- Email: [email protected]
Can energy markets drive DSM?
Can Energy Markets Drive DSM? The kind of conservation promoted as DSM today is central planning that can play no role in a competitive power market. From its ashes will arise an energy efficiency phoenix that will perform far better for the consumer: market-driven DSM. Douglas A. Houston ver the past several years, the effectiveness of demandside management programs has been actively debated. ] Recentl~ this discussion has shifted to the merits or demerits of DSM's deployment in an increasingly competitive electric power market. 2 Suffice it to say that these arguments are not likely to be resolved through the powers of empiricism. Given the elusive, subjective nature of such musings, there is no way of presenting any objective, show-stopping evidence. If market forces indeed are to shape the industry's future, we can add clarity by framing the issues in
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Douglas Houston is professor of business economics and Koch Industries faculty Fellow at the University of Kansas. He has written and spoken often on matters involving energy efficiency and its infrastructure.
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the language of market economics. The viability of DSM in the 1990s and beyond rests, first, on a prediction of whether a substantially deregulated industry will evolve and, second, a judgment about DSM's fit with the intensified competition in power markets should such markets evolve. Admittedl}~ any prediction of industry structural change is uncertain. But if competition emerges, there is little doubt that market participants - - not politicians and interest groups - - will redefine institutions, including DSM. To its many defenders, DSM programs are well suited to a new
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competitive environment, capable of providing essential strategic advantages for utilities as they struggle to survive. But can DSM be transformed from a commandand-control instrument to a market-based tool? What, precisel)4 might DSM m e a n in the new environment? This article attempts to address these points. It concludes that the changes coming to the industry are so profound that it is misleading to even refer to the emerging energy services industry as DSM, unless the term is modified to underline the vast conceptual differences in contextual settings. Perhaps marketdriven DSM (MD-DSM) will do for this purpose. Summary comparisons of current-day DSM to what it might become in a competitive marketplace are shown in Table 1, which also serves as a reference to points in the article.
I. W h e n M a r k e t s M e e t D S M It is helpful to retain the defining elements of present-day DSM in order to distinguish it from MD-DSM. Otherwise essential changes needed in DSM are slighted, producing confusion about the nature of a competitive process and the activities and institutions that are compatible with it. While today's DSM may have arisen as a set of pragmatic prescriptions on h o w to dampen load and usage, it also has been and remains essentially a political tool, engaging utilities in a social agenda advocated primarily by environmentalists; it also is a command-control, non-market tool in large measure. November 1994
At present, utility DSM programs prescribe and subsidize home, office, and factory conservation investments; the revenue to cover incentive payments to adopters, utility DSM-related expenses, and "lost revenue" recovery (due to lower usage of electricity) are gathered through revenues collected from all customers, not just the ones benefiting directl)a This cross-subsidization (internal taxation) is possible because regulators can set prices and exclude entrants. The political clout of regulators underwrites about two billion dollars a year in customer-borne DSM expenditures. 3 Although DSM advocates judge most of these pro-
grams successful, yielding large net societal returns they say would have been passed over otherwise, it's dear that unsubsidized market transactions would not confirm that conclusion - - the mix and timing of investments would differ greafl3a Thus, DSM today is predicated upon market failures - - failures in making the types of energy conservation investments that planners would have made. Transformation of DSM programs into competitive, marketoriented instruments means more than a change in intent by regulators and utilities. Structural changes in the industry will include a DSM metamorphosis, con-
Table 1: Comparison of Current-Day DSM to DSM in a Competitive Market Current DSM
Market-Driven DSM
Explicit subsidies given?
Significant incentives to adopters, paid from general revenue requirements.
None ... or few directed at informing, not directing.
Implicit subsidies given?
Closed retail markets exclude DSM must compete with many choices, including use of numerous substitutes in potentially lower-priced energy. market, including potentially lower-priced energy to end users,
Programs target
Conservation of energy resources.
All resources, and could promote additional energy use as easily as energy conservation.
Measurement (test) of effectiveness
Regulators' attempts to establish objective benefits, costs, and risks; market choices presumed to be in error.
Accumulation of market decisions by users, predicated upon subjective appreciation of benefits, costs, and risks; market presumed not to err.
Entrepreneurial, marketing elements
Few; programs are defined in political arena,
Many; programs must anticipate consumer demands.
A strategic political weapon for utilities?
Yes; argument of utility economies of scale or scope (utililty-as-portfolio manager) becomes appeal to exclude alternative providers.
No; greater control of energy use by consumers works against the natural monopoly argument and diminishes opportunities for political intervention by all providers.
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sistent with an expansion of retail consumer opportunities to select energy supply and demand control programs. DSM makes economic sense: It can serve as a "competitive tool" for any provider, if the advantages it confers are due to real cost advantages held by the provider and are acknowledged by the consumer through his market selections. Competitive advantages cannot be based on establishing regulatory impediments to market options - - a "managed" competition. Thus, if DSM is marketdriven, it will face broad entrepreneurial challenges that are stimulated by end-user choice. Under these circumstances, most of the trappings of current-day DSM will vanish, as services are redefined in the context of such challenges. he primary distinction between today's and tomorrow's demand-side management will be the return of responsibility for economic decisions in energy matters to consumers, realigning incentives to invest in energy-using capital with the ownership of that capital. This is a fundamental component of a workable market process in any industry; to deny that it can or should be done for DSM amounts to a denial of a meaningful industry deregulation. A useful way to look at MDDSM in a competitive marketplace is from a consumer's pragmatic perspective: Is net value added by participating in a program purporting to assist in controlling energy use? Undoubtedl~ some ventures on the
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information superhighway hold the potential for doing just that and will expand greatly as the technology is dispersed among potential users. For example, Entergy Corporation's plans to install the fiber optic-based "Powerview" load management system to extend residential load control in 10,000 residences may be very useful as consumers see it. Knitting these technological advances in with industry restructuring, Karl Rabago of the Texas Public
D S M makes economic sense: It can serve as a "competitive tool"for any provider, if the advantages it confers are real.
