000 to 15,000senior citizens relocated to Florida every month. No other single graup in Florida was assignificant nor as potentially powerful as this one. Almost half of Florida's elderly population wasconcentrated in counties served by FPL. Sixty-one percent of these migrators were from theNortheast with another 23 percent fram the Midwest. Projections indicated that, by the year2000, 26 percent of Florida's population would be at least 60 years old and 41 percent would beover 75.

Florida's senior citizen had an average income significantly higher than that of the rest of theelderly population in the United States. Nationally, families headed by persons over 65 hadincomes that were 57 percent of the median incomes of ail families. The figure for Florida was 70percent; only 14.8 percent of the state's elderly population was below the poverty leve!. Also,Florida's elderly were more educated than the national average. FPL records indicated thatelderly persons were more likely to !ive in apartments and condominiums than in single-familydwellings in Dade, Broward, Palm Beach, and Martin counties. The reverse was true in Volusiaand Sarasota counties, A minority Iived in mobile homes.

7

Exhibit 7- EnergyConsumption:EstimatedAmountConsumedandPercentageDistribution by End Use in Florida, 1977

Total

Percentage Consumption by Sector

Consump.tionAmount

Per-Trans-Residen-Commer·IndustrialGovem-Non-

End Use

(trillion BTU)centageportationtialcial -mentalenergy

Total

2.140.5100.037.323.116.516.03.9 3.1

Private passenger conveyance

428.720.020.0 !

~

0.00.00.0 0.0

Air conditioning

330.315.40.0 6.80.11.4 0.0

Distribution of goods and services

208.39.79.70.00.00.00.0 0.0

Water heating

168.37.90.0

~1.40.00.4 0.0

Direct Drive

122.85.70.0 0.05.70.0 0.0

Generation of steam

120.45.60.00.00.05.60.0 0.0

Lighting (including street and highway)

119.25.60.01.23.20.11.0 0.0

Refrigeration and freezing

89.44.20.0®1.30.00.0 0.0

Direct heat

74.33.50.00.00.03.50.0 0.0

Nonenergy

66.53.10.00.00.00.00.0 3.1

Cooking

42.62.00.01.20.70.00.1 0.0

Health and emergency transportation

37.41.71.70.00.00.00.0 0.0

Clothes washing and drying

20.41.00.01.00.00.00.0 0.0

Television

7.70.40.00.40.00.00.0 0.0

Mobile Equipment operation

5.60.30.00.00.00.30.0 0.0

Dishwashing

4.90.20.00.20.00.00.0 0.0

Other

62.22.90.30.71.20.60.0 0.0

Note: The energy consumed by the electric and natural gas utilities is allocated to the above sectors. Sectoral end uses are computed by using 1976

estimated distribution percenlages applied to 1977 energy consumption levels for those sectors.Source: Florida Slatistical Abstract 1979.

Closely associated with the heavy migration to Florida was the emphasis on new building. Ft.Myers and Cape Coral (both in FPL's service area) were among the fastest growing cities in thenation. West Palm Beach was also noted for growth in its housing market. The Primary reasonfor this boom was the influx Of retirees who were able to pay cash for horfl)Q.~mdwere thus notdependent on mortgage market conditions. The flow of people into central Florida (the portion ofFlorida Iying between Daytona and Fort Pierce across the peninsula to the gult) was expected toadd $2 billion to the states's economy by 1983.

The Energy Management Plan for the 19808

FPL had long been actively involved in energy conservation and energy efficiency programs.Through many thousands of field representative contacts with residential, commercial, andindustrial customers, recommendations had been made to improve efficient use of electricity.Since 1965 "Helpful Hints" booklets on the efficient use of major appliances and energyconservation had been distributed through direct mail, handouts, and district offices.

The 1973 oil embargo intensified the conservation effort and led to the "Wise EnergyManagement" program. The theme of this program was that customers should decide theirultimate usage pattern and thereby gain control over their bills. The "Watt Watchers Guide to

8

Exhibit 8 - Sam pie Promotion Literature

1NSUIATION

Usually the mostdollar-saving.

energy-conservingmeasure a homeowner

can take.

