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Economic and Fiscal Analysis of S.94

Note: S.94 was incorporated into H.520 later in the legislative session.

  • To: Senate Finance Committee
  • From: Doug Hoffer
  • Date: 19 March 2007
  • Re: Economic and fiscal analysis of S.94

Attached is an analysis of the economic and fiscal impacts of the proposed all fuels efficiency program (S.94). The data for this analysis were obtained from a study prepared for the DPS by GDS Associates.1

The GDS study estimated total program costs (including incentives, customer contributions, and administrative costs) and savings from "achievable cost-effective efficiency measures" (as well as environmental benefits not germane to this analysis).2 In addition to customer savings and environmental benefits, the program offers considerable ancillary benefits. For example:

  • The estimated net present value (NPV) of customer contributions = $68.8 million. This will result in $194 million in new economic activity, including $46.8 million in new earnings over ten years.
  • The new investments are expected to generate 180 jobs each year and will result in about $1.6 million in new state income tax revenue over the 10 year life of the program.
  • The NPV of residential savings for participants is estimated to be $269 million. Customers will use the savings to buy other goods and services (rather than fuel) and the resulting state sales tax revenues will be approximately $6 million during the life of the measures.
  • The NPV of commercial and industrial customer savings is estimated to be $202.7 million over the life of the measures. These savings will lower business overhead and make companies more competitive.

Note: This is a conservative estimate of benefits.  Other potential benefits have not been modeled because of time and resource constraints.

The multiplier effect of the savings: The NPV of total savings is estimated to be $471 million ($269m Residential and $202m Commercial & Industrial). We estimated how the savings would be reallocated for households and by industry, but did not calculate the multiplier effect of this shift. On one hand, the $471 million in savings is already in the economy because households and businesses purchase the fuel from local dealers. However, the majority of this money leaves the state since all the fuels are imported. Therefore, most of the $471 million is not "working" in the Vermont economy so the multiplier effect is very limited. But when households and businesses realize the savings, a considerable portion will remain in Vermont. For example, households will have more to spend on housing, health care, and food. Businesses will spend more for wages, business services, and profits. If the difference in the two multiplier effects were calculated, it is likely there would be significant additional benefits to the state, as well as increased personal and business tax revenues.

Jobs attributed to program expenditures:  We did not estimate job creation from direct program expenditures funded by the proposed Efficiency Charge. Even though these funds are already in the economy, there is likely to be incremental job creation by moving those dollars to a retrofit program.

Customer Contributions and the Multiplier Effect

Although the program will include generous incentives, participants will pay a portion of the cost for the measures installed (which will be recovered through fuel savings). According to the study prepared for the Department of Public Service by GDS Associates, the estimated net present value (NPV) of participant contributions is $68.8 million.3 While program measures will vary by household, the average will probably be about $5,000.4 Depending on household income, incentives will cover 40% to 80% of the cost so an average household will contribute $1,000 to $3,000. Since very few families have this much money in cash, we assume it will come mostly from borrowing and some from savings. This will likely be true for small businesses as well. These funds are not currently circulating in the local economy and can be considered new money that will have a substantial multiplier effect.

hoffertable1_326

We assume program expenditures will be split between technical work (20%), construction (60%), and administration (20%). Using multipliers from the U.S. Commerce Department, the $68.8 million in customer contributions will result in $194 million in new economic activity, including $46.8 million in new earnings over the ten year life of the program.

The average annual contribution from participants is estimated to be $8.6 million.5 This is expected to generate 180 jobs each year of the program.6 Most of the jobs will be created in industries directly involved in the program, but the indirect and induced effects of the new expenditures will stimulate job growth in other sectors as well (see table below).

We estimate these jobs will result in $1.6 million in new state income tax revenue over the life of the program.

 hoffertable2_349

Note: To the extent some of the customer contributions come from savings or investments, there is an added opportunity cost because those funds were earning interest or dividends.

New Sales Tax Revenues from Residential Customer Savings

The NPV of residential savings for participants are estimated to be $269 million.7 This money had been spent on fuel but will now be available for other purposes. We assume the savings will be spent on the usual household budget items in the same proportion as current expenditures. The household budget allocation reflects the expenditure patterns of a moderate-income family.8

 

Using these assumptions, program beneficiaries will have an additional $57 million to spend on housing over the next ten years, $43 million on transportation, $36 million on food, and so on. We estimate that state sales tax revenues resulting from a shift to other purchases will be $6 million during the life of the program.9

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Distribution of Commercial & Industrial Savings by Industry

The NPV of commercial and industrial customer savings are estimated to be $202.7 million over ten years.10 Although we do not know the extent to which these fuels are purchased by businesses in each of the state's major industries, we assume it is in proportion to their share of the economy.11 Therefore, each industry can expect to save the amounts shown. These savings will lower business overhead and make companies more competitive. It should result in increased sales and/or greater profitability, and perhaps lead to more jobs and/or higher wages.

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Note: It is likely that a considerable portion of the business savings will be spent in Vermont for wages, business services, and other inputs. Because of time and resource constraints, we were unable to model the multiplier effects of these changes. However, it seems reasonable to assume that there would be significant additional benefits to the state from the reallocation of resources, including increased personal and business tax revenues.

Footnotes:

1. Vermont Energy Efficiency Potential Study for Oil, Propane, Kerosene and Wood Fuels", 1/16/07.

2. The GDS study provided two estimates for customer contributions and savings. One involves costs and benefits that pass the "Societal Test", which considers factors beyond direct impacts on customers and is intended to allow regulators to compare investments in efficiency with other resource options. The second is derived from the "Participant Test", which "is designed to give an indication as to whether the program or measure is economically attractive to the customer. Benefits include the participant’s retail bill savings over time, and costs include only the participant’s out-of-pocket costs." (GDS report, p.16, emphasis added) I used the figures from the Participant Test for this analysis.

3. Op. cit., "Vermont Energy Efficiency Potential Study", pp. 8 & 9. Figures presented do not include program measures for wood.

4. Based on estimates from Efficiency Vermont.

5. Op cit., "Vermont Energy Efficiency Potential Study", Appendix E, p.268. Not including budgets for wood.

6. Job creation will not be cumulative. That is, there will be a total of 180 new jobs each year.

7. Op cit., "Vermont Energy Efficiency Potential Study", pp. 8 & 9. Not including savings for wood.

8. Census, 2005 Consumer Expenditure Survey, Table 1: Quintiles of income; middle quintile; pretax income = $42,622. National expenditures were adjusted for the Northeast using Table 8, Region.

9. See Appendix for assumptions regarding expenditures and applicable sales tax.

10. Op cit., "Vermont Energy Efficiency Potential Study", p. 8. Not including savings for wood.

11. Rankings based on sales / revenue by industry from the 2002 Economic Census. We multiplied each industry's percentage of total state sales / revenues times the overall C&I savings. Since Northwest Vermont has access to natural gas, many, if not most, of these regional businesses undoubtedly use natural gas instead of the other fuels. Therefore, it is likely that the rankings do not accurately reflect actual usage of alternative fuels by industry (especially because of IBM, UVM, and FAHC). In addition, because this data is from 2002, "Wholesale" may include sales of C&S Wholesale, which was a substantial company but moved to New Hampshire.

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