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Must DSM Programs Increase Rates?

Fortnightly Magazine - June 15 1995

that customers now pay 75 percent of total costs) cuts the 15-year price increase by one-fourth. Increasing the percentage of T&D costs that can be avoided by DSM programs from 50 to 150 percent cuts the 15-year price increase in half. Increasing the percentage of fixed costs assigned to the monthly customer charge from 5 to 20 percent cuts the price increase 15 percent. Shifting avoided costs four years earlier cuts the price increase 20 percent. Combining these four changes cuts the average price increase from 0.25 to -0.03 percent (see Figure 3).

This combination of factors leads to a DSM program that lowers electricity prices. Very small price increases occur while the program is in effect. Beginning in 1999, however, yearly prices are lower with DSM than without. Prices decline because avoided costs are higher and undepreciated program costs are lower.

Whether this combination of factors and its effect on electricity prices is reasonable depends on the specific utility and its DSM programs. We think it possible to run carefully designed and targeted DSM programs that lower electricity prices. But because such programs require participants to pay a large share of the DSM costs, participation is likely to be lower than in programs where the utility pays for most of the DSM. Similarly, because such programs focus on areas with high avoided T&D costs, the potential to reduce the need for generation (and its attendant pollution) is reduced relative to systemwide programs.

Utilities that run broadly based DSM programs, however, are likely to experience modest price increases. Only if natural gas prices increase or pollution-control requirements on power plants become stricter will DSM consistently offer the possibility of both cost and price decreases.

Cheaper Overall

Ultimately, utility and PUC decisions on DSM programs will

hinge on much more than price impacts alone. As San Diego Gas & Electric noted in a June 1994 filing to the California Public Service Commission:


"Currently, SDG&E has a large and successful DSM program in place, continuing the direction that was established as a result of the California Collaborative Process in 1990. This program was implemented to address market barriers to cost-effective energy-

efficiency measures. At that time, it was determined that utility involvement in energy efficiency was necessary to overcome these barriers, so that cost-

effective energy efficiency could be a viable resource option in California.


SDG&E believes that the market barriers that necessitated utility DSM programs still exist and a strong utility role in DSM is still required if those programs are to continue to thrive."

DSM provides substantial economic and environmental benefits to utilities, to their customers, and to society at large. One important benefit is lower emissions of carbon dioxide, a major contributor to greenhouse warming. Alternative ways to reduce U.S. emissions of greenhouse gases might be much more expensive than DSM programs. A recent study from the U.S. Environmental Protection Agency estimated that a $120-per-metric-ton tax on the carbon content of oil, natural gas, and coal would roughly stabilize carbon dioxide emissions at 1990 levels over the period 1990