A Free-Market Energy Blog

Demand-Side Planning: Utility Rent-Seeking Meets Ecostatism

By Jim Clarkson -- January 29, 2015

Economic conservation of energy consists of voluntary actions and investments that make sense to the decision-maker in a free-market setting. Political conservation is  government-directed energy reduction measures. The later, conservationism, is energy savings for its own sake through monopolistic coercion or special favor (tax beak, crony regulation, or public check).

Demand-Side Management (DSM) programs by electric utilities are a major element of conservationism. Those who support reasonable efficiency and the elimination of waste should let the energy-efficiency politicos have the DSM term and use other words to describe what is favored.

DSM rose to regulatory prominence during the late 1980’s following the disastrous nuclear generation construction programs of the electric utilities. The confidence of the utility industry and its regulators in high-cost building programs shaken, they listened to new other approaches to meet future energy demand.

The DSM lobby made assertions like “if everybody used new high-efficiency light bulbs, future electric generating capacity could be avoided.” The notion sounded plausible; perhaps high efficiency could eliminate or at least reduce the need for future power plants. But to get ‘everybody’ to do the ‘right’ thing, it was concluded that only a coercive tax-and-spend program with all-around regimentation of consumers would work.

In the cumulative march of interventionism, in other words, the supply-side failure of public utility regulation was followed by the demand-side interventionism.

Apocalyptic environmentalism was the major driver of early DSM initiatives. Left environmentalists saw the crisis of global warming as being caused by fossil fuel consumption, which should be curtailed to save the world. For these neo-Malthusians, energy usage was too serious a matter to leave to voluntary self-interested efforts. In their view, consumers were just too misinformed (‘dumb’ in Gruberian terms) to know what was good for them.

The environmental activists, with visions of catastrophe dancing in their heads, put forth an agenda of central planning, social engineering, and meddling in the household budget. It played upon the running-out-of-resources meme of the 1970s (when, ironically, global cooling was also a fear). Remember Paul Ehrlich, the mentor to Obama’s current science advisor John Holdren? Here is what Ehrlich and coauthor Richard Harriman wrote in the early 1970s:

Except in special circumstances, all construction of power generating facilities should cease immediately, and power companies should be forbidden to encourage people to use more power. Power is much too cheap. It should certainly be made more expensive and perhaps rationed, in order to reduce its frivolous use. [1]

The utilities and their regulators in general did not buy the disaster scenario of the environmental lobby. However, they were attracted by the prospects of expanding the scope of state regulation. They saw a chance to increase and intensify their control over customers, reduce the threat of competition, and guarantee returns on investments that otherwise would be highly questionable.

Through processes known as Integrated Resource Planning, utilities and state regulatory agencies tried to determine the least cost choices between supply-side options and demand-side options for making investment decisions. DSM programs are an assortment of give-away programs to retrofit buildings and subsidize energy-using equipment; they have high administrative overhead and provide incentives to the managing utility.

By the mid 1990’s, America’s utilities had spent tens of billions of dollars of their customers’ money on DSM programs with little to show for it. The electric industry was facing competition on the retail level and had excessive DSM costs, called regulatory assets, on its books. With competition on the horizon and DSM largely shown to be worthless, the utilities wanted to clean up their books by getting rid of the burden of DSM expenditures.

The prospect of new competitors without the burden of worthless DSM carrying costs was perceived as a serious problem.  DSM programs in America’s utilities went through a drastic reduction in the late 1990s as managed competition called “deregulation” was tried for retail power customers in many states. With the later collapse of managed retail competition, DSM made a comeback.

It seems the opponents of DSM had failed to drive the proverbial wooden stake into its political heart.  The threat of competition had played a larger part in the hiatus than DSM’s failure to deliver or the persuasiveness of its opponents.

The mandatory cross-subsidy of DSM can only be accomplished in a strictly regulated sector of the economy where the political machinery exists to shift money without consumer consent.  The environmental lobby has not attempted such programs in other relatively free sectors of our economy.  The environmentalists are staunch supporters of regulation, and they oppose any moves toward competition.  DSM agitation waxes and wanes in a counter-cyclic manner to the viability of competition in the electric utility industry.

In the first round of DSM programs, the industrial customers generally opposed their implementation during regulatory proceedings. Industrial users did not believe the hype about conservation being an alternative to building generation; they argued that industrials could best do their own conservation and that industrials could not bear the tax necessary to subsidize others.

These industrials, and the sound economists they employed, made accurate predictions about DSM’s failure. (An early study by the Institute for Energy Research, where I am a director, Demand-Side Management: Ratepayers Beware, by Doug Houston, was a classic in this regard.

In many states industrials were allowed to opt out of paying for DSM programs. Most DSM programs are aimed at residential electricity users. In the comeback stage, the environmental lobby has left out the politically powerful industrials as a source of money for their pet spending programs. It is now the much less politically powerful commercial customers who are expected to bear a substantial portion of the subsidy burden.

The Limits of Conservation

The assumption that there is a correlation between conservation and society’s overall energy use is wrong. Increased efficiency has often resulted in more, not less, energy use.

Take the example of a typical household. If money is saved in the monthly budget from the use of high efficiency appliances, the family has more money available to spend on other things.  Human wants are endless. With the newly available disposable income the family may take a trip to Hawaii, buy a SUV, or have a hot tub installed on the deck.  Virtually any new spending will involve additional use of energy.

Modern televisions use less energy, so consumers now have multiple sets in the home with larger screens. Similar things happen in the business world. If a retailer cuts his cost through the use of high efficiency air conditioning, he is better able to compete for new business. A shopper in his store may now buy two sweaters instead of one due to lower prices. More sweaters means more energy used in their production and delivery.

A manufacturer that reduces the energy use per unit of a product will make more units of that product. The U.S. is not only the biggest user of energy in the world; we are the most efficient user. Macro growth, in other words, can more than cancel out the micro energy reductions. (And why not just leave the lights on with the long lasting bulbs?)

So increased efficiency and conservation will not appreciably reduce the economy’s overall demand for energy but might well increase it. This curious, counter-intuitive phenomenon means that state and federal subsidies and mandates for conservation will do little to reduce energy demand in the aggregate. Nor should they try.

Natural market-based conservation is good for individuals because it raises their standard of living. Like virtue, energy conservation and efficiency are their own reward. We should support consumer-driven voluntary economic conservation, not political conservation driven by the fatal conceit. But do not expect consumer freedom to necessarily slow the growth in the demand for the master resource. But don’t expect bad things from energy growth either. We are not running out of resources, clean air, or climate.


[1] Paul Ehrlich and Richard Harriman, How to Be a Survivor (Rivercity: Rivercity Press, MA, 1971, 1975), p. 72.

Comments are closed.