As competition in the electric industry increases, so does utility concern about the effect of demand-side management (DSM) programs on electricity prices. Because DSM programs often raise prices, several utilities have recently reduced the scope of their DSM programs or focused these programs more on customer service and less on improving energy efficiency (see sidebar). Whether all utilities should follow suit is, however, open to question. We contend that DSM programs do not always exert upward pressure on prices (em just sometimes. The actual effect will depend on many factors: the intensity of DSM programs, the underlying utility cost structure and retail tariffs, avoided costs, and regulatory treatment of DSM-program costs.
We used the Oak Ridge Financial Model (ORFIN) to examine the two factors that contribute to DSM's upward pressure on prices: 1) the cost of the programs themselves, and 2) the loss of revenue associated with fixed-cost recovery. (The second factor reflects the reduction in revenues caused by DSM-induced energy and demand savings that exceed the reduction in utility costs.) Our analysis examined DSM price impacts as functions of the factors shown in Table 1. (For details, please consult the Oak Ridge National Laboratory report, Price Impacts of Electric-Utility DSM Programs.)