[BETA] Fortnightly

Electric utilities nationwide are attempting to retreat from commitments to energy efficiency (em a retreat that will benefit few customers, while damaging many. This retreat is driven by fear of retail wheeling (em that consumers will be able to shop for the lowest prices among competing entities. In turn, the threat of retail wheeling has spurred utilities to a frantic scramble to cut costs and trim rates. Among the costs to fall under the knife are programs associated with resource planning, including demand-side management (DSM).Some utilities have attempted to discontinue DSM entirely. Others have proposed to continue DSM only where it has no rate impact on nonparticipants. But these cost-cutting efforts occur even though DSM programs can actually reduce the utility's total revenue requirement if they satisfy the Total Resource Cost test (TRC), the most commonly used cost/benefit test. Participants in DSM programs that qualify under TRC actually see their electricity use fall and their bills drop.

Regulators, facing skittish electric utilities, are caught in the middle. Despite the current rush toward competition, regulators should not abandon cost-effective DSM simply for fear of the short-run rate impacts.

Cost Cutting:

The Downside

Streamlining utility operating activities is good business practice if quality of service remains the same. But that's not what is happening.

DSM program costs are added to rates. That increment includes that portion of fixed costs no longer recovered when DSM pares down energy sales and utility revenues fall as a result. These fixed costs elevate the per-unit cost of furnishing electricity, which boosts rates and drives up bills of customers that do not participate in DSM programs. These adverse rate effects are typically captured by the Rate Impact Measure test (RIM).

But because the RIM test counts lost revenues from decreased utility sales as a cost, DSM that produces high-energy savings can have an unfavorable RIM score. The RIM test thus eliminates proven energy-saving measures from consideration.

RIM test reliance marks a large step backward in the planning evolution of the utility industry. By ignoring DSM's long-term potential to defer or displace future capacity needs at costs well below those of new construction, utilities will bear higher costs in the long run when additional capacity is needed, leading to higher rates. This "business as usual" planning approach has no nonparticipants; all customers will bear the future costs of new supply-side additions.

Dr. Peter Fox Penner, principal deputy assistant secretary for energy efficiency and renewable energy at the Department of Education, forcefully made this point in recent testimony before the Florida Commission:

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"The Department [of Energy] encourages utilities and state regulators to acquire DSM resources that will be cost-effective in minimizing the energy bills of utility consumers in the long run. The RIM test, which measures the impact of DSM programs on utility rates, can be useful in addressing DSM program design and cost-

allocation matters. However, the Department believes that the RIM test generally should not be used as a cost-effectiveness test for DSM programs, because it can rule out many DSM options that would be cost-effective in minimizing