Utility planning and demand-side management

The U.S. electric power industry spends a significant amount of resources on demand-side management (DSM) programs to reduce electricity consumption and/or to modify the pattern of the consumption. Many state regulators have provided regulatory incentives to those utilities within their jurisdictions in order to promote DSM. These incentive regulations, consisting of cost recovery, lost revenue recovery, and/or shareholder incentives, allow electric utilities to recoup their DSM costs and expenses. In some cases, utilities are even permitted to earn a 'fair' rate of return on DSM related expenditures. This study examines the impact of these regulations on the electric power industry.;The first part of this study contains a utility supply planning model in which DSM is considered as an alternative to traditional supply technologies, such as base-load and peaking unit, to accommodate electricity demand. This study demonstrates that, influenced by these regulations, utilities will place more weight on DSM to supply electricity than if these regulations did not exist. More importantly, these regulations may induce utilities to manipulate their DSM costs and expenses to their own advantage. As a result, DSM or electricity conservation is, or has been, attained by employing more than necessary resources.;The second part of this study uses information reported on EIA (Energy Information Administration) Form-861 to identify the factors that determine the magnitude of DSM pursued by an electric utility that adopts DSM. Because the adoption of DSM has been largely voluntary, the problem of sample selection bias arises. For this reason, both ordinary least squares and Heckman's two-stage estimation approaches are used. The estimation is performed based on the electricity supply planning model derived in the first part of the study. The results illustrate that the magnitude of DSM is influenced by the incentive regulations. A utility provided with regulatory incentives will pursue DSM more aggressively than a utility not furnished with any regulatory incentives.