Hue's what proper insulationcan do for you ...1. Could sav~ you as much as 1/3 on your

cooling and heating costs.2. Cou Id r~duc~ the running tim~ for your

air conditioning and heating ~quip­ment. perhaps eXlenàing its !ife.

3. When building a new home or replacingyour air conditioning equipment. Jetsyou cool and heal your home withsmaller. less exp~nsiv~ equlpment.

4. Can mak~ vour hom~ mor~ comfo:1.able.5. Aàds to th~ resale \'alue ofyour home.

R-Value ... What Is It?R-Valu~ tells you how wel] a maleriaJ

resists heat nov.'. The higher the B-value.th~ greater th~ resistance.

R'\'alu~s vary v.'ith different types ofmaterials. Therefore. how weil insulationperforms is more accuraleJy measured byils R-\'alue lhan by inches of Ihickness.

Other conservation tips ...1. Insula: ion can be effect i\'eh' added to

allics afler a hom~ is bui)t.- .2. Som~limes installing insulation can be

a dO-I1-yourself projec!. If you're in­teresled. pick up a free copyof our"Guideto Home Insulation" at any ,PL office.

3. Th~ best time 10 insulate a home is \\'henit's unà~r construci ion. LIse R-5 insuJa­tion in the walls as weIl as R-I 9 in thealtic.

4. AJso make sure your windows and doorsare weatherslripped and cracks aresealed v.'ilh caulking compound.

Use R·19 for attics

1=1=I~':'i-~:i2. '-""-- .•-: ."OW<_ ""'""'1" •• .,.- ~~ •••

Wewant to hclp )'Ou save.

9

Economy and Efficiency" provided 36 specific tips on how to use electric applianceseconomically. Topics such as air conditioning and insulation were subjects in subsequentcommunications. Sam pie literature is shown in Exhibit 8.

FPL's interest in energy efficiency, conservation, and management was demonstrated by thecontinued growth and evolution of what was known in 1980 as the Energy ManagementDepartment (EMD). Basically, EMD provided a two Pronged approach to energy conservation:(1) programs aimed at changing consumption habits to decrease customers' total energy usageand to shift consumption to off-peak hours, thereby increasing the effective capa city Of FPL'spower-generating equipment and (2) Programs designed to improve the efficiency of FPL's ownelectricity generating equipment. These programs comprised the Energy Management Plan(EMP).

Because efforts to improve internai efficiency were expected to produce marginally decreasingbenefits, Mr. Petillo recognized that the success of EMP hinged on FPL's ability to influenceconsumer eledridty LJSagA which would permit FPL to comply with FPSC eI1ergy conservationexpectations and to meet projected demand with minimum investment in building new, expensivegenerating capacity. Failure of the EMP could result in a future electric power shortfall.

The EMP programs were grouped according to six objectives, each contributing to increasedefficiency in electric energy use. Three of the objectives are described below.2'

Objective 1Programs: Making End-Use Systems More Efficient

These programs were designed to assist residential customers in making their homes more energy­efficient through the installation of specifie equipment such as water-heater insulation, reflectivewindow film, ceiling insulation, and efficient appliances.

Key to many of these conservation measures was\the Residential Conservation Service Program,which offered residential customers two types of energy analysis service: The On-Site EnergyAnalysis ($15 cost) , which incuded a thorough inspection and analysis of customers' homes byFPL representatives (Hi-rise building customers with shared services were not included), andrecommendations for more energy-efficient measures.

For those customers who did not wish or were not able to pay for a $15 analysis, a Customer­Assisted Enerqy Analvsis would be available for $3. The customer would fill out forms provided by­FPL, and the resulting data on energy efficiency would be analyzed by the company.

Announcement of these services was to be primarily through{ enclosures in electric bills. FPLestimated that 28,000 on-site energy analyses would be performe per year during 1981-1986,with 23,000 customer-assisted analyses in 1981 and 46,000 per year during 1982-1986. Thecosts (in 1980 dollars) were estimated as follows:

2 The number of program descriptions makes summarizing ail of them impractical. Therefore, only the programs aimed at specificconsumer groups and designed to decrease energy and peak load demand the most are described here. Programs to increase theefficiency of electricity generation are not included.

