In any conservation or efficiency program, some market participants will reap benefits without paying their share of the costs—i.e., the “freerider” problem. Some freeriders are...
Demand-side Management: Mitigate, Don't Eliminate
5.1 percent or less.4 According to the 1991 Annual Survey of Manufacturing (Bureau of the Census), average electricity cost represented only 1.2 percent of the value of shipped goods. Thus a 5-percent electric rate increase would produce a profit impact of only .06 percent of wholesale value for an average nonparticipating industrial customer who receives no bill reductions from DSM.5 That hardly seems large enough to stampede large users into the eager hands of low-cost power producers, especially when compared to the larger average rate impacts of
There are no nonparticipants when it is time to include the costs of building a new power plant in the rate base. When Baltimore Gas & Electric added a 600-Mw steam plant to its system, average rates increased 3.3 percent. Even more dramatically, during the mid-1980s, New Orleans Public Service Co. (NOPSI) attempted to increase rates either by a one-year hike of 65 percent or a 100-percent increase spread over 10 years, to recover costs associated with construction of the Grand Gulf nuclear plant. The NOPSI rate filings led ultimately to a 43-percent
increase in residential rates, a 90-percent increase in commercial rates, and a 36-percent industrial rate hike spread over six years.
Not Without Options
If nonparticipant rate effects remain a concern for regulators, the most equitable solution would ensure that utilities offer DSM programs to all customer classes, maximizing participation and penetration rates so all ratepayers can capture the benefits of reduced bills.
In addition, the costs (rate impacts) of DSM can be reduced (em and benefits increased (em through careful program design. For example, regulators can minimize "free ridership" by offering straight rebates only for the high end of the spectrum of product-efficiency ratings. Regulators may also use market "sticks" to encourage DSM while reducing rate impacts. By requiring the utility to offer incentives to manufacturers and wholesalers, DSM programs can nudge efficiency along the learning curve, bringing down upfront costs, while boosting demand for energy-efficient products.
If customer class equity is an issue, regulators can allocate costs solely to the customer class that benefits, shielding rate-sensitive customers. They can require the utility to capitalize or amortize DSM costs over the lifetimes of
efficiency measures, rather than over the short term. This technique (em natural for supply-side
additions (em spreads the costs of DSM programs over time.
At its 106th Annual Convention, the National Association of Regulatory Utility Commissioners (NARUC) passed a resolution stating that "a fundamental responsibility of state and federal electric utility regulators in this transition period is to assure that vital public interests and established public benefits will be preserved in any restructuring of the electric utility industry."6
NARUC defined these public benefits to include:
s system reliability
s responsible management of environmental impacts of electric generation
s promotion of systematic investments in energy efficiency (thus improving the nation's energy security and lowering energy costs)
s innovative rate designs
s support for research and development
s investments that speed the development of renewable energy technologies.
Regulators should adhere to the NARUC resolution and preserve DSM programs,