Coda To The Puget Sound Energy Demand Management Program

On Wednesday PSE decided to terminate its residential demand management TOU program, according to this article. I am disappointed but not entirely surprised, as I think some poor strategic decisions were made in determining the residential focus of the program. Furthermore, halfway demand management approaches are more a creature of risk aversion than of courageous, innovative change, which severely limits the success of such programs.

Another guest post today comes from Jim Johnston, former senior economist at Amoco and a policy advisor to the Heartland Institute. Jim has been following electricity “deregulation” for years and brings a refreshing, novel finance-oriented perspective to the issue. Here are Jim’s observations on PSE:

I am not surprised at the Puget Sound Energy experience. It is not that I think consumers are ill informed or stupid. They probably realize that demand side management, even when successful in reducing peak loads, does not protect them from crises which are spawned on the supply side. Remember, the supposed payoff from reducing demand during peak periods is measured in terms of less investment in generating and transmission capacity. That, in turn, means that the system is less able to cope with failures of transmission lines and generating plants which might occur at any time, not just during peak periods.

I recently looked at William Vickrey’s Bell Journal article in 1971 which was the beginning of this idea of having consumers face real-time pricing. Interestingly, he also proposed the idea for telephone rates and airline fares. Can you imagine not knowing what your rate or fare will be until it comes time to make the call or show up at the gate? Moreover, how would the telecommunications and airline industries plan for peak load capacity and what would happen to prices when the systems fail on the supply side. It would be very inconvenient, to say the least. If it happened to electricity it would be a disaster. In 1965 the blackout in New York City was characterized by the New Yorker as “a festival of inconvenience” when the birth rate jumped nine months later. However, in 1977 when the power went down again, then mayor Abraham Beam called it “a night of terror.” Just ask yourself what you would do if the electricity went out for a day starting now.

The stark truth is that demand side management makes the delivery system more vulnerable to failure and I suspect that consumers instinctively know this.

Lynne’s observation: I think Jim’s comments illustrate the value of simultaneously freeing up regulatory constraints on demand-side retail pricing and on distributed generation, which would provide both alternatives to the susceptible centralized grid as Jim describes it and backup for it. I also think that many of the flaws he points out come from limiting the types of demand side management you implement. If you offer your customers a portfolio of contracts, kind of like when you choose among cell phone contracts, then you can satisfy a certain degree of price certainty (or budget certainty) and still shave peaks and get good changes to load shape.