The Past, Present, and Future of U.S. Utility Demand-Side Management Programs

Demand-side management or DSM refers to active efforts by electric and gas utilities to modify customers' energy use patterns. The experience in the U.S. shows that utilities, when provided with appropriate incentives, can provide a powerful stimulus to energy efficiency in the private sector. This paper describes the range and history of DSM programs offered by U.S. electric utilities, with a focus on the political, economic, and regulatory events that have shaped their evolution. It also describes the changes these programs are undergoing as a result of U.S. electricity industry restructuring. DSM programs began modestly in the 1970s in response to growing concerns about dependence on foreign sources of oil and environmental consequences of electricity generation, especially nuclear power. They grew rapidly during the late 1980s as state regulators provided incentives for utilities to pursue least-cost or integrated resource planning principles. Electric utility DSM programs reached their largest size in 1993, accounting for $2.7 billion of utility spending or about one percent of U.S. utility revenues. The foundation for the unique U.S. partnership between government and utility interests can be traced first to the private-ownership structure of the vertically integrated electricity industry and second to the monopoly franchise granted by state regulators. Electricity industry restructuring calls into question both of these basic conditions, and thus the future of utility DSM programs for the public interest. Restructuring does not, however, call into question the basic rationales for public policies to promote energy efficiency; the environmental consequences of electricity generation in particular, remain a strong argument for continuing energy-efficiency programs. In many parts of the U.S., broad public support for energy-efficiency programs will lead to continued ratepayer funding for them. At the same time, many utilities are interested in using DSM programs to further their unregulated business interests in a restructured electricity industry. Thus, future policies guiding ratepayer-funded energy-efficiency DSM programs will need to pay close attention to the specific market objectives of the programs and to the balance between public and private interests.