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California DSM: A Pyrrhic Victory for Energy Efficiency?

Fortnightly Magazine - October 1 1995

fear. And, judging from the DSM cutbacks with just the prospect of restructuring, their fears are well-founded.9

Do electricity customers fear the end of subsidized DSM? After all, their dollars are at stake. Large and small consumers, some of whom five years ago were signatories to the DSM Collaborative that accelerated ratepayer-funded DSM, clearly do not. Toward Utility Rate Normalization (TURN), a lobby group for captive electric and gas ratepayers in California, stated in the CPUC Blue Book hearings:

"The time has come to test the need for continuing ratepayer subsidies in the DSM market. . . . First ... the vast majority of the benefits accrue to participants, while the vast majority of the costs fall upon nonparticipating ratepayers. And second, even after the injection of hundreds of millions of dollars of ratepayer-funded subsidies . .. the proponents of DSM still contend that significant market barriers endure. ... [T]he flow of subsidies must be stemmed."10

The California Manufacturers Association, representing larger users, also testified that utility-funded DSM is "fundamentally inconsistent with customer choice and cannot comfortably exist within a structure which seeks to promote a 'vibrant market ... for efficiency energy services.'"11

On the natural gas side, SoCalGas revamped its Total Energy

Efficiency Management (TEEM) program to remove ratepayer funding on the determination that their customers are best served by market DSM, not coercive DSM.

The CPUC's 1994 Blue Book order (R.94-04-031, I.94-04-032, 151 PUR4th 73) also revealed second thoughts about subsidized DSM by focusing almost exclusively on rates. The 1994 proposed order would have ended the electric revenue adjustment mechanism (ERAM) for DSM, a balancing account allowing utilities to increase rates to recover revenue lost by reduced sales from energy efficiency. A second proposal would have terminated ratepayer cross-subsidies for direct-access customers. These two proposals could mark the beginning of the end of force-funded DSM, and led an "astonished" Natural Resources Defense Council (NRDC) to warn that market-based DSM would be "automatic money-losers for utilities" and "all but hopeless" for independent energy-service firms.12

There is good reason to be excited about a more competitive electric industry (em rates will fall substantially. Adjusted for

inflation, U.S. natural gas prices have fallen by one-third for end users during the 1985-94 period of open-access transmission, and electricity rates today on the competitive wholesale market are one-third below retail rates offered by the utilities. These lower rates will make fewer DSM programs economic under the TRC, CVT, or any other cost/benefit test.

Environmental Impacts:

Why Natural Gas

is Benign

Economics tells us to expand production if marginal costs fall below selling prices. Expanded production in that case lowers rates.

California's electric (and gas) market exhibits retail rates substantially above short-run marginal costs. The marginal cost of surplus gas-fired electric generation in the state is under 3 cents per kilowatt-hour (›/Kwh); average generation costs and total delivered marginal costs are under 5›/Kwh; and retail electric rates are around 10›/Kwh. Whether these incremental units are generated for offsystem sales or for expanded consumption within the state, each kilowatt-hour produces a ratepayer benefit over 5 cents. For