Utility Commission has noted, "The future of regulation is deregulation, and in an unregulated market DSM and load management are the ultimate competitive tool. ''4 Market-driven DSM, I presume. The supporters of a new, sleeker version of DSM, regeared to cruise on the information superhighwa~ often focus on the energy savings aspects of the information technologies - - as delivered by the utilit~ But the "how" and "who" of such technology are yet to be determined in a competitive marketplace, and
a major rethinking of fundamental issues is likely. For example, assistance to consumers in making investments that call for more energy use, not always less, is part of MD-DSM. s Fuel-switching and electricity-supplier switching options also could be components of energy control packages; such program features are incompatible with many conventional DSM programs toda~ If detailed information about a consumer's energy uses and supply options can be gleaned from an information network, it can be put into that consumer's hands to be acted upon (perhaps with the aid of user-friendly software). Decentralized energy management makes sense when this specific technical knowledge can be harnessed to an individual's considerable tacit knowledge about how his home or business operates. In current DSM this knowledge - by nature not readily transferable - - is sacrificed, supplanted by rigid behavioral assumptions which increase the risks of making mistakes in evaluating DSM programs. II. M a r k e t - D r i v e n A p p r o a c h e s to M a n a g i n g
Decentralized, market-based approaches to management are now being hailed as essential to success in a dynamically competitive environment. A trend in American business is to place decisionmaking authority deeper into organizations (through profit centers, intemal markets, and team empowerment, to name a few approaches). Individuals are vested The Electricity Journal
with greater authority to act in areas where they have considerable tacit knowledge. A fundamental component of market-driven management approaches (which distinguishes them from other management reforms) is the deliberate linkage of actions taken by managers and teams to the long term impacts of those actions, either by a more formal sense of property rights (as with profit centers), or by making managers into claimants on their measured results (as in pay-for-performance). The decision-maker, therefore, has a direct incentive to use his cumulative knowledge purposefully and creatively for value creation, assuming that the measurement of the individual's or group's performance is consistent with increasing the organization's value. Importantl}~ these market-oriented changes also reduce the illtering and distorting of information that is typical in hierarchies. 6 pplying this reasoning to electric power markets, consumers of DSM services can become "empowered" managers too: They already have incentives as owners of the capital in which they invest and can count on improved quantity and quality of energy data in the future. Regulation which distorts information and incentives to the user can be removed. A possible argument against an open competition for DSM services is that economies of scale in information technologies might make the utility a natural monopoly provider of high-tech communications gear and services. Such
superiority should be demonstrable in an unregulated environment; it need not be assumed. Single supplier dominance seems inconsistent with developments in information network services to date, and public policy now favors greater telecommunications competition in most spheres. For example, traditional local telephone services face formidable competition, both present and potential: Cable systems, competi-
Many market failure arguments made for DSM could support regulation of other consumer markets, where we would not think of imposing them.
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tive alternate providers, private networks, and wireless systems all substitute (and complement) to some extent for the services of local exchange companies. The coming multi-media, interactive network(s) could support numerous end-use services, and the efforts of utilities cannot be isolated from this broader evolution. Market-driven demand-side management probably will be part of a big information parade, but only a small part. As a practical matter, monopolizing any aspect of DSM information services will become
increasingly unlikely if open communications networks emerge. III. Is D S M Efficient?
Against the backdrop of a competitive energy market, the current form of DSM cannot survive. Many observers, however, believe otherwise. Although it seems w e should be able to evaluate DSM effectiveness in ways agreeable to all, that common framework has not been found - - for good reason. The essential problem with attempting to measure DSM benefits and costs today in an "objective" sense is that there are no obvious benchmarks for value, absent reliance on market choices. And market decisions are not examined as a reflection of DSM value because DSM's very existence presupposes that consumers' market choices about conservation investments are inferior. The standard defense of DSM on economic grounds begins by assuming deep flaws in consumer rationality, barriers to information, or the underpricing of electricity; these are suggested to lead to a pattern of conservation underinvestment in the marketplace. 7 Yet energy conservation markets are similar to many other durable good markets which are not regulated, such as in computers, autos, and, perhaps, even education. In each, the future-returns stream is long, and uncertainty is largely due to a set of circumstances unique to that individual, household, or business. Many market failure arguments made for DSM apply (or do not apply) equally as a rationale for broad-based regula49
tion of other consumer markets, where we would not think of imposing them. Certainl~ m a n y investment decisions taken in the marketplace are complex, and risk}~ but describing reality does not change it - - one must also demonstrate a convincing alternative that yields better decisions. Some would say that current-day DSM is such an instrument. Shifting investment decisions from a consumer, who has property rights over the investment capital and, for that reason, an obvious motive to try to understand problems and opportunities related to "his" investment, to a planner, who necessarily acts with less understanding of the consumer's circumstances and preferences and no direct incentive to become so informed, is a troubling aspect of today's DSM. n the other hand, the typical user's limited understanding about the consequences of his actions might be much improved by providing better technical information and decision tools. These are tasks that a utility or energy service company might undertake with some success in a competitive market environment. This prediction rests on the expectation of increased profits (absent price and profit regulation) acting to motivate the supply of an improved quality of service - - including better information. Quite a bit of empirical evidence suggests that consumers (especially households) invest very little in many conservation projects unless they yield high implicit returns. This is not necessar-
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ily an indictment of individual rationality,s Instead, high-risk premiums often reflect uncertainties related to the consumer's specific circumstances - - an individual is not an average, after all. Risk premiums could be reduced and energy investments stimulated by whomever can provide: (a) better individual-specific information on energy uses; (b) tools by which this information can be inter-
Market information is inherently incomplete, and the consequent uncertainty will always keep many seemingly attractive conservation investments from being made.
preted; and (c) marketing packages that can "frame the investment bet" in such a way that effident investments are seen as attractive to users who are risk adverse. Market-driven DSM certainly can assist in all three areas. As an example, suppose that information suggests that an individual is under-investing in conservation by not insulating more - - perhaps because he cannot easily make sense of a jumble of data. However, this consumer probably could comprehend that hiring a consultant to analyze the e c o -
nomic and technical potential in a situation could pay off handsomel}z Also, MD-DSM providers, given access to the consumer's energy information, might fashion risk-arbitrating proposals. The user might contract with a provider for the installation and maintenance of energyconserving capital in return for little cash down, but with the seller receiving a contingent claim on lower future utility bills resulting from the investment. This presumes, of course, that a linkage between new capital and lower energy costs can be monitored practically. Yet even if this contract is not feasible, there should be ways to package energy management services that are attractive to the consumer. The bottom line is simply this: If improving information technologies reduces the cost of gaining knowledge, this is understandable by a number of firms and individuals; it need not be all firms and individuals in order for markets to form that can that use this knowledge profitabl3a 'arket-driven DSM may re.main unpalatable to those who find market barriers so unyielding that only a well-armed regulator can blast through. In fact, information in a market setting is inherently incomplete9 and the consequent uncertainty will always keep many seemingly attractive conservation investments from being made. However, little that regulators, utilities, or their consultants do eliminates most causes of uncertainties. These lie in such concerns as the prices of
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electricity and its substitutes, the lifestyle of the user, or the predicted throughput and product mix of a manufacturing plant. Ignoring consumers' assessments of risks, which is implicitly done with subsidized DSM, redistributes costs away from users to the many consumers who are forced to fund these projects. More ominousl~ another risk is incurred: The regulation necessary to accomplish the redistribution is incompatible with market institutions that substitute for regulation. Thus, if more value is created by having those market institutions, then DSM imposes an opportunity cost. et current DSM is seen by many as both a costless resource and as part of a competitive movement in electricit~ Edward Moscovitch writes, in evaluating the macro-economic effects of DSM, "The environmental and welfare benefits of DSM are unambiguous - - reduced use of electricity means lower emission levels and the reduction in the overall cost of electric energy leads to higher levels of consumption of other goods and services. ... There is no economic cost to such investments. ''1° Neither plausible economic theory nor compelling empirical evidence supports this view in the current industry environment - but that may not be the appropriate context in which to evaluate DSM, in any event. As greater market competition enters the industry, conservation services cannot be excluded. There is irony (not to mention a logical contra-
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diction) posed by an increasingly competitive industry - - shaped by expanding energy supply choices - - and the same industry, continuing to distort consumers' decisions about energy-saving investments that are often substitutes for that energ~
IV. Current Disquiet The inexorable force of competition quickly demonstrates the impossibility of isolating DSM from other types of energy decisions
The inexorableforce of competition demonstrates the impossibility of isolating DSM from other types of energy decisions.
