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California DSM: A Pyrrhic Victory for Energy Efficiency?

Fortnightly Magazine - October 1 1995

suddenly occurred; they have existed for years, particularly during the DSM Collaborative era. Between 1990 and 1994, Californians paid $28.2 billion more for electricity than if they had bought the same quantity at the average U.S. rate, a $912 per-capita surcharge.6 Given California's relative abundance of low-cost hydropower (including hydro-by-wire imports from the Pacific Northwest), and natural gas, as the swing fuel for electric generation), the hypothetical competitive rate would have been at or below the national average. In any case, a huge overpayment has occurred, with real wealth effects and negative usage impacts.

Uneconomic programs. California has systematically implemented uneconomic DSM programs. Its $3-billion ratepayer-subsidized DSM investment has been predicated on a Total Resource Cost test (TRC) that has understated costs and overstated benefits. Measurement and evaluation costs, which sum to as much as 10 percent of total DSM costs, have not been allocated among specific programs. "Market barrier costs" (also called "hidden participant costs") such as imperfect information, financial constraints, uncertainty, and inconvenience have been assumed away in the TRC as well. The negative rate effect on consumers from lost demand from DSM-related rate increases ("long-run rate impacts") is ignored, as are any "takeback effects" (consumers responding to DSM bill savings with higher energy use). Quality losses from DSM substitutions are also not considered.7 The raft of DSM programs that met the TRC (em but that would not have passed a corrected Customer Value Test (CVT) (em represent uneconomic overconservation.

Another cost escapes even the CVT (em the higher rates for natural gas that flow from a chronically underutilized gas infrastructure. California's electric DSM

programs have cut demand for gas for electric generation, bunching fixed gas costs over fewer units. The lost revenue for gas ratepayers of the displaced load is over 40›/MMBtu, judging from the transportation rate and

incremental cost of Southern California Gas Co. (SoCalGas).8 This fuel displacement clearly represents a substantial cost that should figure into any DSM cost/benefit analysis.

Appliance and building codes. Two decades of state and federal appliance standards and building codes have forced energy conservation. The energy crises prompted these rules. Today, as surplus replaces energy shortages, these standards have tightened. Prospective standards from the Department of Energy would be stricter still.

Advocacy groups. Multimillion-dollar, private-sector philanthropic efforts have promoted energy efficiency for its own sake. These efforts, ranging from private foundation grants for energy conservation to public service advertise-ments to "use energy wisely," have reduced energy usage. This not-for-profit effort for the "public good" assumes that public and other private efforts have fallen short of internalizing the externalities of fossil-fuel usage.


Exposed to Markets

If the California market has "overachieved" with energy conservation, and the large and growing discrepancy between marginal costs and rates suggest that it has, a move to market-driven competition can be expected to sharply curtail energy efficiency activities, at least in the short run. This move will uncover excess capacity throughout the DSM infrastructure, as prior deregulation revealed in the airline, trucking, railroad, petroleum, and natural gas industries. This truth is what the proponents of ratepayer-subsidized DSM