10

Total cost

Less: CustomerchargeNet cost to FPL

On-SiteEnergy Analysis$118

-L1.§l$103

Customer­Assisted Analysis$70

--.m$67

~ cumulative costs to FPL thraugh 1986 were estimated at almost $37 million, with consume;:-1~nding approximately$3.3million. ~Recovery of FPL's costs was to come thraugh other pragrams, such as the sale of water heaterinsulation, which would be recommended in many of the energy analyses. FPL estimated thatnearly 720,000 conservation measures would be instituted fram 1981 thraugh 1990, as follows:

Expected Participation in Energy Conservation Measures (in billable customers)

Year

Water Heater InsulationRenectiveCeiling InsulationAppliance EfficiencyEstimated Measures

Window Film

Installed

1981

6,1003,9701,520 011,5901982

18,60011,8904,84050.00085.3301983

18,60011.8905.24050,00085,7301984

18.60011.89014,54050,00095.0301985

18,60011,89016,54050,00097,0301986

18,60011,89016,54050,00097,0301987

0012,000 50,00062.0001988

0012,000 50,00062.0001989

a012,000 50,00062,0001990

0a12,000 50,00062,000

Totals

99,10063,420107,220450,00719,740

Water Heater Insulation. Typical customer savings from insulation were estimated to be 20kwhr per month. It was also estimated that over one million FPL customers could benefit framthe use of water-heater insulation kits. Whenever the results of an energy analysis indicated thata payback for the total kit cost could be achieved in no more than seven years, FPL wou Id offer tose Il the kit to the customer at a fair market priee. The FPL energy consultant in on-site energyanalyses would also offer to install the kit at no charge. Average costs per kit were estimated asfollows:

Materials $15Administration 2Total costLess customer chargeNet cost to FPL

$24(20)U

11

The costs and forecasted conservation for the Water Heater Insulation Program were as follows(ail figures in these program tables are in thousands of 1980 dollars):

FPL Expenditures Forecasted Conservation

Customer

DemandEnergy

Capital

OperatingExpenditures(Mw)(Kwhr)

1981

$ 25$ 89$122NilNil

1982

05737214

1983

05737218

1984

057372213

1985

057372317

1986

057372422

1987

0004lJ'1988

000424 LI X. 2. 1{ -=. Cf G,

1989

000424 .1990

000424

1 (.0Cumulative

$..25s....llili9l!.2(1981-1990)

Program Economies: 15-year levelized cost approximately $5 per 1,000 kwhr.

Reflective Window Film. Reflective window film used on single-pane clear glass windows intypical single-family residences could reduce energy used for air conditioning by as much as 24percent. FPL estimated that 85 percent of its residential customers had sorne form of airconditioning and that 90 to 95 percent of these customers could benefit from installation of thefilm.

When an energy analysis indicated a possible seven-year payback, FPL would offer to pay up to$ 1 00 towards the cost of installing the film. The customer was expected to pay for the materialonly. Average costs per home were estimated as follows:

$1757540

MaterialsLaborAdministrationTotal cost

Less customer investmentNet cost to FPL

$290175

12

The costs and forecasted conservation for the ReflectiveWindow Film Program were as follows:

FPL Expenditures Forecasted Conservation

Customer

DemandEnergy

Capital

OperatingExpenditures(Mw)(Kwhr)

1981

$ 47$555 $695 Nil 1

1982

01,3452,08127

1983

01,3452,081415

1984

01,3452,081626

1985

01,3452,081832

1986

01,3452,0811040

1987

00011

"~1988

00011 44 .Il~1989

00011 44 '

1990

00011 44 .---Cumulative

UZli28QSJ.1jQQ

(1981-1990)

Program Economics: 15-year levelized cost approximately$60 per 1,000 kwhr.

