Power brokers: managing demand for electricity.

• Author: Roodman, David Malin
• Position: Electric utilities; demand-side management - Includes related article

Utilities are switching to a new strategy, generating the same service with much less supply--thereby providing important benefits for both the public and the environment

In 1975, the Environmental Defense Fund (EDF) formally involved itself in hearings before California's Public Utilities Commission to consider the request by the Pacific Gas and Electric Company (PG&E) for a rate increase. EDF's small team, which included the great-grandson of PG&E's founder, injected a notion into the soporific proceedings that was at once radical and transparently common-sensical. Nearly a generation later, the revolution that idea seeded is coming to fruition. And as a result, one of the world's largest industries--in both sales and environmental impact--is now undergoing the greatest transformation in its 100-year history.

What EDF proposed was that the commission order PG&E to slow down the race between the ever-growing demand for new power and the ever-growing generators that supplied it, by investing in the more efficient use of electricity in homes, offices, and factories. It should do so not because this would reduce dependence on limited and imported fuels, maintain air quality, avoid the safety risks of nuclear power, add flexibility to electricity planning, and improve customer relations and industrial competitiveness--though it could do all these things--but simply because it was cheaper.

Seemingly as absurd as a shop-owner chasing away customers, this idea could only have made sense in a context far removed from the free markets of Adam Smith's influential vision. In the old English town squares, well-informed buyers and sellers faced each other on equal bargaining terms. But in the monopolized and technologized electricity market, all the bargaining power and knowledge were concentrated on the utility's side. To compensate, privately-owned utilities--which account for 78 percent of U.S. power sales--were subject to the artificial and quite visible hand of a public regulatory commission. The commission's job was to rein in a power company's profits as if it were subject to competition, and to assure that it spent customers' energy dollars wisely. Until 1975, technological change had driven up the efficiency with which electricity could be produced even as it multiplied its uses beyond the imaginations of all but a few visionaries. Consequently, prices fell steadily even as sales and profits rose, keeping both sides of the market happy, and making utility regulation an agreeable, if dry, vocation. But by the early 1970s, exploding construction costs for huge new plants had unexpectedly pushed up electricity prices for the first time, laying the industry open to criticism. EDF argued that to protect customers from unnecessary rate hikes, the commission must now force PG&E against the grain of history. In return for the utility investing in the cheaper alternative--efficiency--the commission could raise rates just enough to cover PG&E's costs along with a profit margin. For customers, the counterintuitive result would be that while electric rates would rise slightly, electric bills would actually fall, thanks to efficiency improvements in their buildings and facilities. Along with this would also come a clearer benefit: less pollution and environmental damage from electricity generation.

To reconcile electricity production and reduction under one corporate roof, both could be seen as new sources of energy: conservation one place freed up supplies for another. They were each means toward an end the commission itself could hardly quibble with: that of providing adequate energy services--such as lighting, heating, and cooling--to society as cost-effectively as possible. Under unflagging pressure, PG&E's response went--degree by painful degree--from stubborn silence to ultimate capitulation. In the end, the five-year struggle spawned the largest set of utility-funded efficiency investment programs in the United States, with hundreds of thousands of Californians getting zero-interest loans to improve the energy efficiency of their homes. As the 1980s drew to a close, however, it became clear that utilities' enthusiasm for the efficiency approach had stalled even as they demonstrated its potential. The energy crisis mentality from the 1970s had faded, and while efficiency programs were cost-effective for society as a whole, falling electricity sales did little for utility profits. With this in mind, environmental groups such as the Conservation Law Foundation in New England and the Natural Resources Defense Council (NRDC) in California began collaborating with utilities again to revive their efficiency programs.

Partly as a result of their efforts, and partly thanks...