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To be truly effective, integrated resource planning must give equal play (“comparable” treatment) to both supply- and demand-side resources. But that task can prove difficult. Direct comparisons can pose challenges, owing to the sometimes counter-intuitive nature of demand-side management (DSM), versus the more conventional notions of what such resources truly are.

We use the term DSM to refer to both energy efficiency and demand response programs. These programs provide incentives for customers to use energy more efficiently or to shift the time period in which they use it. In so doing, they can reduce the utility’s future obligation either to provide energy or to stockpile capacity to meet demand. But DSM’s characteristics differ from supply-side alternatives.

One key difference concerns the physical attributes of a supply resource, versus the virtual nature of its demand-side counterpart.

Figure 1 - DSM Cost Recovery and Incentives

Supply-side resources are tangible. They typically take the form of a large-scale asset. The utility frequently owns the plant and earns a return on investment supplied by shareholders. That large-scale investment typically is sufficient to trigger a general rate case to roll the costs into the utility’s prices.

DSM programs, by contrast, represent a larger number number of smaller investments. They are insufficient individually to trigger a general rate case. They don’t typically create a regulatory asset booked on the utility’s balance sheet. And without such treatment, there’s no return on investment for shareholders. Further, DSM programs reduce future sales, whereas supply-side resources provide additional energy to serve increased sales.

These different characteristics have led regulators to treat the two classes of resources differently. More importantly, however, to ensure a level playing field for both demand- and supply-side resources, regulators must address three key issues:

• Recovery of program costs, including administration, marketing, and incentives;

• The effect of reduced future sales; and

• Shareholder expectations.

Regulators aren’t blind to these ideas, however, nor are researchers or policymakers.

As far back as 1989, the National Association of Regulatory Utility Commissioners (NARUC) passed a resolution citing the need to “align utilities pursuit of profits with least-cost planning.” The resolution urged its member state commissions to: “consider the loss of earnings potential connected with the use of demand-side resources; adopt appropriate ratemaking mechanisms to encourage utilities to help their customers improve end-use efficiency cost-effectively; and otherwise ensure that the successful implementation of a utility’s least-cost plan is its most profitable course of action.” ¹

Twenty years later, in 2009, the Lawrence Berkeley Lab released a study stating the same concern in slightly different terms: “A key issue for state regulators and policymakers is how to maximize the cost-effective energy efficiency savings attained while achieving an equitable sharing of benefits, costs and risks among the various stakeholders.” ² (See sidebar “Missouri Shows Us.”)

These issues will only grow in importance. Recently the U.S. Energy Information Administration (EIA) indicated that $5.5 billion was spent on electric DSM programs in 2011,