Electric Demand-Side Management Under Federal Law
By James W. Moeller
On October 24, 1992, President Bush signed into law the Energy Policy Act of 1992 (the Act). The Act implements many of the provisions of the National Energy Strategy proposed by the U.S. Department of Energy (DOE) in February 1991, including an amendment to the Public Utility Regulatory Policies Act of 1978 (PURPA) to promote increased investment by electric utilities in electric demand-side management.
The term “demand-side management” (DSM) is synonymous with electric power conservation. Thus, DSM embraces all measures associated with electric power conservation, from the use of energy-efficient light bulbs in the home to the introduction of energy-efficient processes in energy-intensive industries. DSM also reflects the principle that the nation's need for electric power should not be met solely through supply-side management, which includes the construction of additional electric power production capacity, but also through electric power conservation, which is in itself a source of electric power.
The environmental advantages of electric DSM relative to the construction and operation of electric power generation and transmission facilities are well documented. Unlike adding new coal and natural gas facilities, the use of DSM does not contribute to acid rain, global warming or stratospheric ozone depletion. Unlike new nuclear power plants, using DSM does not produce radioactive waste.
Perhaps demand management's most valuable advantage over supply technology is its benign environmental impact. Coal has acid rain as an albatross, nuclear fuel has yet to be disposed of, and both natural gas and coal contribute to ... greenhouse gases. Demand-side management, particularly strategic conservation, mitigates against harmful environmental effects.
Largely for these reasons, trends and experiments in DSM “have been broadly supported by environmentalists as important alternatives to the construction of additional capacity.”
The cost-effectiveness of electric DSM relative to the construction and operation of new electric power facilities has improved due to the increase in the average cost of electric power generation over the past two decades. For example, between 1973 and 1982, the average price of electric power rose from 5.6 cents per kilowatt hour to 8.5 cents per kilowatt hour. This increase was due largely to significantly higher fuel costs, which dominate the operational expenses associated with electric power generation.
Finally, DSM offers a way to harness market forces in support of national energy goals. According to the DOE, DSM “will encourage ... private-sector programs, such as utility-conducted industrial [energy] audits performed as part of a demand-side management program.”
The environmental and economic advantages associated with DSM have prompted electric utilities to invest heavily in DSM, resulting in significant decreases in residential, commercial and industrial use of electric power. Utilities currently spend an estimated $1 billion or more each year for DSM. At this level of spending, DSM reduced the total demand for electric power by 16,700 megawatts in 1990 alone. Moreover, annual expenditures by electric utilities for DSM could exceed $3 billion by the year 2000. Consequently, DSM could eliminate up to 15% of the total demand for electric power that otherwise would exist in the year 2000. The DOE predicts that, with respect to growth in electric power demand between 1993 and 2010, “price-induced conservation, legislative action, and utility investments in demand-side management (DSM) programs are expected to increase efficiency in end-use electricity markets and, thereby, dampen that growth.”
The Energy Policy Act's amendment of PURPA to encourage DSM adopts one of two approaches fashioned under federal law since the 1970s to promote the involvement of electric utilities in DSM. This amendment adopts the approach to DSM pioneered by the Energy Production and Conservation Act of 1976. This approach addresses the development and implementation of electric power rate structures with incentives for electric utilities to invest in energy conservation.
A second and alternative approach, pioneered by the National Energy Conservation Policy Act of 1978 but repealed in 1986, addresses the direct involvement of electric utilities in the sale of goods and services for residential energy conservation. This approach was rejected in 1986 in part due to concerns about the potential for anticompetitive practices on the part of electric utilities in the sale and installation of energy conservation measures relative to small businesses engaged in energy conservation goods and services.
In addition to PURPA, the Public Utility Holding Company Act of 1935 (PUHCA) will also affect the level of DSM activities undertaken by electric utilities. PUHCA restricts public utility holding company subsidiaries to traditional utility activities, specifically electric power generation and distribution. PUHCA also restricts the acquisition of public utility holding company subsidiaries for the purposes of engaging in non-utility activities, such as DSM.