made by consumers. California, the incubator for DSM, provides interesting examples. In 1993 testimony before the California Energy Commission hearings on "uncommitted DSM forecasts," Pacific Gas and Electric Co., the nation's largest DSMer, slashed its longer-term forecasts of energy and demand savings from DSM. Additionall~ PG&E's plans reflect far more "dispatchable load management" (interruptible service) than in prior forecasts. This switch may function more as a means of giving disguised price concessions to industrial consum-
ers than of conserving energ3a Although PG&E management indicates that they remain committed to DSM, their longer-term view of DSM is far less optimistic than it was two years prior, n That picture is made bleaker by the April 20,1994 proposal by the California Public Utility Commission (CPUC) outlining a deregulated industry in which retail consumers would have direct supply choices32 For retail electricity consumers in California who exercise choice, the proposal states: "The utility is free to offer energy efficiency services to direct access consumers; however, just as will be the case for generation services, it may not finance these programs through rates charged to utility service consumers. "13 In other words, in a competitive (direct access) market, California regulators are proposing pulling the plug on conservation subsidies. Remaining programs must meet a market test. nother example of DSM collapse on the West Coast comes from the Bonneville Power Administration. BPA has proposed eliminating all conventional DSM from its resource acquisition program, suggesting instead that it unbundle services and offer DSM as a direct, billable service. The BPA is one of the most experienced and savvy DSMers in the nation, and as a result its actions have unsettled environmentalists. 14 The seeming causes of BPA's altered views on DSM are the same set of factors faced by utilities everywhere: (a) markets are under at-
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tack by low cost independent power producers, operating in a more competitive industry from which retail consumers will not be excluded; and (b) DSM programs cause utilities to raise prices, putting utility providers in a competitive squeeze. Although dearly distressed at the harm done by competition to utility-directed conservation, the Northwest Power Planning Council, which oversees planning for the region, echoes BPA's assessment. 15 This serves as a cautionary tale for those who believe that DSM has been "institutionalized" in the U.S. Even in environmentalist strongholds, DSM comes under fire quickly when competitive forces work against it. The pace of that attack is accelerating. 'n other states, the attack on .DSM has generally been led by the large industrial users. Energy-intensive firms face competitive disadvantages when DSM surcharges are stuck on them that do not affect competitors in other (non-DSM subsidizing) states. These price-sensitive consumers often have other options at hand, including self-generation of electricity, movement of work, and, now, direct competitive sourcing, as states such as California begin deregulation. Their concerns are taken seriously by utilities, which hesitate to saddle industrial consumers with unwanted DSM programs. 16 ELCON, the principal trade association of large industrial energy users in the U.S., has been a leading critic of DSM. Until recently, ELCON argued that all 52
DSM programs should be evaluated on criteria similar to that applied to utility supply programs. Now, it has seemed to move toward a market justification of DSM, apparently in the belief that retail competition will be thrust into the industry in any event and that this cannot occur without upending the underlying exclusive franchising system and, with it, DSM. Put another way, these consumers fear that unless they become more aggressive in demand-
ing market choices for both supply and conservation service, they will get rhetoric about "least cost" service rather than the reality of lower prices.
V. Managed Competition as a Replacement for Market Competition? As the above suggests, DSM is becoming a target of dissatisfied utilities, consumers, and even regulators. Each contemplates an industry with substantially more competition and finds subsidized
DSM an anomal~ Thus, those who view current DSM as an essential component of any future electric industry are left to ponder how a DSM funding mechanism can be retained. ne answer is "managed competition," in which each utility remains a distributionlevel monopolist over captive retail consumers. According to one environmentalist report, "Many of today's regulators have been responding, at least implicitl)~ to the natural monopoly characteristics of utilities' portfolio management function .... Those who need additional energy services and those best positioned to achieve improved efficiencies often will be different and widely separated entities; no institution has rivaled utilities in their capacity to bring both groups together for mutual advantage. "17 In this view, presumably; competition will be kept at a discrete distance from consumers (only wholesale trade is voluntary), and the utility is permitted to play the role of "portfolio manager," judiciously pitting demand- and supply-side resources against one another, unimpeded by saber-rattling consumer demands for lower prices. Today's DSM might survive, if not prosper, in such a managed competition (regulated) environment.TM The importance of eliminating retail customer choice is well recognized by environmentalists as the key to saving DSM. Thus, the Natural Resource Defense Council has mounted an aggressive campaign to get state utility commissioners to "just say no" to re-
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tail choice, and recently a lobbying consortium of environmental and consumer groups opposing retail consumer choice has formed. 19 They understand well the dangers that an open marketplace in energy poses for the social agenda that is today's DSM. But can such resistance hold? Three key competitive drivers suggest that DSM, operated within the context of "managed energy care," will be unsustainable: (1) Technological changes in energy and conservation services work against scale economies (e.g., distributed generation; minitransmission grids; evidence that complex market transactions can be executed on large transmission grids2°; decentralized computer control of energy use); (2) Entrepreneurial initiatives (stimulated by prospects of
greater transmission access, and motivated by large price discrepancies among neighboring utilities); (3) Political interest groups emerging that favor market competition (e.g., cities, hospitals, shopping centers, school boards, independent power producers, and independent energy service companies21). While this paper has not focused on controversial retail customer choice (sometimes inappropriately simplified as retail wheeling) issues, connections between more choice for retail electricity customers and the survival of DSM are reasonably clear. Regardless of the specific market institutions and practices that e v o l v e , 22 n o proposed conservation programs can be funded using other people's mone~ regardless of the virtues found in doing
so by academics, regulators, utilities, or environmentalists. Further, programs cannot be monopolized by a utility or any other institution. We will have to await the evolution of market organizations and practices in this area to understand what will develop and who will provide services. Indeed, a great virtue of depoliticizing DSM and other energy management issues is the application of market incentives to capture information about the values and costs related to various proposals - - without asking ratepayers or taxpayers to underwrite the search. Toda~ utilities scramble to find missions that are compatible with an industry in which real choices are more widely available to consumers. Understanding thatbeing competitive is essential to their survival, utilities should take
As if in a dream, a vision of a revitalized, market-driven energy efficiency industry.
