DSM in the Doghouse?

Last April's dramatic announcement by the California Public Utilities Commission (CPUC) that it would revamp the way it regulates energy utilities sent shock waves throughout the industry. Consumers would have "direct access" to electric power. Like the airlines and telephone companies, utilities would be deregulated. On Wall Street, the value of California's investor-owned utilities fell by $2 billion.

"We are single-minded in our objective to lower the cost of electric service to California's residential and business consumers," CPUC commissioners stated in their proposal.

The future of electric services in California is far from decided, however, and the CPUC's plan may not be implemented any time soon. Still, some observers fear that a new era of "competition" will kill utility demand-side management (DSM) programs. "DSM in California is circling the drain," says Gene Coyle, senior analyst with the San Francisco-based consumer group Toward Utility Rate Normalization (TURN).

Amory Lovins of the Rocky Mountain Institute calls the CPUC's plan a "Richter-8 earthquake" in utility regulation. Already, utilities throughout the country are preparing for an era of increased competition by downsizing, and among other things, scaling back their DSM programs. California's utilities plan to cut their energy efficiency budgets by nearly $200 million this year.

The New World

The 1994 "Order Instituting Rulemaking on the Commission's Proposed Policies Governing Restructuring California's Electric Service Industry and Reforming Regulation" (known as the "Blue Book," for its blue cover) would first allow large industrial users to have "direct access," to competitive power markets (also called "retail wheeling") starting in 1996. Eligibility to tap these markets would expand over the next six years with smaller industrial users eligible in 1998 and small businesses eligible in 1999. Finally in 2002, all consumers who wanted it would have direct access to competitive markets.

Meanwhile, "performance-based" regulation would replace traditional utility regulation. Rather then having their earnings be based on capital expenditures and recovery of expenses, utilities would be rewarded for "efficient operations," management, and investment.

In the new world, the power market would be divided into two sectors: direct access--where customers would buy from their supplier of choice and the utility service sector, where customers would continue to buy from the local utility at regulated rates.

In theory, an active electricity spot market would develop, along with new tailored products and services. Electricity would be priced as a commodity, and services such as transmission and distribution would be "unbundled" from the power rates, appearing as a separate service on utility bills. Similarly, energy efficiency services might be optional, and billed for separately.

Customers would pay an up-front fee to the utility for access to the power grid and would then choose a generation supplier from a group that would include independent power producers and the utility itself, based on posted prices per kWh. The discipline of the market would set rates, and prices would drop.

Consumer advocates are concerned that, among other things, during the market transition, utilities--who would continue to provide transmission and distribution services to customers--would be protected from former investments in power generation assets, so-called stranded investments that proved uneconomic (for instance old nuclear power plants). The Blue Book proposes that customers pay jilted utilities a competition service charge to cover transition costs.

Good-bye Energy Efficiency?

For advocates of energy efficiency, a fundamental concern is that utility profits may once again be linked to the amount of electricity they sell, eliminating the utilities' incentive to promote conservation. Additionally, the Blue Book proposes that "direct access" customers pay an expensive fixed service charge, which could not be reduced by saving energy.

As Kenneth Gudger, vice president for energy efficiency at Southern California Edison, told CPUC members at a hearing last summer, "Energy efficiency as we know it today will wither away under the competitive marketplace described in the Blue Book. Simply put, we must find a way to preserve energy efficiency before we move into some direct access system."

The Blue Book would call for the CPUC to abandon policies which promote integrated resource planning in favor of a "let-the-market-decide" policy for investment in electric generation services. Issues such as what long-term role utilities should have in social programs, such as the promotion of clean-cars, are up in the air.

The prediction of James Newcomb, the president of E-Source, is that the move toward a more competitive electric power market holds the potential to promote development of an energy-efficiency services industry that is more creative in conceptualizing and packaging services. "We're not as pessimistic (about DSM's future) as some observers," he says.

Newcomb expects a new industry to emerge, building upon the lessons learned from increasingly refined DSM delivery mechanisms. He cites, as examples, financing approaches used by PacifiCorp and Southern California Edison that incorporate sophisticated service-packaging and marketing approaches--programs with little rate impact, financed through participating customers' utility bills.

Newcomb predicts that competition will lead to the emergence of a new class of energy services company--the "super ESCO"--national and international in scope, with technically deep capabilities to deliver energy savings for buildings and processes. ESCOs have largely focused on serving utilities as customers instead of serving end-users as customers, but this may change as they acquire more specialized expertise, he says.

David Goldstein, energy program manager at the Natural Resources Defense Council, is optimistic about the situation, but for slightly different reasons. "Retail wheeling as it's proposed in California would devastate DSM," he says. "However, retail wheeling isn't going to happen."

Retail wheeling won't happen because it would cause severe procedural gridlock, says Goldstein, noting that the U.S. Department of Energy and California's legislature both question whether the CPUC has the jurisdiction to implement the Blue Book. "There are so many obstacles, it can't be implemented," he says. Unfortunately, some utilities are acting like retail wheeling is a foregone conclusion, Goldstein observes.

One widely held view is that even if utility-subsidized energy efficiency programs are on their way out in California, it won't mean the end of energy efficiency. "The incentive for individual customers to invest in energy efficiency on their own is greater than ever, simply because rates are so high," says Mike Florio, TURN's senior attorney.

"There's been a very sad development in terms of energy-efficiency programs being equated with utility DSM programs," says Florio. "It's sort of like easy and fast money. People have forgotten that you can do these things without relying on the utility. The 800-pound gorilla may be getting out of the game, but the game isn't over."