Ceiling Insulation. The 1978 FPL Home Energy Survey indicated that 28 percent of singlefamily homes had no insulation and had either electric heat and/or air conditioning. Thus thepotential market for ceiling insulation was estimated at approximately 300,000 homes. Qualifiedcustomers who installed ceiling insulation would receive a $300 rebate from FPL. It wasestimated that each insulated home would conserve 1, 150 kwhr per year. Potential customerswere to be identified through energy analyses and a neighborhood survey and inspectionprogram. The latter program (after some pilot work) would involve up to 20 insulation installationcrews. It was estimated that 107,220 homes would be insulated through 1990-83,000 generated

by the neighborhood program and the remainder comingfrom the energy analyses.The costs and forecasted conservation for the Ceiling Insulation Program were estimated asfollows:

FPL Expenditures Forecasted Conservation

Customer

DemandEnergy

Capital

OperatingExpenditures(Mw)(Kwhr)

1981

$47 $141 $410 NilNil

1982

1,4553251,30714

1983

1,5723251,415310

19844,3726593,926621

1985

4,9626594,4661040

1986

4,9626594,4661559

1987

3,6004583,2402075

1988

3,6004583,2402389

1989

3,6004583,24027103

1990

3,6004583,24030116

Cumulative

1.32..220li550$.28.9.5.Q

(1981-1990)

Program Economics: 15-year levelized cost approximately$88 per 1,000 kwhr.

13

Appliance Efficiency. The objective of this program was to increase the average efficiency ofnew and replacement appliances used by residential customers by 15 percent. Federallaws hadmandated labeling to show energy cost and consumption information on most appliances in orderto influence customers to buy efficient appliances that had a higher initial cost but a lower totalcost. Advertising by appliance manufacturers and the labeling was expected to have sornepositive influence on the purchase of efficient appliances. The FPL program proposed (a) arebate scheme to enhance the purchase of highly efficient appliances and (b) a mass media anddealer advertising campaign to heavily promote the merits of efficient appliances.

Average residential consumption in 1979 for appliance use was 11,354 kwhr per year and wasprojected to increase with appliance proliferation. It was estimated that one twelfth of existingappliances would be replaced each year with appliances 15 percent more efficient, and that overthe next 12 years typical customers would spend $700 (excluding rebates) above thereplacement cost for less efficient appliances.

FPL expected 50,000 rebates per year at a cost of $10 million; advertising was budgeted at $2million per year. The costs and forecasted conservation of the Appliance Efficiency Programwere estimated as follows:

FPL Expenditures Forecasted Conservation

Customer

DemandEnergy

Capital

OperatingExpenditures'(Mw)(Kwhr)

1981

$18$307 $0 0 0

1982

3613.811126,85040166

1983

013.727127,550121500

1984

013,643127,400202834

1985

013,643127,6002821,169

1986

013,643127,7003631,503

1987

013,643127,8004441,833

1988

013,643127,8505252,173

1989

013,643128,4506072,509

1990

013,643128,4506882,846

Cumulative

1.54U23.34fi$1149650

(1981-1990)

• Annual incremental customer investments in efficient appliances less $10 million in annual rebates.

Program Economies: 15-year levelized approximately $85 per 1,000 kwhr,

Efficient Home Credit. FPL had been promoting the building of energy efficient homes since1978. During the same period, state construction standards had also been rising. A revised"Watt-Wise Living Program" (efficient home credit) proposed a "credit" for new homes that werebuilt and equipped to meet new energy-efficiency standards. This credit would offset a proposedcharge that ail new homes would be assessed. The charge-$1,500-was equal to the estimatedincremental cost burden that an inefficient new residence would impose on the FPL system. Thisprogram depended on securing a number of approvals from state and local authorities.

14

FPL Expenditures Forecasted Conservation

Customer

DemandEnergy

Capital

OperatingExpenditures(Mw)(Kwhr)

1981

$ 365$3,191$6,150 15

1982

03,191112,5002391

1983

03,191117,00064256

1984

03,191116,100106424

1985

03.191117,150148592

1986

03.191117,900190761

1987

03,191118,500233932

1988

03.191118,8002761,1041989

03,191122,8503191,2781990

03.191~700 3641.454

Cumulative

$..36.5U1.91!l 'Ullii9.fi50

(1981-1990)

Program Economies: 15-year levelized approximately $84 per 1,000 kwhr,

It was estimated that 642,200 new residences built du ring 1981-1990 wou Id be certified Watt­Wise. Only 5 percent of residences in 1981 would be certified; 1982 and beyond were estimatedat 90 percent certified. The kwhr reduction was estimated at 2,400 kwhr per year per home, anda kwhr reduction of 0.6 kw per home, assuming a 47 percent load factor.