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a d i m view of current DSM (or any other social agenda) that requires t h e m to raise prices to one group of c o n s u m e r s in order to subsidize another. As the features of electric deregulation b e c o m e more concrete, customers will place more weight on gains from competition and therefore will be less sanguine a b o u t remaining regulatory barriers to market supply. O n e of those barriers is today's DSM. Perhaps market competition temporarily can be kept at b a y for a few years, b u t the costs of doing so are n o w more apparent. As participants see their aims furthered more b y supporting deregulation than b y opposing it, political debate will rapidly tip t o w a r d deregulation. Market-driven DSM will rise quickly to fill an important role in the industr~
This cost of dismantling DSM is well w o r t h bearing; it quickly will be displaced b y institutions and enterprises that will p e r f o r m far better for the consumer. MDDSM will m o v e far b e y o n d the confines of current DSM to a broader and deeper examination of energy issues, asking questions about the virtues of more as well as less energy use, and about who, a m o n g a variety of suppliers, can best provide desired services. While it is true that MDDSM provides no bias t o w a r d
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2. For two conflicting visions, see C. Bartsch and D. DeVaul, A Bright Idea for Industry, and D.A. Houston, A Losing Proposition for Consumers, PUB.UTIL. FORT.,May 1, 1993. 3. Richard Hirsh, an historian of the electricity industry, reminds me that DSM initially was not political handmaiden for environmentalists or any other group. On the other hand, it seems impossible to discuss DSM, as developed in the late 1980s and early 90s, without addressing the role of interest groups in designing a system of cross-subsidization, and then in protecting it against various potentially debilitating market incursions (such as retail wheeling). To understand well where DSM might be headed, it seems appropriate to consider the probable activities of such groups to use various regulatory instruments, such as DSM, for their own purposes. 4. DSM Seen as a Potent Competitive Tool in a Deregulated Environment, ELEC-
TRICUTILITYWEEK,May 16, 1994, at 17. 5. From a social efficiency perspective, reliance on unconstrained consumer choice also requires getting to energy prices that reflect opportunity costs -- one expectation of emerging competition in electric power.
VI. T h e D e a t h o f D S M : L o n g Live DSM? M a n y reasonable Americans believe that current DSM yields worthwhile savings of energy and prevents excessive environmental damage. But this j u d g m e n t is w r o n g if excluded market institutions and practices could d o better. The kind of conservation prom o t e d as D S M t o d a y is central planning that can play no role in a competitive p o w e r market. Instead, it has b e c o m e part of the political strategy to hinder market developments: Conservation obtained from DSM p r o g r a m s is "countable," a n d its disappearance is cited as hard evidence of avoidable loss if competition is kept from the c o n s u m e r ' s door.
the resurrection of the debate between Amory Lovins and Paul Joskow; Debating Negawatts, ELEC.J., May 1994.
conservation, it also provides no bias toward uneconomic energy use either. That is as it should be if efficiency is the objective: Let the economics of use or conservation be debated through the market process, with flexible market prices signaling relative scarcity or abundance. • Endnotes:
1. The empirical battle continues, with no evidence about benefits and costs of past programs capable of convincing either side. See, for example,
6. The works of Frederick Hayek and other economists who have addressed issues surrounding ownership and control of the firm and informational problems within the firm have influenced current managerial thinking and practice far more than is commonly acknowledged. Among current management gurus, Tom Peters is one of the few to acknowledge a debt to Hayek. See T. Peters, Liberation Management (Knopf, 1992). 7. Another justification is that public utility regulation often leads to electricity prices that are below marginal costs. However, in a competitive power market, the price-marginal cost gap would shrink - - and with it this defense for DSM. This rationalization
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is even less convincing in light of the large number of utilities now selling at prices above marginal cost. 8. More prosaically, individual rationality can be viewed as the capability of an individual to understand how to move from existing circumstances to a desired improvement in those circumstances ... and doing so. 9. Part of the uncertainty is due to the fundamental dynamics of any market: innovations are not wholly predictable, nor their applications. Inevitably, creativity rocks many boats ... and capsizes a few; this is the "creative destruction" that is part and parcel of markets. A fully informed marketplace, therefore, is hardly a meaningful policy objective.
that could jeopardize this price advantage. 17. The Great Retail Wheeling Illusion - - And More Productive Energy Futures, E SOURCE,Inc. (1994) at 9. 18. "Managed electric competition" looks much like "managed health care" in that consumer choice is limited in both - - no "retail wheeling" of medical care would be permitted either. In both, a political process defines the nature of basic and extended services that can be sought; others must be made illegal. In both, large subsidies remain in the pricing system in order to accomplish non-economic goals, and pricing is largely ignored as
10. E. Moscovitch, DSM and the Broader Economy, ELEC.J., May 1994, at 26.
13. Id., at 55.
a rationing device. And in both, large bureaucracies are needed to ensure desired performance of the system.
14. Controversial BPA Restructuring Hits New Snag, ENERGYDAILY,May 11, 1994.
19. INDUSTRIAL ENERGY BULL., March
15. D. Kaplan, Northwest Considers (DSM) Revolution, ENERGYDAILY,Dec. 20, 1993. 16. For example, in New York, a modified DSM "opt out" provision was enacted in the Niagara Mohawk case two years ago. Here, industrial rates were above the national average. In other states with fairly low industrial rates, such as Kentucky, regulators have been cautious about engaging utilities in large-scale DSM programs
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21. An example of the growing force of retail consumers to leverage themselves into the market is the attempt by 30 school districts on Long Island, New York, to buy power from other than their franchised supplier, LILCO. Banding together to buy around LILCO is predictable given the large savings that could result. These consumers have enlisted the aid of a middleman, Wheeled Electric Power Co., to solicit bids from the wholesale market for a percentage of the savings.
See Coalition Seeks OK to Buy Low-Cost Power, NEWSDAY, at 21.
11. Forecasts for uncommitted DSM (e.g., the programs not yet committed) are shown in PG&E's filing of July 1, 1993 to the CEC. An analysis of the PG&E programs proposed for the 1994 Electricity Report (Docket No. 93-ER94) compared to the 1992 report is made in the rebuttal testimony of William Monsen on behalf of Independent Energy Producers Assn. on Dec. 10, 1993. 12. Order Instituting Rulemaking and Order Instituting Investigation, Public Utilities Commission of the State of California, April 20, 1994.
ences in Great Britain and the growing debate over transmission issues instigated by the CPUC order of April 20, 1994, suggest that market-oriented innovations in pricing and in ownership structure can dismantle this notion of monopolistic control.
25, 1994, at 10. 20. Much of the debate about the nature of electricity competition centers on issues of access to, and management, pricing, and ownership of transmission and distribution assets. While beyond the scope of this paper, the connections to DSM are clear enough. If transmission and distribution must remain monopolized, presumably so must energy control programs, as the environmentalist version of utility-asportfolio manager suggests. Experi-
22. Many contractual constraints may be negotiated that place new risks on consumers. In addition, transmission access cannot be a political right for users, if markets in power are to thrive. Perhaps the next step in market evolution will be toward voluntary merging of the individual transmission assets owned by utilities into larger group-owned organizations. Reasons for doing so are to promote effective operation, control, and development of transmission capital and, at the same time, to deflate the incentive of individual transmission owners to use their position to bargain opportunistically. See D.A. Houston,
Toward Resolving the Access Issue: UserOwnership of Electric Transmission Grids, REGULATION,Winter 1991/2. On the other hand, a plan floated by Southern California Edison and San Diego Gas & Electric Company for a regional "Poolco" that would function in a substantially deregulated market (per the California proposal) was not greeted enthusiastically by some nonutility power marketers, perhaps because they fear that utility collusion, extensive regulation, or eventual nationalization of the grid could result. See Mary O'Driscoll, "Stick to Your Guns,' Skilling Tells CPUC, ENERGY DAILY,June 16, 1994.
