Abstract
This paper reviews critically the economics of utility demand-side conservation programs under different regulatory regimes introducing a service-oriented framework in order to derive simultaneously the demand for electricity and for efficiency. This framework establishes a relation between engineering efficiency improvements, the rebound effect (i.e., more efficient appliances tend to increase the service demand), and actual conservation. Price-cap regulation, which is consistent with least cost planning (LCP), leads to the necessary condition for (profitable) DSM that the price cap does not cover the marginal costs of supplying electricity. The difference between the marginal costs and the price cap determines the upper bound on the costs of a “negawatt.” This necessary condition for LCP cannot be met within the traditional model of rate-of-return regulation so that other incentives (“shared saving”) induce the utility to undertake DSM. A profit-maximizing, regulated utility subverts the DSM expenditures to inflate the rate base yet minimizing the impact on revenues. Therefore, a rate-of-return regulated utility might favor “inefficient” conservation programs, which helps to explain that the costs of actual conservation exceed the a priori expectations by far. Finally, DSM as a permanent option will increase free riding substantially, due to strategic consumer reactions.
Similar content being viewed by others
References
Averch, Harvey, and Leland L. Johnson. 1962. “Behavior of the Firm under Regulatory Constraint”.American Economic Review 52:1052–1069.
Beesley, M. E., and S. C. Littlechild. 1989. “The regulation of privatized monopolies in the United Kingdom”.Rand Journal of Economics 20:454–472.
Central Maine Power Company. 1990. 1989Energy Management Report. Central Maine Power Company.
Cicchetti, Charles J., and William, W. Hogan. 1989. “Including Unbundled Demand Side Options in Electric Utility Bidding Programs”.Public Utilities Fortnightly 8(June):9–20.
Dubin, Jeffrey, Allen, K. Miedema, and Ram V. Chandran. 1986. “Price Effects of Energy-Efficient Technologies: A Study of Residential Demand for Heating and Cooling”.The Rand Journal of Economics 17:310–325.
Gilbert, Richard, and Steven Stoft. 1992. “A Review and Analysis of Electric Utility Conservation Incentives.” Mimeo, Power, PWP-005.
Greene, David L. 1992. “Vehicle Use and Fuel Economy: How Big is the “Rebound” Effect?”The Energy Journal 13(1): 117–143.
Hausman, Jerry A. 1979. “Individual Discount Rates and the Purchase and Utilization of Energy-Using Durables”.Bell Journal of Economics 10:33–54.
Hirst, Eric. 1992. “Price and Cost Impacts of Utility DSM Programs”.The Energy Journal 13(4):75–90.
Hobbs, Benjamin F. 1991. “The ”Most Value“ Test: Economic Evaluation of Electricity Demand-Side Management Considering Customer Value”.The Energy Journal 12(2):67–91.
Joskow, Paul L., and Donald B. Marron. 1992. “What Does a Negawatt Really Cost? Evidence from Utility Conservation Programs”.The Energy Journal 13(4):41–74.
Katz, Myron B. 1992. “Demand-Side-Management. Reflections of an Irreverent Regulator”.Resources and Energy 14:187–203.
Khazzoom, Daniel J. 1989. “Energy Savings from More Efficient Appliances: A Rejoinder”.The Energy Journal 10(1):157–166.
Lewis, Tracy R., and David. E. M. Sappington. 1992. “Incentives for Conservation and Quality Improvement by Public Utilities”.American Economic Review 82:1321–1340.
Liston, Catherine. 1993. “Price-Cap versus Rate-of-Return Regulation”.Journal of Regulatory Economics 5:25–48.
Lovins, Amory. 1985. “Saving Gigabucks with Negawatts”.Public Utilities Fortnightly 115(6): 19–26.
Marino, Anthony M., and Joseph Sicilian. 1987. “Direct Investment in Conservation Measures by a Public Utility”.The Energy Journal 8(2): 137–146.
Moskovitz, David. 1989. “Profits & Progress through Least-Cost Planning”. National Association of Regulatory Utility Commissioners, Washington D.C.
Nadel, Steven. 1990. “Lessons Learned: A Review of Utility Experience with Conservation and Load Management Programs for Commercial and Industrial Customers.” Prepared for New York State Energy Research and Development Authority, American Council for an Energy-Efficient Economy, 1064-EEED-AEP-88, New York.
Nowell, Clifford, and John Tschirhart. 1990. “The Public Utility Policy Act and Regulatory Behavior”.Journal of Regulatory Economics 2:21–36.
PG&E. 1989.Annual Summary Report on Demand Side Management Programs 1989. San Francisco.
Ruff, Larry E. 1988. “Least-Cost-Planning and Demand-Side-Management: Six Common Fallacies and one Simple Truth”.Public Utilities Fortnightly 28 (April): 19–26.
Sherman, Roger. 1992. “Capital Waste in the Rate-of-Return Regulated Firm”.Journal of Regulatory Economics 4:197–204.
Shioshansi, Fereidoon P. 1991. “The Myths and Facts of Energy Efficiency. Survey of Implementation Issues”.Energy Policy 13:231–242.
Symposium on Price-Cap Regulation. 1989.Rand Journal of Economics 20 (Autumn), 369–471.
Wirl, Franz. 1989. “Analytics of Demand-Side Conservation Programs”.Energy Systems & Policy 13:285–300.
Wirl, Franz. 1994. “On the Unprofitability of Utility Demand-Side-Conservation Programmes”.Energy Economics 16:46–53.
Author information
Authors and Affiliations
Additional information
I acknowledge discussions with Reinhard Haas and suggestions from the editor of the journal, Professor Michael A. Crew. I am particularly grateful for the extensive, constructive and, in the end, very helpful comments from an anonymous referee.
Rights and permissions
About this article
Cite this article
Wirl, F. Impact of regulation on demand side conservation programs. J Regul Econ 7, 43–62 (1995). https://doi.org/10.1007/BF01062779
Issue Date:
DOI: https://doi.org/10.1007/BF01062779