The average costs per home were estimated as follows:

Less customer investmentLess cost ta FPL

IncrementaicastAdministrationTotal

$1,500---.1.§

$1,545(1,500)

$45

The program costs and forecasted conse}Vation estimates for the Efficient Home Credit Programwere as shown in chart on top of page~. ~

Objective Il Programs: Using End Systems More Efficiently

The main emphasis in these programs was to shift customer usage of electricity from peakperiods to off-peak periods. The three programs affecting residential customers will bediscussed.

Residentia/, Swimming, Pool, Pump, Program. The objectives of this program were (a) toeliminate the use of residential pool pumps at times of system peak and (b) to reduce the overalloperation of pool pumps. To accomplish the objectives, tripping devices (clips) were to beinstalled on existing pool pump timers so pumps would operate during off-peak hours and only acertain number of hours per day. FPL had found that most pool pumps operated from 8 to 12

15

hours per day, but that pool cleanliness could be maintained by operating for fewer hours andsplitting the operation into two or more off-peak times.

Summer students were to be hired to adjust existing pool timers; other employees would workwith pool builders to adjust new timers. A sticker attached to adjusted timers would remind poolowners to recheck their timers periodically and instruct them how to reset timers if necessary.Most pool pumps were one horsepower, which meant that each imposed about 1kw of demandon the system when in operation.

It was assumed that the following number of residential swimming pool pump timers would beadjusted under this program:

Year Existing PoolsNew PoolsTotal

1981

25,0005,00030,0001982

25,0005,00030,0001983

25.0005.00030.0001984

25.0005.00030,0001985

25.0005.00030.0001986

05.0005.0001987

05.0005,0001988

05,0005.0001989

05,0005.0001990

05.0005.000

Total 125,000 50.000 175.000

The average cost per pool pump adjustment (in 1980 dollars) was expected to be :

EXisting~FboŒ FboŒ

Personnel $12 $ 6

Administration andadvertising/promotion 16Net cast ta FPL $28

20

$26

The forecasted costs and conservation for the Pool Pump Program were as follows:

FPL Expenditures Forecasted ConservationCustomer

DemandEnergyCapital

OperatingExpenditures(Mw)(Kwhr)

1981

$5$ 830$01051982

0830031161983

0830052271984

0830073381985

0830094491986

01300107561987

01300110571988

01300114591989

01300117611990

0130012163

Cumulative 1..5 SA..8QQ $JJ(1981-1990) - -- -

Program Economies:15 year levelizedcast approximately $79 per 1,000 kwhr.

16

Residential Load Control Pro gram and Residential and General Service Time-of-Use RatePro gram. The objective of these related programs was to reduce the peak demand forelectricity. Load control would "cycle" a customer's appliances through use of a switching device.A customer would receive an incentive (e.g., $25/year for central AlC) to go on the program.Time-of-use (T-O-U) rate customers would have a special meter installed and would have variablerates per time of use. Both programs (and devices) would make use of a bidirectionalcommunication system that would allow the utility and the customer's switch or meter devices tocommunicate. Extensive efforts had been started to develop and test the advanced technologyinvolved and to test customer acceptance. The testing and installation time made 1985 theearliest that the programs could be offered on a system-wide basis.

Load control program costs were estimated as follows:

a. 160,000 single-family homes would participate by 1990 (1.3 million homes in 1985 x 61percent with AlC x 20 percent participation).

b. Average cost per load control switch at $1 10. (This figure included $15 for thecommunications system, assumed ta cast $9.5 million, which wou Id be amortized over bothload control and T-O-U rate metering points.)

c. The capital, operating costs ($7 per switch maintenance plus customer incentives), andforecasted conservation were estimated as follows:

FPL Expenditures Forecasted Conservation

Customer

DemandEnergy

Capital

OperatingExpenditures(Mw)(Kwhr)

1981

$2 $64 $000

1982

212800 0

19832,37512800 0

1984

4.75115800 0

1985

5,6251,6140Nil 0

19866,4603,457038 0

1987

6,4605,414077 0

19886,4607,3710115 0

1989

3,2309,0840154 0

1990

2~ 0154 0

Cumulative

U5.3R5$..3lMfi$J)

(1981-1990)

Program Economies: 15-year levelled eost approximately$99 per 1,000 kwhr.