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Douglas Houston is professor of business economics and Koch Industries faculty Fellow at the University of Kansas. He has written and spoken often on matters involving energy efficiency and its infrastructure.
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the language of market economics. The viability of DSM in the 1990s and beyond rests, first, on a prediction of whether a substantially deregulated industry will evolve and, second, a judgment about DSM's fit with the intensified competition in power markets should such markets evolve. Admittedl}~ any prediction of industry structural change is uncertain. But if competition emerges, there is little doubt that market participants - - not politicians and interest groups - - will redefine institutions, including DSM. To its many defenders, DSM programs are well suited to a new
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competitive environment, capable of providing essential strategic advantages for utilities as they struggle to survive. But can DSM be transformed from a commandand-control instrument to a market-based tool? What, precisel)4 might DSM m e a n in the new environment? This article attempts to address these points. It concludes that the changes coming to the industry are so profound that it is misleading to even refer to the emerging energy services industry as DSM, unless the term is modified to underline the vast conceptual differences in contextual settings. Perhaps marketdriven DSM (MD-DSM) will do for this purpose. Summary comparisons of current-day DSM to what it might become in a competitive marketplace are shown in Table 1, which also serves as a reference to points in the article.
I. W h e n M a r k e t s M e e t D S M It is helpful to retain the defining elements of present-day DSM in order to distinguish it from MD-DSM. Otherwise essential changes needed in DSM are slighted, producing confusion about the nature of a competitive process and the activities and institutions that are compatible with it. While today's DSM may have arisen as a set of pragmatic prescriptions on h o w to dampen load and usage, it also has been and remains essentially a political tool, engaging utilities in a social agenda advocated primarily by environmentalists; it also is a command-control, non-market tool in large measure. November 1994
At present, utility DSM programs prescribe and subsidize home, office, and factory conservation investments; the revenue to cover incentive payments to adopters, utility DSM-related expenses, and "lost revenue" recovery (due to lower usage of electricity) are gathered through revenues collected from all customers, not just the ones benefiting directl)a This cross-subsidization (internal taxation) is possible because regulators can set prices and exclude entrants. The political clout of regulators underwrites about two billion dollars a year in customer-borne DSM expenditures. 3 Although DSM advocates judge most of these pro-
grams successful, yielding large net societal returns they say would have been passed over otherwise, it's dear that unsubsidized market transactions would not confirm that conclusion - - the mix and timing of investments would differ greafl3a Thus, DSM today is predicated upon market failures - - failures in making the types of energy conservation investments that planners would have made. Transformation of DSM programs into competitive, marketoriented instruments means more than a change in intent by regulators and utilities. Structural changes in the industry will include a DSM metamorphosis, con-
Table 1: Comparison of Current-Day DSM to DSM in a Competitive Market Current DSM
Market-Driven DSM
Explicit subsidies given?
Significant incentives to adopters, paid from general revenue requirements.
None ... or few directed at informing, not directing.
Implicit subsidies given?
Closed retail markets exclude DSM must compete with many choices, including use of numerous substitutes in potentially lower-priced energy. market, including potentially lower-priced energy to end users,
Programs target
Conservation of energy resources.
All resources, and could promote additional energy use as easily as energy conservation.
Measurement (test) of effectiveness
Regulators' attempts to establish objective benefits, costs, and risks; market choices presumed to be in error.
Accumulation of market decisions by users, predicated upon subjective appreciation of benefits, costs, and risks; market presumed not to err.
Entrepreneurial, marketing elements
Few; programs are defined in political arena,
Many; programs must anticipate consumer demands.
A strategic political weapon for utilities?
Yes; argument of utility economies of scale or scope (utililty-as-portfolio manager) becomes appeal to exclude alternative providers.
No; greater control of energy use by consumers works against the natural monopoly argument and diminishes opportunities for political intervention by all providers.
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sistent with an expansion of retail consumer opportunities to select energy supply and demand control programs. DSM makes economic sense: It can serve as a "competitive tool" for any provider, if the advantages it confers are due to real cost advantages held by the provider and are acknowledged by the consumer through his market selections. Competitive advantages cannot be based on establishing regulatory impediments to market options - - a "managed" competition. Thus, if DSM is marketdriven, it will face broad entrepreneurial challenges that are stimulated by end-user choice. Under these circumstances, most of the trappings of current-day DSM will vanish, as services are redefined in the context of such challenges. he primary distinction between today's and tomorrow's demand-side management will be the return of responsibility for economic decisions in energy matters to consumers, realigning incentives to invest in energy-using capital with the ownership of that capital. This is a fundamental component of a workable market process in any industry; to deny that it can or should be done for DSM amounts to a denial of a meaningful industry deregulation. A useful way to look at MDDSM in a competitive marketplace is from a consumer's pragmatic perspective: Is net value added by participating in a program purporting to assist in controlling energy use? Undoubtedl~ some ventures on the
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information superhighway hold the potential for doing just that and will expand greatly as the technology is dispersed among potential users. For example, Entergy Corporation's plans to install the fiber optic-based "Powerview" load management system to extend residential load control in 10,000 residences may be very useful as consumers see it. Knitting these technological advances in with industry restructuring, Karl Rabago of the Texas Public
D S M makes economic sense: It can serve as a "competitive tool"for any provider, if the advantages it confers are real.
Utility Commission has noted, "The future of regulation is deregulation, and in an unregulated market DSM and load management are the ultimate competitive tool. ''4 Market-driven DSM, I presume. The supporters of a new, sleeker version of DSM, regeared to cruise on the information superhighwa~ often focus on the energy savings aspects of the information technologies - - as delivered by the utilit~ But the "how" and "who" of such technology are yet to be determined in a competitive marketplace, and
a major rethinking of fundamental issues is likely. For example, assistance to consumers in making investments that call for more energy use, not always less, is part of MD-DSM. s Fuel-switching and electricity-supplier switching options also could be components of energy control packages; such program features are incompatible with many conventional DSM programs toda~ If detailed information about a consumer's energy uses and supply options can be gleaned from an information network, it can be put into that consumer's hands to be acted upon (perhaps with the aid of user-friendly software). Decentralized energy management makes sense when this specific technical knowledge can be harnessed to an individual's considerable tacit knowledge about how his home or business operates. In current DSM this knowledge - by nature not readily transferable - - is sacrificed, supplanted by rigid behavioral assumptions which increase the risks of making mistakes in evaluating DSM programs. II. M a r k e t - D r i v e n A p p r o a c h e s to M a n a g i n g
Decentralized, market-based approaches to management are now being hailed as essential to success in a dynamically competitive environment. A trend in American business is to place decisionmaking authority deeper into organizations (through profit centers, intemal markets, and team empowerment, to name a few approaches). Individuals are vested The Electricity Journal
with greater authority to act in areas where they have considerable tacit knowledge. A fundamental component of market-driven management approaches (which distinguishes them from other management reforms) is the deliberate linkage of actions taken by managers and teams to the long term impacts of those actions, either by a more formal sense of property rights (as with profit centers), or by making managers into claimants on their measured results (as in pay-for-performance). The decision-maker, therefore, has a direct incentive to use his cumulative knowledge purposefully and creatively for value creation, assuming that the measurement of the individual's or group's performance is consistent with increasing the organization's value. Importantl}~ these market-oriented changes also reduce the illtering and distorting of information that is typical in hierarchies. 6 pplying this reasoning to electric power markets, consumers of DSM services can become "empowered" managers too: They already have incentives as owners of the capital in which they invest and can count on improved quantity and quality of energy data in the future. Regulation which distorts information and incentives to the user can be removed. A possible argument against an open competition for DSM services is that economies of scale in information technologies might make the utility a natural monopoly provider of high-tech communications gear and services. Such
superiority should be demonstrable in an unregulated environment; it need not be assumed. Single supplier dominance seems inconsistent with developments in information network services to date, and public policy now favors greater telecommunications competition in most spheres. For example, traditional local telephone services face formidable competition, both present and potential: Cable systems, competi-
Many market failure arguments made for DSM could support regulation of other consumer markets, where we would not think of imposing them.