In this regard, the difficulty of forming non-utility subsidiaries poses an obstacle to engaging in DSM. Specifically, Section 11(b)(1) of PUHCA requires a “functional relationship” between the non-utility subsidiaries and the utility subsidiaries within a public utility holding company system. To ensure that a “functional relationship” exists between a DSM subsidiary and the utility activities of the holding company system to which it belongs, the SEC has fashioned a “fifty percent” standard that limits the geographical region of, and the revenues from, the activities and operations of a DSM subsidiary. This standard requires fifty percent of a subsidiary's revenues to be from energy conservation sales and services from within the geographical region served by the utility subsidiaries of the holding company system to which it belongs.
Unfortunately, the Energy Policy Act of 1992 did not amend PUHCA to address the fifty percent standard, which limits the profits and effectiveness of DSM subsidiaries. PUHCA, in its existing form, thus impedes increased formation and acquisition by public utility holding companies of DSM subsidiaries. Consequently, PUHCA does not reflect the national energy policy on DSM that is otherwise implemented in the Act.
PURPA addresses retail regulatory policies for public utilities. Among other things, PURPA establishes regulatory policies that improve electric power conservation, encourage the efficient use of electric power generation facilities and fuels, and promote the adoption of equitable rates for electric power.
The PURPA amendment designed to promote DSM reflects a milestone in the evolution of a federal legal regime aimed at reducing the use of electric power and promoting an energy conservation culture in the United States. However, the evolution of federal energy conservation law should not end with the recent amendment of PURPA. It should continue with an amendment to PUHCA that repeals the “fifty percent” standard, thereby facilitating and promoting an expansion and increase in the formation and acquisition by public utility holding companies of non-utility subsidiaries to engage in DSM.
Part II of this article will describe the development of DSM in the 1970s under the Energy Policy and Conservation Act of 1975, the Energy Production and Conservation Act of 1976, and the National Energy Conservation Policy Act of 1978. In addition, Part II will discuss the initial implementation of PURPA and the recent amendment of PURPA by the Act. Part III of this article will discuss how PUHCA affects DSM under PURPA. In particular, it will summarize the requirements under Section 11(b)(1) of PUHCA for forming public utility holding subsidiaries to engage in DSM. Part III will also discuss several SEC orders that approved the formation of DSM subsidiaries and the limits the orders imposed on the activities and operations of those DSM subsidiaries. The article will conclude that PUHCA should be amended to repeal the “fifty percent” standard. Finally, a proposed amendment to PUHCA in this regard, “The Electric Demand-Side Management Act of 1993,” is included in the appendix.
The term “demand-side management” (DSM) is synonymous with electric power conservation. Thus, DSM embraces all measures associated with electric power conservation, from the use of energy-efficient light bulbs in the home to the introduction of energy-efficient processes in energy-intensive industries. DSM also reflects the principle that the nation's need for electric power should not be met solely through supply-side management, which includes the construction of additional electric power production capacity, but also through electric power conservation, which is in itself a source of electric power.
The environmental advantages of electric DSM relative to the construction and operation of electric power generation and transmission facilities are well documented. Unlike adding new coal and natural gas facilities, the use of DSM does not contribute to acid rain, global warming or stratospheric ozone depletion. Unlike new nuclear power plants, using DSM does not produce radioactive waste.
Perhaps demand management's most valuable advantage over supply technology is its benign environmental impact. Coal has acid rain as an albatross, nuclear fuel has yet to be disposed of, and both natural gas and coal contribute to ... greenhouse gases. Demand-side management, particularly strategic conservation, mitigates against harmful environmental effects.
Largely for these reasons, trends and experiments in DSM “have been broadly supported by environmentalists as important alternatives to the construction of additional capacity.”
The cost-effectiveness of electric DSM relative to the construction and operation of new electric power facilities has improved due to the increase in the average cost of electric power generation over the past two decades. For example, between 1973 and 1982, the average price of electric power rose from 5.6 cents per kilowatt hour to 8.5 cents per kilowatt hour. This increase was due largely to significantly higher fuel costs, which dominate the operational expenses associated with electric power generation.
Finally, DSM offers a way to harness market forces in support of national energy goals. According to the DOE, DSM “will encourage ... private-sector programs, such as utility-conducted industrial [energy] audits performed as part of a demand-side management program.”
