McGill School of Environment - Regulation Reform in the Electricity Industry






Executive Summary

Research Question

Case Sudies





The Group


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Final Report

It is difficult to measure the impact of California’s restructuring on energy efficiency in the residential sector. Finding an association between restructuring and energy efficiency is equally problematic. These challenges stem, in large part, from the fact that the state restructured its electric energy sector very recently. Moreover, the multitude and interdependence of the variables involved, and the lack of comprehensive data about these variables, exacerbate the challenges. Evidence of the impact of deregulation might be derived from quantitative changes in the price of, and demand for, electricity, the budgets allocated for energy efficiency, and the energy saved by efficiency programs. Likewise, qualitative changes in the nature of energy efficiency programs may indicate certain effects. None of these changes, however, provide the proof that allows us to definitively conclude that there has been a decline in the quantity or quality of energy efficiency in the residential sector since California’s deregulation.

Price and Demand:

Prices have remained affordable since deregulation because of the government’s continued use of price caps and rate freezes, which protect the residential consumer from price spikes (see figure 1). As a result, residential customers have not experienced the financial hardships caused by California’s transformation – instead, the price increases have been absorbed at the wholesale level, leading to the bankruptcy of the state’s two leading energy providers, Pacific Gas & Electric and Southern California Edison.

Figure 1. Average Residential Price (CEC, 2002)

Statistics indicate that there has been a relative increase in the amount of electricity consumed, and thus demanded, since California’s restructuring (see figure 2). A California Energy Commission report argues, however, that these increases in demand do not represent departures from the trend in increasing demand recorded over the last four decades (n.b., these figures are associated with California’s 2002 ranking as the most energy efficient state).

Figure 2. Residential Consumption (CEC, 2002)

Energy efficiency programs:

“California’s energy efficiency programs have historically encompassed some of the largest and most effective programs in the United States” (CPUC, “2001 Energy Efficiency and Conservation Programs,” 2001). Since deregulation, however, many argue that competition is already leading to “the demise of many utility-sponsored programs for energy conservation” (Brennan, Alternating Currents, 2002). The legacy of effective energy efficiency can be traced to the 1974, when the creation of the California Energy Commission (CEC) heralded a new era of energy conservation: one of the CEC’s mandates involves the coordination of conservation activities. This trend continued into the 1980s as regulators and utilities began to pursue more earnest programs: successful regulatory activism and energy efficiency went hand-in-hand. During the early 1990s, energy efficiency programs were in full swing until word of deregulation led many to believe that these programs would be destroyed. On the surface, there are similarities between pre- and post-deregulation energy efficiency programs in California. Utilities and non-profit organizations now advance brochures, guidebooks and extensive websites on energy efficiency. Below the surface, however, there has been a transformation: the programs are now predominantly organized by governmental and independent bodies and funded by the residential customers. The CPUC is the key coordinator of these programs and their funding. Customers pay a Public Goods Charge (PGC) every month that contributes to a public benefits fund, with which the CPUC solicits and approves plans for energy efficiency

Expenditures and Savings:

The budget allocations of utilities and regulatory bodies on energy efficiency roughly parallel the qualitative trends in energy efficiency programs: immediately following deregulation, there was a decline in investment, but this decline may prove to be short-lived. Indeed, expenditure on energy efficiency in California took hold in the mid-1980s and rose through the early 1990s; since then a marked reduction in post-deregulation spending has dissipated and given way to spending that approached all-time highs in 2001 (see figure 3).

Figure 3. Energy Efficiency Expenditures (CPUC, 2002)

Similar to expenditure on energy efficiency programs, the savings (in kWh) induced by the implementation of energy efficiency programs in California have varied over time. Most recently, savings (total and residential) have increased since deregulation (see figure 4).

Figure 4. Electricity Savings, 1998-2001 (CPUC, 2002)

It is difficult to draw definitive conclusions about the impact of deregulation on energy efficiency in California’s residential sector. Measuring the effects of deregulation and establishing an association between deregulation and efficiency has proven very challenging. The lessons that can be derived from this case study are that, first, turning a natural monopoly like electricity into a textbook example of perfect competition is “close to impossible, and probably would not make sense under any circumstance” (Banks, 2002); and that, second, “all states are realizing that deregulation is very complex and that just when they think they have control of it, they find out something sneaks up from behind and bites them” (Shames, 2002).

  © 2002 McGill School of Environment
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