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tive alternate providers, private networks, and wireless systems all substitute (and complement) to some extent for the services of local exchange companies. The coming multi-media, interactive network(s) could support numerous end-use services, and the efforts of utilities cannot be isolated from this broader evolution. Market-driven demand-side management probably will be part of a big information parade, but only a small part. As a practical matter, monopolizing any aspect of DSM information services will become
increasingly unlikely if open communications networks emerge. III. Is D S M Efficient?
Against the backdrop of a competitive energy market, the current form of DSM cannot survive. Many observers, however, believe otherwise. Although it seems w e should be able to evaluate DSM effectiveness in ways agreeable to all, that common framework has not been found - - for good reason. The essential problem with attempting to measure DSM benefits and costs today in an "objective" sense is that there are no obvious benchmarks for value, absent reliance on market choices. And market decisions are not examined as a reflection of DSM value because DSM's very existence presupposes that consumers' market choices about conservation investments are inferior. The standard defense of DSM on economic grounds begins by assuming deep flaws in consumer rationality, barriers to information, or the underpricing of electricity; these are suggested to lead to a pattern of conservation underinvestment in the marketplace. 7 Yet energy conservation markets are similar to many other durable good markets which are not regulated, such as in computers, autos, and, perhaps, even education. In each, the future-returns stream is long, and uncertainty is largely due to a set of circumstances unique to that individual, household, or business. Many market failure arguments made for DSM apply (or do not apply) equally as a rationale for broad-based regula49
tion of other consumer markets, where we would not think of imposing them. Certainl~ m a n y investment decisions taken in the marketplace are complex, and risk}~ but describing reality does not change it - - one must also demonstrate a convincing alternative that yields better decisions. Some would say that current-day DSM is such an instrument. Shifting investment decisions from a consumer, who has property rights over the investment capital and, for that reason, an obvious motive to try to understand problems and opportunities related to "his" investment, to a planner, who necessarily acts with less understanding of the consumer's circumstances and preferences and no direct incentive to become so informed, is a troubling aspect of today's DSM. n the other hand, the typical user's limited understanding about the consequences of his actions might be much improved by providing better technical information and decision tools. These are tasks that a utility or energy service company might undertake with some success in a competitive market environment. This prediction rests on the expectation of increased profits (absent price and profit regulation) acting to motivate the supply of an improved quality of service - - including better information. Quite a bit of empirical evidence suggests that consumers (especially households) invest very little in many conservation projects unless they yield high implicit returns. This is not necessar-
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ily an indictment of individual rationality,s Instead, high-risk premiums often reflect uncertainties related to the consumer's specific circumstances - - an individual is not an average, after all. Risk premiums could be reduced and energy investments stimulated by whomever can provide: (a) better individual-specific information on energy uses; (b) tools by which this information can be inter-
Market information is inherently incomplete, and the consequent uncertainty will always keep many seemingly attractive conservation investments from being made.
preted; and (c) marketing packages that can "frame the investment bet" in such a way that effident investments are seen as attractive to users who are risk adverse. Market-driven DSM certainly can assist in all three areas. As an example, suppose that information suggests that an individual is under-investing in conservation by not insulating more - - perhaps because he cannot easily make sense of a jumble of data. However, this consumer probably could comprehend that hiring a consultant to analyze the e c o -
nomic and technical potential in a situation could pay off handsomel}z Also, MD-DSM providers, given access to the consumer's energy information, might fashion risk-arbitrating proposals. The user might contract with a provider for the installation and maintenance of energyconserving capital in return for little cash down, but with the seller receiving a contingent claim on lower future utility bills resulting from the investment. This presumes, of course, that a linkage between new capital and lower energy costs can be monitored practically. Yet even if this contract is not feasible, there should be ways to package energy management services that are attractive to the consumer. The bottom line is simply this: If improving information technologies reduces the cost of gaining knowledge, this is understandable by a number of firms and individuals; it need not be all firms and individuals in order for markets to form that can that use this knowledge profitabl3a 'arket-driven DSM may re.main unpalatable to those who find market barriers so unyielding that only a well-armed regulator can blast through. In fact, information in a market setting is inherently incomplete9 and the consequent uncertainty will always keep many seemingly attractive conservation investments from being made. However, little that regulators, utilities, or their consultants do eliminates most causes of uncertainties. These lie in such concerns as the prices of
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electricity and its substitutes, the lifestyle of the user, or the predicted throughput and product mix of a manufacturing plant. Ignoring consumers' assessments of risks, which is implicitly done with subsidized DSM, redistributes costs away from users to the many consumers who are forced to fund these projects. More ominousl~ another risk is incurred: The regulation necessary to accomplish the redistribution is incompatible with market institutions that substitute for regulation. Thus, if more value is created by having those market institutions, then DSM imposes an opportunity cost. et current DSM is seen by many as both a costless resource and as part of a competitive movement in electricit~ Edward Moscovitch writes, in evaluating the macro-economic effects of DSM, "The environmental and welfare benefits of DSM are unambiguous - - reduced use of electricity means lower emission levels and the reduction in the overall cost of electric energy leads to higher levels of consumption of other goods and services. ... There is no economic cost to such investments. ''1° Neither plausible economic theory nor compelling empirical evidence supports this view in the current industry environment - but that may not be the appropriate context in which to evaluate DSM, in any event. As greater market competition enters the industry, conservation services cannot be excluded. There is irony (not to mention a logical contra-
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diction) posed by an increasingly competitive industry - - shaped by expanding energy supply choices - - and the same industry, continuing to distort consumers' decisions about energy-saving investments that are often substitutes for that energ~
IV. Current Disquiet The inexorable force of competition quickly demonstrates the impossibility of isolating DSM from other types of energy decisions
The inexorableforce of competition demonstrates the impossibility of isolating DSM from other types of energy decisions.
