A Free-Market Energy Blog

Coerced Energy Efficiency in Texas: Government Conservationism Isn’t Market Conservation

By -- March 22, 2010

[Editor note: Texas has been a hotbed for energy mandates and environmental pressure groups ever since Enron successfully lobbied for the state to enact a strong renewable energy mandate in 1999. This mandate was expanded in 2005, and the a second expansion (with a solar carve-out) almost passed in the last session. Currently, environmental pressure groups are working to toughen an energy efficiency mandate enacted in the same 1999 law and extended in 2007.]

The Texas Public Utility Commission (TPUC) is in the midst of a rulemaking that would expand Texas’s energy efficiency program. Questions of administrative overreach aside (the state legislature rejected the program last session), a sober look at costs versus benefits indicates it is a very questionable deal for ratepayers.

Some will argue that more government-directed conservation (or conservationism) is a good thing. After all, it is frequently claimed that the existing efficiency program is cost-effective based on 2001–2009 data.

In reality, however, the record provides no such justification. Actual expenses for the program in 2008 were at least $57.9 million, and projected expenses for 2010 are $105 million. These costs are paid for by residential and commercial electricity consumers. The PUC says the benefits of this program outweighs its cost. But the commission currently uses a cost-benefit method that does not accurately measure the program.

PACT Problem

Texas is almost alone among the states in using a Program Administrator Cost Test (PACT) to evaluate its efficiency programs. Yet the California Standard Practice Manual, used as a reference in many other jurisdictions, explicitly warns against PACT: “By defining device costs exclusively in terms of costs incurred by the administrator, the results reflect only a portion of the full costs of the resource.”

In short, Texas uses an incorrect test to evaluate its efficiency program, and its bias is entirely in one direction—toward acceptance of projects because their costs are uniformly understated.

The full costs of a project are the sum of those for the utility’s incentives and administration of the program, and those incurred by the customer who makes the subsidized efficiency investment.  Yet the PACT ignores the customer costs, so an investment that is made by the customer and incentivized by the utility may still fail to pass a cost-benefit test.

For instance, an investment whose actual cost is $110 might save future power costs of $100, and allow the utility to give the user $50 (the incentive percentage allowed for residential and small commercial customers).   The user happily pays the remaining $60 to save $110 on its power costs.  The utility reports that its $50 investment has passed a PACT test by saving $100 of power.  Society, however, has spent $110 in order to buy only $100 of power savings.

Costly Conservation(ism)

The heart of this rulemaking is an increase in Texas’ energy efficiency goals so that the state’s transmission and distribution utilities, like CenterPoint Energy, would have to spend more money to reduce the annual growth in demand of residential and commercial customers.

This rulemaking is similar to Senate Bill 546 from the Texas Legislature’s 2009 session. SB 546 also sought to increase the energy efficiency goals above the currently required level of at least a 20 percent reduction in demand growth. However, SB 546 failed to become law, with the Texas House of Representatives and the Texas Senate unable to agree to changes made to the bill in the House.

The TPUC’s plan would increase the target for reduced demand growth to 50 percent by 2015.

Administrative Overreach?

In proposing increases to the state’s energy efficiency goals, the TPUC is thus attempting to change in its rules what the Texas Legislature sought—and failed—to do in statute. Combined with the lack of available information for judging this program and the demonstrated costs of mandating reductions in energy use, this raises significant policy and legal questions about whether the TPUC should make the changes it has proposed regarding the energy efficiency goals.


The U.S. is a world leader in energy efficiency. Our energy efficiency has made energy cheaper, allowing us to reap the benefits of increased energy use at reduced cost. The gains have almost all been made in the free market. And self-interested market conservation is a very different from politicized conservation, or conservationism.

The TPUC has been at the forefront of state regulators who are trying to introduce competition and market choices into almost all aspects of electricity.  It should be congratulated for this work. Yet its efficiency program does not provide information about when interventions cease to be warranted and markets should be relied upon.

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