17

Time-of-use rate program costs and participation were estimated as follows:

a. Participation would be mandated for homes not in the load control program starting in 1987based on the amount of energy used. Twenty percent of the NC homes were expected toopt for load control.

Year

1987

1988

1989

1990

Total

Mandatory Usage ResidentialGeneral

Level (over)

CustomerCustomerTotal

3,500 Kwhr/mo.

75,90020,60096,500

3,000 Kwhr/mo.

62,1007,60069,700

3,000 Kwhr/mo.

4,4009005,300

2,500 Kwhr/mo.

123,0009,000132,000

265,400

38,100303,500

b. Average cost per customer, mostly in metering, was estimated at $325, including a $50customer investment. The net cost to FPL was $275. Maintenance of the system wasestimated at $17 per customer per year.

c. The capital, operating costs, and forecasted conservation were estimated asfollows:

FPL Expenditures Forecasted Conservation

Customer

DemandEnergy

Capital'

Operating+Expenditures(Mw)(Kwhr)

1981

$0 $0 $000

1982

0000 01983

0000 01984

0000 01985

6,3702,06600 01986

17,9242,83900 01987

17,5713,6034,82510190

198817,3114,3313,485187133

198915,9645,028265193137

1990~5,083--=.§.,600244200

Cumulative

$.11.53.2S.22.95OU5J15(1981-1990)

, Capital cos! for bidirectional communication system is included in the residentialload control program.

+ Manpower for meter removal and installation is included in the capitalized installed cost of metering equipmenl

Program Economies: 15-year levelized cost approximately $85 per 1,000 kwhr.

18

Objective III Programs: Energy Management Information

The information program was designed to increase customer awareness of the need to conserveenergy, to educate customers about how energy conservation can be achieved, and to motivatecustomers to act by demonstrating the potential benefits of conservation. The program included12 mini-programs, sorne of which are described below.

1. Public energy conservation presentations -- a series of speeches, films, slides, anddemonstrations to senior citizens, single family homeowners, townhouse, condominium,and apartment dwellers, and students. FPL representatives were to make regularpresentations and offer personalized information and assistance at fairs, home shows, andother large-audience expositions.

2. Energy conservation van -- a mobile, walk-through exhibit with messages on why and howto use energy wisely. The van started operating in 1979 and visited fairs, home shows,energy expositions, schools, universities, banks, home-improvement stores, mails,shopping centers, and so forth.

3. Energy conservation literature -- a series of informational cards and brochures coveringmany wise energy practices and measures.

4. District office conservation displays -- a set of displays in the walk-in area of each districtoffice, with topics basically those covered in the van.

5. Commercial and industrial customer presentations, exhibits, and information.6. Free energy-saver items such as water-flow restrictors and rubber faucet washers

distributed to the public to promote an awareness of the need for energy conservation.7. Tips for Watt-Wise Living -- a question and answer column provided to daily and weekly

newspapers. To date, the column had been featured in 47 dailies and 61 weeklies.8. Inforinational media messages -- a series of press releases, billing inserts, and radio,

television, newspaper, and magazine messages designed to increase public awareness ofthe need to conserve energy.

9. Energy Conservation Newsletter -- a bimonthly publication for FPL employees intended tostimulate and improve their awareness, interest, and understanding of energy conservation.

10. Energy Conservation Handbook -- a reference handbook for customercontact employees.11. A.I.D. (Assistance, Information, Direction) Program -- a package of programs and services

to assist customers having difficulty paying their electric bills.12. Conservation hotline-to be developed in the form of an energy conservation tape library, a

telephone operator, and toll-free access to the information.13. Conservation competition program -- to be developed as contests among groups to achieve

energy conservation.

