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The Choice Not to Buy: Energy $avings and Policy Alternatives for Demand Response

What California would have saved-in real dollar figures-plus a look at pilot programs from around the country.
Fortnightly Magazine - March 15 2001

and 25 percent of industrial loads, to a high of 50 percent of both types of loads.

11 For a detailed discussion, see K. Eakin and A. Faruqui, "Pricing Retail Electricity: Making Money Selling a Commodity," in , edited by Ahmad Faruqui and Kelly Eakin, Kluwer Academic Publishing, 2000.

12 The current financial crisis of PG&E and Southern California Edison serves as an extreme example of the risk of offering a fixed price (at a level set by regulation for a multi-year period) in the face of uncertain wholesale prices.

13 See S. D. Braithwait, "Residential TOU Price Response in the Presence of Interactive Communication Equipment," Chapter 20 in , edited by A. Faruqui and K. Eakin, Kluwer Academic Publishers, 2000.

14 See "An Application of Coincident Peak Pricing to Seattle City Light", EPRI, 2001, forthcoming.

15 Witness the extremely high losses that interruptible customers have faced in California.

16 Interruptible programs have been offered for two different purposes. One is for reliability reasons, to provide load relief only during rare periods of low system reliability. The other is for economic reasons, to reduce utilities' need to purchase high-cost power. Suppliers and system operators may wish to maintain some load on emergency interruption programs to help in times of reliability problems. However, interruptions for economic reasons are an inefficient way to match demand and supply. A more effective approach is to inform customers of the cost of power, and let each of them decide how much to consume at those prices.

17 See Eric Hirst and Brendan Kirby, "Retail-Load Participation in Competitive Wholesale Electricity Markets," prepared for EEI and Project for Sustainable FERC Energy Policy, December 2000.

18 The single preset payment may be overly inflexible, leading to underpayments or overpayments, unless interruptions are limited to periods of wholesale prices within a relatively narrow range. It will also limit the magnitude of potential demand response during the most severe conditions.

19 See Braithwait (2000), op. cit.

20 For further discussion, see David Glyer, "You Can Run but You Can't Hide: Why Fixed-Price Products May Reflect Market Prices, and What You Should Do About It," EPRI International Energy Pricing Conference, July 2000.

21 Some have apparently swung to the opposite extreme of suggesting that all customers should face hourly prices. We believe that it would be difficult to justify the cost of the metering and other requirements relative to the benefits obtained. Furthermore, it would violate one of the tenets of deregulation—greater customer choice. Finally, as shown in this study, the demand response of only a portion of the total load is needed to produce substantial wholesale price reductions.

22 An amendment to the recent state legislative measure authorizing the state to enter long-term power contracts restricts future rate increases to apply only to usage 130 percent above an average baseline level. This one-sided feature will limit customers' incentive to conserve energy, because they receive credits only at low capped rates, rather than higher market prices.