QUANTIFYING REGULATORY DISINCENTIVES TO UTILITY DSM PROGRAMS

In principle, current regulation of investor-owned electric utilities is simple: the more electricity a utility sells, the more money it mak es for its stockholders. This link between sales and earnings encourag es utilities to sell more electricity, whether or not such increased s ales benefit customers. For the same reason, utilities often find it d ifficult to conduct even the most cost-effective energy-efficiency pro grams: these programs reduce sales, and reduced sales cut earnings. Al though the theoretical underpinnings of this problem have been careful ly explained, little quantitative analysis exists to identify the magn itude of the problem. This paper provides that quantitative analysis f or a Rocky Mountain utility. It shows that a utility that runs modest energy-efficiency programs will find its return on equity cut by almos t 100 basis points. Sensitivity analyses confirm that this earnings lo ss will occur under a wide range of sizes and load factors of energy-e fficiency programs, retail price levels and structures, and short-run marginal costs. Shareholder losses are greatest for utilities that run ambitious programs and for which the difference between retail electr icity price and average fuel cost is high. This erosion of earnings oc curs even though utility customers may receive substantial benefits fr om these energy-efficiency programs because rapid load growth accelera tes the need to build new and often expensive generating capacity.