The cumulative cost of the listed activities, 1981-1990, was estimated at $17,457,000. Theforecasted energy conservation was "indeterminate."

19

Conclusion

ln addition to the previous figures, each program was to be evaluated in relation to the additionalcost of electric service that would be incurred over the next 15 years if the potential conservation

results of the plan did not occur-$90 per 1,000 kwhr. The estimated incremental cost of energyper program varied from $3/1,000 kwhr to $99/1,000 kwhr. See Exhibit 9 for a summary of theprograms.

Exhibit 9 Energy Management Plan: Relative Electrical Energy Cost* of Programs

Estimated Cost of Energy+

($/1,000 kwhr)

Objective 1 Programs: Making end-use systems more efficientWater heater insulation programReflective window film program

Residential ceiling insulation program

Appliance efficiency programEfficient home credit program

Objective Il Programs: Using end-use systems more efficientlyResidential pool pump programResidentialload control program

Residential and general service time-of-use rate program

56088

85

84

79

9985

• Energy cost impacts are not applicable for Objective IV programs.

+ The cost of producing electrical energy is specified on a 15-year levelized basis beginning in 1980: this cost indicates the equivalent total cost

of the program on the basis of energy not produced by new facilities. For comparative purposes, the estimated cost of energy from new

facilities is $90 per 1,000 kwhr.

FPL expenditures for the EMP through 1990 were projected to total approximat~and customers were projected to spend about $2.3 billion (in 1980 dollars) through 19 orenergy-saving appliances and measures, primarily as a result of the EMP. Commenting on theincentive programs and the company and customer expenditures that they represented, Mr.Petillo said:

ln analysing the cost effectiveness of these conservation programs, the amount thecustomer is willing to spend on energy conservation determines a given program's marketpenetration. To the extent that FPL can offer a cash incentive (rebate) large enough toreduce the customers' expenditure to a level at which a given conservation measure (e.g.,ceiling insulation) shows a significantly increased market penetration, then, From amarketing standpoint that cash incentive h b effective. ln other words, thëcustomers W 0 install ceiling insulation have determined their savmgs will be larger thantheir expenditure and, there fore, the program is cost-effective to them. Whether if is costeffective to these customers' neighbors is another question! FPL's problem is to assurethat ail its customers are at least no worse off than they would have been had no cashincentive been provided.

20

Exhibit 10 : Energy Management Plan Potential Demand Conservations (kw 000)

Objective+

Il

III Total

1981

4 Mw10 MwNil Mw 14 Mw

1982

781961 275

1983

2122552 469

1984

3492833 635

1985

4863123 801

1986

6254373 1,065

1987

7636223 1,388

1988

8987613 1,662

1989

1,0358203 1,858

1990

1,1728873 2,062

• The projected results rely upon a positive customer response along with aggressive actions on the part of FPL 10

implemenl the programs. These estimated results also depend upon realization of certain conditions which are critical10 the success of the programs.

+ Potential demand conservations are not applicable for Objectives IV, V and VI.

Comparing present Company expenditures for conservation incentives to future capitalexpenditures for new generating plant is the decision criterion. Additionally, every 600 kwhr"conserved" represents one $30 barrel of foreign oil for which neither FPL nor our customershave to pay.

If the EMP were successful, by 1990 it could reduce FPL summer peak demand by about 2.1million and annual energy generation by approximately 5.7 billion kwhr (see Exhibit 10). lnaddition, if the results of the plan were realized, the annual amount of oil that would be requiredwould potentially be reduced by approximately 9.1 million barrels by 1990. The total eventual oilreduction would depend on the actual results of ail programs, the effects of generationalternatives implemented to achieve oil reduction, and the relationship between implementation ofthe programs and the schedule of future generation additions.

21

Questions for preparing the case

1. How marketing strategy at Florida Power and Light Company issupporting the energy conservation target imposed to the company bythe government ?

2. What are the key components of the marketing program of FloridaPower (product or service, priee, promotion, distribution) ?

3. Florida Power and Light Company will spend 582 millions $ in the next10 years to support the marketing of its energy conservation program.How the company could evaluate the success of such a program ?