made by consumers. California, the incubator for DSM, provides interesting examples. In 1993 testimony before the California Energy Commission hearings on "uncommitted DSM forecasts," Pacific Gas and Electric Co., the nation's largest DSMer, slashed its longer-term forecasts of energy and demand savings from DSM. Additionall~ PG&E's plans reflect far more "dispatchable load management" (interruptible service) than in prior forecasts. This switch may function more as a means of giving disguised price concessions to industrial consum-
ers than of conserving energ3a Although PG&E management indicates that they remain committed to DSM, their longer-term view of DSM is far less optimistic than it was two years prior, n That picture is made bleaker by the April 20,1994 proposal by the California Public Utility Commission (CPUC) outlining a deregulated industry in which retail consumers would have direct supply choices32 For retail electricity consumers in California who exercise choice, the proposal states: "The utility is free to offer energy efficiency services to direct access consumers; however, just as will be the case for generation services, it may not finance these programs through rates charged to utility service consumers. "13 In other words, in a competitive (direct access) market, California regulators are proposing pulling the plug on conservation subsidies. Remaining programs must meet a market test. nother example of DSM collapse on the West Coast comes from the Bonneville Power Administration. BPA has proposed eliminating all conventional DSM from its resource acquisition program, suggesting instead that it unbundle services and offer DSM as a direct, billable service. The BPA is one of the most experienced and savvy DSMers in the nation, and as a result its actions have unsettled environmentalists. 14 The seeming causes of BPA's altered views on DSM are the same set of factors faced by utilities everywhere: (a) markets are under at-
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tack by low cost independent power producers, operating in a more competitive industry from which retail consumers will not be excluded; and (b) DSM programs cause utilities to raise prices, putting utility providers in a competitive squeeze. Although dearly distressed at the harm done by competition to utility-directed conservation, the Northwest Power Planning Council, which oversees planning for the region, echoes BPA's assessment. 15 This serves as a cautionary tale for those who believe that DSM has been "institutionalized" in the U.S. Even in environmentalist strongholds, DSM comes under fire quickly when competitive forces work against it. The pace of that attack is accelerating. 'n other states, the attack on .DSM has generally been led by the large industrial users. Energy-intensive firms face competitive disadvantages when DSM surcharges are stuck on them that do not affect competitors in other (non-DSM subsidizing) states. These price-sensitive consumers often have other options at hand, including self-generation of electricity, movement of work, and, now, direct competitive sourcing, as states such as California begin deregulation. Their concerns are taken seriously by utilities, which hesitate to saddle industrial consumers with unwanted DSM programs. 16 ELCON, the principal trade association of large industrial energy users in the U.S., has been a leading critic of DSM. Until recently, ELCON argued that all 52
DSM programs should be evaluated on criteria similar to that applied to utility supply programs. Now, it has seemed to move toward a market justification of DSM, apparently in the belief that retail competition will be thrust into the industry in any event and that this cannot occur without upending the underlying exclusive franchising system and, with it, DSM. Put another way, these consumers fear that unless they become more aggressive in demand-
ing market choices for both supply and conservation service, they will get rhetoric about "least cost" service rather than the reality of lower prices.
V. Managed Competition as a Replacement for Market Competition? As the above suggests, DSM is becoming a target of dissatisfied utilities, consumers, and even regulators. Each contemplates an industry with substantially more competition and finds subsidized
DSM an anomal~ Thus, those who view current DSM as an essential component of any future electric industry are left to ponder how a DSM funding mechanism can be retained. ne answer is "managed competition," in which each utility remains a distributionlevel monopolist over captive retail consumers. According to one environmentalist report, "Many of today's regulators have been responding, at least implicitl)~ to the natural monopoly characteristics of utilities' portfolio management function .... Those who need additional energy services and those best positioned to achieve improved efficiencies often will be different and widely separated entities; no institution has rivaled utilities in their capacity to bring both groups together for mutual advantage. "17 In this view, presumably; competition will be kept at a discrete distance from consumers (only wholesale trade is voluntary), and the utility is permitted to play the role of "portfolio manager," judiciously pitting demand- and supply-side resources against one another, unimpeded by saber-rattling consumer demands for lower prices. Today's DSM might survive, if not prosper, in such a managed competition (regulated) environment.TM The importance of eliminating retail customer choice is well recognized by environmentalists as the key to saving DSM. Thus, the Natural Resource Defense Council has mounted an aggressive campaign to get state utility commissioners to "just say no" to re-
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tail choice, and recently a lobbying consortium of environmental and consumer groups opposing retail consumer choice has formed. 19 They understand well the dangers that an open marketplace in energy poses for the social agenda that is today's DSM. But can such resistance hold? Three key competitive drivers suggest that DSM, operated within the context of "managed energy care," will be unsustainable: (1) Technological changes in energy and conservation services work against scale economies (e.g., distributed generation; minitransmission grids; evidence that complex market transactions can be executed on large transmission grids2°; decentralized computer control of energy use); (2) Entrepreneurial initiatives (stimulated by prospects of
greater transmission access, and motivated by large price discrepancies among neighboring utilities); (3) Political interest groups emerging that favor market competition (e.g., cities, hospitals, shopping centers, school boards, independent power producers, and independent energy service companies21). While this paper has not focused on controversial retail customer choice (sometimes inappropriately simplified as retail wheeling) issues, connections between more choice for retail electricity customers and the survival of DSM are reasonably clear. Regardless of the specific market institutions and practices that e v o l v e , 22 n o proposed conservation programs can be funded using other people's mone~ regardless of the virtues found in doing
so by academics, regulators, utilities, or environmentalists. Further, programs cannot be monopolized by a utility or any other institution. We will have to await the evolution of market organizations and practices in this area to understand what will develop and who will provide services. Indeed, a great virtue of depoliticizing DSM and other energy management issues is the application of market incentives to capture information about the values and costs related to various proposals - - without asking ratepayers or taxpayers to underwrite the search. Toda~ utilities scramble to find missions that are compatible with an industry in which real choices are more widely available to consumers. Understanding thatbeing competitive is essential to their survival, utilities should take
As if in a dream, a vision of a revitalized, market-driven energy efficiency industry.
