California DSM: A Pyrrhic Victory for Energy Efficiency?
California has led the nation in utility expenditures for ratepayer-subsidized energy conservation, also called
demand-side management (DSM).1
With broad-based support from utilities, consumer representatives, environmentalists, the California Public Utilities Commission (CPUC), and the California Energy Commission (CEC), some $1.8 billion has been spent since 1990 (and $3 billion since 1980) on ratepayer-subsidized electric conservation programs.2 The CPUC blessed this effort in 1993 as not only prudent but highly cost-effective:
"DSM programs initiated since the  Collaborative have produced an
estimated $1.9 billion in life-cycle net resource benefits (in nominal dollars). ... Even allowing for considerable uncertainty in savings forecasts, there is no doubt that ratepayers have received substantial benefits from utility DSM activities during the post-incentive period."3
With DSM expenditures in California exceeding $500 million in 1994, a record high, the future not only seemed bright but impregnable for ratepayer-funded energy efficiency in the state.
But three events have reversed the momentum. First, a rate crisis forced the CPUC to change course and issue the "Blue Book" proposal (April 1994) to restructure the California electric industry. Among the reforms was to
streamline DSM along consumer-driven lines. Second, during the Blue Book hearings, certain consumer groups that previously supported DSM started lobbying against forced ratepayer funding of utility conservation. No longer would they buy the "higher rates, lower bills" promise of DSM. Third, CEC hearings connected with the 1994 Energy Efficiency Report and the 1994 Electricity Report revealed that a flawed cost/benefit test was overstating the case for California's DSM programs.
Suddenly, the state's two largest utilities announced over $200 million in DSM cutbacks for 1995. The DSM community began openly to question the continued viability of ratepayer-subsidized energy conservation in a competitive market. Three questions arise:
s Has DSM led California to underconsume electricity, stranding electric (and gas) assets and distorting rates?
s Should DSM play a role in cutting power plant emissions?
s Should the state allow market forces to promote growth in electric consumption?
Carried to Excess
It is difficult to conclude that consumers in California are as ignorant about energy efficiency as some might believe. A more plausible explanation, suggested by the CEC's own inquiry into the Customer Value Test (CVT), is that important costs "in customer comfort, convenience, aesthetics, and productivity" have been ignored.4 This is not a "market failure" so much as an "analyst failure."
From the perspective of customer choice, California consumers have overconserved rather than underconserved electricity. California's economy is often cited as "a model of energy efficiency." But in that model lies a Pyrrhic victory, to the extent that ratepayer-subsidized DSM has contributed to the state's rate problem. Four reasons support the argument that California has overconserved electricity during the last decade.
Inflated electric rates. California's high, noncompetitive electric rates have fostered uneconomic conservation. With rates "approaching 150 percent of the national average," electric consumption in California has been pared below what more competitive rates would have incited.5 In this regard, "above-market" contracts for qualifying facilities (QFs) and nuclear investments have unintentionally promoted energy conservation. These artificially high rates have not now