The environmental and economic advantages associated with DSM have prompted electric utilities to invest heavily in DSM, resulting in significant decreases in residential, commercial and industrial use of electric power. Utilities currently spend an estimated $1 billion or more each year for DSM. At this level of spending, DSM reduced the total demand for electric power by 16,700 megawatts in 1990 alone. Moreover, annual expenditures by electric utilities for DSM could exceed $3 billion by the year 2000. Consequently, DSM could eliminate up to 15% of the total demand for electric power that otherwise would exist in the year 2000. The DOE predicts that, with respect to growth in electric power demand between 1993 and 2010, “price-induced conservation, legislative action, and utility investments in demand-side management (DSM) programs are expected to increase efficiency in end-use electricity markets and, thereby, dampen that growth.”
The Energy Policy Act's amendment of PURPA to encourage DSM adopts one of two approaches fashioned under federal law since the 1970s to promote the involvement of electric utilities in DSM. This amendment adopts the approach to DSM pioneered by the Energy Production and Conservation Act of 1976. This approach addresses the development and implementation of electric power rate structures with incentives for electric utilities to invest in energy conservation.
A second and alternative approach, pioneered by the National Energy Conservation Policy Act of 1978 but repealed in 1986, addresses the direct involvement of electric utilities in the sale of goods and services for residential energy conservation. This approach was rejected in 1986 in part due to concerns about the potential for anticompetitive practices on the part of electric utilities in the sale and installation of energy conservation measures relative to small businesses engaged in energy conservation goods and services.
In addition to PURPA, the Public Utility Holding Company Act of 1935 (PUHCA) will also affect the level of DSM activities undertaken by electric utilities. PUHCA restricts public utility holding company subsidiaries to traditional utility activities, specifically electric power generation and distribution. PUHCA also restricts the acquisition of public utility holding company subsidiaries for the purposes of engaging in non-utility activities, such as DSM.
In this regard, the difficulty of forming non-utility subsidiaries poses an obstacle to engaging in DSM. Specifically, Section 11(b)(1) of PUHCA requires a “functional relationship” between the non-utility subsidiaries and the utility subsidiaries within a public utility holding company system. To ensure that a “functional relationship” exists between a DSM subsidiary and the utility activities of the holding company system to which it belongs, the SEC has fashioned a “fifty percent” standard that limits the geographical region of, and the revenues from, the activities and operations of a DSM subsidiary. This standard requires fifty percent of a subsidiary's revenues to be from energy conservation sales and services from within the geographical region served by the utility subsidiaries of the holding company system to which it belongs.
Unfortunately, the Energy Policy Act of 1992 did not amend PUHCA to address the fifty percent standard, which limits the profits and effectiveness of DSM subsidiaries. PUHCA, in its existing form, thus impedes increased formation and acquisition by public utility holding companies of DSM subsidiaries. Consequently, PUHCA does not reflect the national energy policy on DSM that is otherwise implemented in the Act.
PURPA addresses retail regulatory policies for public utilities. Among other things, PURPA establishes regulatory policies that improve electric power conservation, encourage the efficient use of electric power generation facilities and fuels, and promote the adoption of equitable rates for electric power.
The PURPA amendment designed to promote DSM reflects a milestone in the evolution of a federal legal regime aimed at reducing the use of electric power and promoting an energy conservation culture in the United States. However, the evolution of federal energy conservation law should not end with the recent amendment of PURPA. It should continue with an amendment to PUHCA that repeals the “fifty percent” standard, thereby facilitating and promoting an expansion and increase in the formation and acquisition by public utility holding companies of non-utility subsidiaries to engage in DSM.
Part II of this article will describe the development of DSM in the 1970s under the Energy Policy and Conservation Act of 1975, the Energy Production and Conservation Act of 1976, and the National Energy Conservation Policy Act of 1978. In addition, Part II will discuss the initial implementation of PURPA and the recent amendment of PURPA by the Act. Part III of this article will discuss how PUHCA affects DSM under PURPA. In particular, it will summarize the requirements under Section 11(b)(1) of PUHCA for forming public utility holding subsidiaries to engage in DSM. Part III will also discuss several SEC orders that approved the formation of DSM subsidiaries and the limits the orders imposed on the activities and operations of those DSM subsidiaries. The article will conclude that PUHCA should be amended to repeal the “fifty percent” standard. Finally, a proposed amendment to PUHCA in this regard, “The Electric Demand-Side Management Act of 1993,” is included in the appendix.
