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Orange County Register
Guest Columnist: Dennis J. Aigner
March 25, 2001

Twenty-five years ago, in the aftermath of the first move by OPEC to curtail the world oil supply, there was interest by the federal government in exploring "demand-side management" as an alternative to building more generating plants that ran on oil or diesel fuel.

Especially important then was testing the idea that through the use of appropriate price signals, electricity customers would shift part of their usage out of peak periods, thereby reducing the need to run smaller, dirtier and more costly-to-operate generating plants in order to satisfy peak demand.

In 1978, the Department of Energy helped fund a number of experiments and projects in California and other states devoted to time-of-use (TOU) pricing and direct load control (e.g., remote cycling of air conditioners). This was just after PG&E and Southern California Edison had established mandatory TOU-pricing schedules for their largest commercial/industrial customers.

Time- and seasonally-differentiated prices properly reflect generating costs that can vary dramatically between daytime and nighttime, summer and winter, or both. This is a good thing because then users at peak times pay relatively more for power when it costs more to produce it. But it costs more to meter usage by time-of-day and to allow for shifting the definitions of peak and off-peak periods by season. For very large power customers, the potential benefit on the generating system from them shifting usage out of the peak period and reducing peak demand clearly justifies the installation of more expensive metering equipment. For small and medium-size business customers and for residential customers, the question at that time was whether they could or would shift enough usage out of perk periods to at least offset the additional costs of metering.

A major experiment in TOU-pricing for SCE's residential customers conducted in 1979-81 sheds considerable light on what is likely to happen were such a scheme to be implemented on a mandatory basis today.

First of all, for high consumption households there were significant conservation effects in the peak period as a result of TOU-pricing. Some shifting of usage to the off-peak period did take place, but frequently this amount did not equal the peak period reduction, and, hence, overall conservation was the result. In some cases peak period energy reductions in the summer ranged up to 19.2 percent. And there was no tendency to create a new and more significant spike in demand at either the beginning or end of the peak period.

Since with a pricing-system approach to demand-side management the responses of customers are not guaranteed, the question arises as to what happens on the worst days in the summer - the so-called system peak days. Perhaps on those days, which are characterized by very hot temperatures, people will choose to run their air conditioners anyway, no matter how much more expensive it is. Were that to be the case, then capacity will have to be there to satisfy demand - or there will be rolling blackouts as we have recently experience in California. As a result, while there may be energy savings from the implementation of TOU-pricing, the hoped for savings in generation capacity would not materialize.

To the contrary, it was found that TOU residential customers not only behave in a similar fashion on system peak days and on average summer weekdays, there were instances of even higher relative peak-period reductions on system peak days.

Finally, with regard to the question of additional metering costs, at peak to off-peak price differentials that would apply were such a scheme to be implemented today, SCE residential customers overall would save enough money with no degradation in their welfare to pay for the additional metering costs themselves. There is reason to believe similar outcomes would obtain for residential customers in the rest of the state.

Why implementing mandatory TOU-pricing at least for large residential customers in California is imperative is clear: Most of the Western states are in the same boat as is California. Of the 11 western states, only Montana added enough electric generating capacity during the 1990s to keep up with population and business growth. Without conservation and usage reflecting the cost of providing electricity through prices, it is going to be a miserable summer.

TOU-pricing provides both. Equally important for the longer run, changing the shape of the so-called system load curve by flattening the peak allows larger, cleaner, more efficient generating plants to carry more of the responsibility for providing electricity supply. I would have added "cheaper" to this list except that most of the new power plants approved or proposed for construction in California would run on natural gas, whose price nationally has trebled in the past year. In any event, only a handful of these new plants will be operational soon, if 2003 fits your definition of "soon." Clearly, there will be no quick relief coming from new conventional generation plants built in California or in neighboring states.

Over the past decade, California's annual energy use per capita has remained essentially constant. While appliances and computers are far more energy efficient than in the past, their proliferation has cut into the realization of those savings, in much the same way that the sheer number of additional cars on the road has mitigated the improvement of emissions technology.

Whether to impose higher gasoline taxes in order to force conservation on drivers and improve California's urban air is a public policy issue to be debated. The outcome rests on a benefit calculation linking today's air quality to tomorrow's public health. The benefits of mandatory TOU-pricing for large residential electricity customers are immediate once meters are installed and rest on a straightforward rationale: Let prices fairly reflect the costs of generation. Simple. Understandable. Compelling.

Dennis J. Aigner is acting dean at the Bren School of Environmental Science & Management at UC Santa Barbara. He is responsible for the design of a large "social" experiment in time-of-use pricing for residential customers on behalf of Southern California Edison that was conducted over a two-year period in 1979-81.