(According to the Alliance to Save Energy, the energy efficiency portion approved by the House of Representatives Friday is $3.2 billion.) But a provision that links the money to states providing financial incentives to utilities could favor some states and lead to lengthy litigation.

The stimulus package requires that the Secretary of Energy should only make funds available after a governor provides a written statement that the state "will seek to implement" regulations for "a general policy that ensures that utility financial incentives are aligned with helping their customers use energy more efficiently... and a timely earnings opportunity for utilities associated with cost-effective measurable and verifiable efficiency savings."

But states vary widely in offering incentives to utilities and how energy efficiency adoption impacts their earnings, according to Rob Thormeyer, a spokesman for the National Association of Regulatory Utility Commissioners (NARUC). The provision "sounds like decoupling (of utility rates) to me," he said.

For most utilities, increasing revenue is based on selling more electricity, so they have a vested interest in not encouraging energy efficiency. However, in six states, utility earnings have been decoupled from the volume of electricity sold. Utilities are guaranteed revenue, and the rates paid by customers can be adjusted if power consumption goes up or down.

Thormeyer said the language of the bill doesn't set any timetable for when the incentives should be in place, so legal challenges are likely. Also, some governors may not be able to give the required assurances in a timely fashion because they don't control the actions of their state's utility commissions, which in 13 states are elected positions and not under their authority. "A governor could provide an assurance and it could be meaningless," Thormeyer said.

The federal grants could be withheld from states for months or years while the state utility commissions hold the lengthy hearings required to change their regulatory and electricity rate structures. Conversely, states that have already decoupled rates could start receiving the federal money right away.

NARUC prefers that the money be made available without the conditions that could substantially delay the money from being distributed to a majority of states.

Decoupling utility rates has been contentious. While some experts see it as an effective tool for promoting energy efficiency, organizations that represent customers are against the idea.

Marc Yacker of the Electricity Consumers Resource Council, which represents industrial energy customers, said that under decoupling, some customers that implement energy efficiency can still pay more when rates are raised to meet revenue guarantees.

"You shouldn't condition a state's receiving (grant) money to promote energy efficiency on a state program that means consumers could spend more money on their utility bills," Yacker said. His organization is against decoupling because "utilities are not the best vehicles to achieve energy efficiency." Customers should be the targets of efficiency programs, and there should be no guarantees of utility profits through decoupling, he said.

ELCON, along with the National Association of State Utility Consumer Advocates sent a letter to congressional leaders in January urging changes in the stimulus bill language. Yacker described the stimulus bill's language as "imprecise" and "bizarre." What does "will seek to implement really mean?"

However, the provision (7006) in earlier versions of the stimulus bill referring to incentives received support from 26 organizations including both environmental (Sierra Club, The Wilderness Society, the Natural Resources Defense Council) and industry groups (Edison Electric Institute, the Alliance to Save Energy, and the American Gas Association).

According to a January 27th letter to House leadership that these organizations jointly signed, "Section 7006 provides a robust federal incentive for states to remove these barriers to promoting efficiency by adopting polices that ensure utilities 1) obtain cost recovery for prudent investment in energy efficiency, 2) have an earnings opportunity tied to verified success in delivering cost-effective energy savings, and 3) will not under- or over-recover authorized fixed costs as electricity and natural gas sales volumes change."

Jim Owen of the Edison Electric Institute said that the bill's language will not impede, but instead increase the adoption of energy efficiency by state regulatory agencies. "It is my understanding that the final language of the bill does not specify decoupling per se," he said.

The ambiguity of the legislation should enable states to receive the funding, according to Owen. The legislation does not require energy efficiency incentives to be in place, but merely requires governors to state that they intend to do so, he said. "Shouldn't that be enough to start receiving funds?"

Owen believes the legislation will help to create a "new regulatory paradigm in which electricity utilities can receive a comparable return in energy efficiency as they would in building a new power plant."

(Update 3:15 p.m. PST) Attorney Steven Goldenberg of Fox Rothschild said the language in the original version of the legislation explicitly referred to decoupling, so he welcomed changes to the new "wishy washy" wording.

Goldenberg, who represents the New Jersey Large Energy Users Coalition as well as renewable energy companies, said the original draft was rewritten because of opposition from decoupling foes. "The law should not be preclude states {without decoupling] from receiving federal funds," he said.

State utility commissioners may be opposing this legislation because of territorial concerns, according to Goldenberg, who at one time was special counsel to the New Jersey Board of Public Utilities. "There's a natural resistance about being told how to do things that fall in their regulatory jurisdiction."

Exactly what steps a governor must take to provide "assurances" that a state is considering establishing financial incentives for utilities to encourage energy efficiency is unclear. If utility commission action, such as hearings or studies of decoupling are required, "the people of NJ would probably say [federal funding] is not worth it," according to Goldenberg.

Update 2: This is from an emailed response from environmental attorney Stephen Hall, a partner at Stoel Rives:

"... Although this provision lacks details of how that decoupling policy should be implemented, I see this as a plus because it offers flexibility that recognizes that utility regulatory policies vary from state to state and encourages bottom-up policy making and innovation, rather than one-size-fits-all decrees from Washington. In addition, by merely requiring state governors to confirm in writing that these policies will be put in place, it removes delays in allocating grants that might otherwise occur if the governor had to receive assurances from policy makers that the state could and would, in fact, adopt a certain program. One person’s ambiguity is another person’s flexibility."