[BETA] Fortnightly

Over the last decade, the Total Resource Cost

(TRC) test has become the dominant method of comparing the costs and benefits of demand-side management (DSM) programs. Yet the TRC test fails to recognize the negative rate impacts from reduced kilowatt-hour consumption. DSM advocates argue that more extensive DSM programs will compensate for this flaw. If all customers have an opportunity to participate in a DSM program, they claim, customers' total bills will fall in spite of rising rates that pay for the DSM investments. This argument rings hollow in an electric industry increasingly governed by market forces. The price increases needed to pay for large-scale DSM programs will undermine a utility's competitive position in that market.

Some jurisdictions are attempting to address this issue by requiring a Ratepayer Impact Measure (RIM) test that eliminates programs with any meaningful impact on sales. Several proposals have sought a middle ground between TRC and RIM, but these proposals tend to be short on tangible techniques to assist regulators in screening programs. They typically require the quantification of unquantifiable theoretical variables, adding an additional layer of uncertainty to an already uncertain analysis.

The true value of DSM remains its potential to defer a utility's need to add capacity, and thus save the cost of additional resources. All else equal, deferring capacity will lower revenue requirements and result in lower long-term rates. The standard for cost-effective DSM programs should ask whether the value of the capacity deferral is greater or less than the cost of the DSM program. A DSM investment should only be undertaken if the direct costs are less than the costs of the alternative supply-side resource. By contrast, the TRC includes the stream of energy cost savings over the life of the DSM technology as an additional benefit. Certain programs can pass a TRC test analysis because of their avoided energy costs, even though they have minimal impact on deferral of capacity. If cost-effectiveness is measured by TRC, even utilities with excess capacity will be required to make substantial investments in conservation programs. These programs benefit participating customers but lead to unnecessary rate increases to the detriment of all others. The illogic of this outcome is even clearer when viewed in the context of a more competitive electric industry where the negative consequences of rate increases will be further magnified. The TRC test also does not recognize that in that competitive marketplace, the kilowatt-hours saved through DSM will likely be resold.

A More Accurate Test

I propose that regulators exclude from the analysis any costs or benefits that do not directly affect long-term revenue requirements or provide some other direct benefits to nonparticipating customers. Let's call this test the Revised Utility Cost (RUC) test.

Figure 1 breaks out the costs and benefits of the various tests currently used in DSM program evaluation, as well as the RUC. These tests recognize four types of DSM program costs: the utility's program costs (administrative and promotional), utility incentive payments, net participant costs, and the revenue loss from reduced kilowatt-hour consumption. Note carefully the disaggregation of incremental DSM