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a d i m view of current DSM (or any other social agenda) that requires t h e m to raise prices to one group of c o n s u m e r s in order to subsidize another. As the features of electric deregulation b e c o m e more concrete, customers will place more weight on gains from competition and therefore will be less sanguine a b o u t remaining regulatory barriers to market supply. O n e of those barriers is today's DSM. Perhaps market competition temporarily can be kept at b a y for a few years, b u t the costs of doing so are n o w more apparent. As participants see their aims furthered more b y supporting deregulation than b y opposing it, political debate will rapidly tip t o w a r d deregulation. Market-driven DSM will rise quickly to fill an important role in the industr~
This cost of dismantling DSM is well w o r t h bearing; it quickly will be displaced b y institutions and enterprises that will p e r f o r m far better for the consumer. MDDSM will m o v e far b e y o n d the confines of current DSM to a broader and deeper examination of energy issues, asking questions about the virtues of more as well as less energy use, and about who, a m o n g a variety of suppliers, can best provide desired services. While it is true that MDDSM provides no bias t o w a r d
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2. For two conflicting visions, see C. Bartsch and D. DeVaul, A Bright Idea for Industry, and D.A. Houston, A Losing Proposition for Consumers, PUB.UTIL. FORT.,May 1, 1993. 3. Richard Hirsh, an historian of the electricity industry, reminds me that DSM initially was not political handmaiden for environmentalists or any other group. On the other hand, it seems impossible to discuss DSM, as developed in the late 1980s and early 90s, without addressing the role of interest groups in designing a system of cross-subsidization, and then in protecting it against various potentially debilitating market incursions (such as retail wheeling). To understand well where DSM might be headed, it seems appropriate to consider the probable activities of such groups to use various regulatory instruments, such as DSM, for their own purposes. 4. DSM Seen as a Potent Competitive Tool in a Deregulated Environment, ELEC-
TRICUTILITYWEEK,May 16, 1994, at 17. 5. From a social efficiency perspective, reliance on unconstrained consumer choice also requires getting to energy prices that reflect opportunity costs -- one expectation of emerging competition in electric power.
VI. T h e D e a t h o f D S M : L o n g Live DSM? M a n y reasonable Americans believe that current DSM yields worthwhile savings of energy and prevents excessive environmental damage. But this j u d g m e n t is w r o n g if excluded market institutions and practices could d o better. The kind of conservation prom o t e d as D S M t o d a y is central planning that can play no role in a competitive p o w e r market. Instead, it has b e c o m e part of the political strategy to hinder market developments: Conservation obtained from DSM p r o g r a m s is "countable," a n d its disappearance is cited as hard evidence of avoidable loss if competition is kept from the c o n s u m e r ' s door.
the resurrection of the debate between Amory Lovins and Paul Joskow; Debating Negawatts, ELEC.J., May 1994.
conservation, it also provides no bias toward uneconomic energy use either. That is as it should be if efficiency is the objective: Let the economics of use or conservation be debated through the market process, with flexible market prices signaling relative scarcity or abundance. • Endnotes:
1. The empirical battle continues, with no evidence about benefits and costs of past programs capable of convincing either side. See, for example,
6. The works of Frederick Hayek and other economists who have addressed issues surrounding ownership and control of the firm and informational problems within the firm have influenced current managerial thinking and practice far more than is commonly acknowledged. Among current management gurus, Tom Peters is one of the few to acknowledge a debt to Hayek. See T. Peters, Liberation Management (Knopf, 1992). 7. Another justification is that public utility regulation often leads to electricity prices that are below marginal costs. However, in a competitive power market, the price-marginal cost gap would shrink - - and with it this defense for DSM. This rationalization
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is even less convincing in light of the large number of utilities now selling at prices above marginal cost. 8. More prosaically, individual rationality can be viewed as the capability of an individual to understand how to move from existing circumstances to a desired improvement in those circumstances ... and doing so. 9. Part of the uncertainty is due to the fundamental dynamics of any market: innovations are not wholly predictable, nor their applications. Inevitably, creativity rocks many boats ... and capsizes a few; this is the "creative destruction" that is part and parcel of markets. A fully informed marketplace, therefore, is hardly a meaningful policy objective.
that could jeopardize this price advantage. 17. The Great Retail Wheeling Illusion - - And More Productive Energy Futures, E SOURCE,Inc. (1994) at 9. 18. "Managed electric competition" looks much like "managed health care" in that consumer choice is limited in both - - no "retail wheeling" of medical care would be permitted either. In both, a political process defines the nature of basic and extended services that can be sought; others must be made illegal. In both, large subsidies remain in the pricing system in order to accomplish non-economic goals, and pricing is largely ignored as
10. E. Moscovitch, DSM and the Broader Economy, ELEC.J., May 1994, at 26.
13. Id., at 55.
a rationing device. And in both, large bureaucracies are needed to ensure desired performance of the system.
14. Controversial BPA Restructuring Hits New Snag, ENERGYDAILY,May 11, 1994.
19. INDUSTRIAL ENERGY BULL., March
15. D. Kaplan, Northwest Considers (DSM) Revolution, ENERGYDAILY,Dec. 20, 1993. 16. For example, in New York, a modified DSM "opt out" provision was enacted in the Niagara Mohawk case two years ago. Here, industrial rates were above the national average. In other states with fairly low industrial rates, such as Kentucky, regulators have been cautious about engaging utilities in large-scale DSM programs
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21. An example of the growing force of retail consumers to leverage themselves into the market is the attempt by 30 school districts on Long Island, New York, to buy power from other than their franchised supplier, LILCO. Banding together to buy around LILCO is predictable given the large savings that could result. These consumers have enlisted the aid of a middleman, Wheeled Electric Power Co., to solicit bids from the wholesale market for a percentage of the savings.
See Coalition Seeks OK to Buy Low-Cost Power, NEWSDAY, at 21.
11. Forecasts for uncommitted DSM (e.g., the programs not yet committed) are shown in PG&E's filing of July 1, 1993 to the CEC. An analysis of the PG&E programs proposed for the 1994 Electricity Report (Docket No. 93-ER94) compared to the 1992 report is made in the rebuttal testimony of William Monsen on behalf of Independent Energy Producers Assn. on Dec. 10, 1993. 12. Order Instituting Rulemaking and Order Instituting Investigation, Public Utilities Commission of the State of California, April 20, 1994.
ences in Great Britain and the growing debate over transmission issues instigated by the CPUC order of April 20, 1994, suggest that market-oriented innovations in pricing and in ownership structure can dismantle this notion of monopolistic control.
25, 1994, at 10. 20. Much of the debate about the nature of electricity competition centers on issues of access to, and management, pricing, and ownership of transmission and distribution assets. While beyond the scope of this paper, the connections to DSM are clear enough. If transmission and distribution must remain monopolized, presumably so must energy control programs, as the environmentalist version of utility-asportfolio manager suggests. Experi-
22. Many contractual constraints may be negotiated that place new risks on consumers. In addition, transmission access cannot be a political right for users, if markets in power are to thrive. Perhaps the next step in market evolution will be toward voluntary merging of the individual transmission assets owned by utilities into larger group-owned organizations. Reasons for doing so are to promote effective operation, control, and development of transmission capital and, at the same time, to deflate the incentive of individual transmission owners to use their position to bargain opportunistically. See D.A. Houston,
Toward Resolving the Access Issue: UserOwnership of Electric Transmission Grids, REGULATION,Winter 1991/2. On the other hand, a plan floated by Southern California Edison and San Diego Gas & Electric Company for a regional "Poolco" that would function in a substantially deregulated market (per the California proposal) was not greeted enthusiastically by some nonutility power marketers, perhaps because they fear that utility collusion, extensive regulation, or eventual nationalization of the grid could result. See Mary O'Driscoll, "Stick to Your Guns,' Skilling Tells CPUC, ENERGY DAILY,June 16, 1994.
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