Topic Area: Demand-Side Management of Energy
Geographic Area: Madison, Wisconsin, USA
Focal Question: Can a "game" encourage a utility to promote demand-side management of electricity?
(1) Newman, Paul; Steven Kihm and David Schoengold. 1992. "Spare the Stick and Spoil the Carrot: Why DSM Incentives for Utility Stockholders Aren't Necessary," in Regulatory Incentives for Demand-Side Management, Steven M. Nadel, Michael W. Reid and David R. Wolcott, eds. Washington, D.C.: American Council for an Energy-Efficient Economy. 1992.
(2) Electric Utility Week. 1988. "PSC sets conservation competition between Madison G&E, contractors." P.3. July 4.
(3) Electric Utility Week. 1989. "Competition by MG&E, private firms for conservation showing promise." P.15. March 27.
(4) Electric Utility Week. 1990. "Madison G&E competition with DSM suppliers is successful, PSC finds." P.15. July 16.
Reviewer: Aran F. Ryan, Colby '96

Incentives for Demand-Side Management:

Energy is not an end of itself; instead it is a means to provide a number of services. Firms and households view energy as an input, an expense of doing business or maintaining a home. They are less concerned with how many kilowatt hours they purchase than with the services such as heat, light and appliances which electricity provides. This relationship provides the basis of demand-side management (DSM) - the conservation of energy through reduced demand, to the benefit of consumers, the environment and utility shareholders.

As a facet of sustainable development energy conservation through DSM offers welcome potential:

"Credible estimates indicate that cost-effective technologies available today have the potential to cut the nation's electricity use by 30% - 75% without lifestyle changes or reduced growth of the GNP."
(Gellings et al., 1990; within Nadel, Reid, and Wolcott, 1992)
Once the twin disincentives to DSM of linked profits and sales and DSM program costs are removed, in many cases it is still necessary to offer incentives in order to coax utilities into providing DSM programs to their customers. The Wisconsin Public Service Commission (Wisconsin PSC) experimented with one type of DSM incentive when it directed Madison Gas & Electric (MG&E) to participate in a competition to provide DSM services to its customers.

The Competition:
In June 1988, the Wisconsin PSC outlined a competition between private suppliers of energy-efficiency measures and Madison Gas and Electric in which the winner would be determined as the firm having achieved the greatest customer energy savings. Wisconsin PSC was motivated to institute "simultaneous competition" incentives after MG&E failed to achieve earlier commission-directed conservation goals.

Sectors and Competitors:
Private consultants and contractors submitted preliminary proposals to a three-man panel charged to direct the program. Private firms were required to demonstrate previous relevant experience and an ability to compete with MG&E. The following firms were selected as competitors in defined sectors and allocated working capital:

· Large Commercial and Industrial Sector: Honeywell Inc.; allocated $348,500.
· Commercial and Apartment Sector: A&C Consultants Inc., of Atlanta; allocated $392,500.
· Rental Sector: Building Resources Management Corporation, a subsidiary of Puget Sound Power and Light in Bellevue, Washington; allocated $209,000.
MG&E was allocated a similar total and was allowed to compete in all three sectors as it saw fit.

Each competitor entered into a contract with MG&E to provide conservation services such as more efficient lighting or energy consulting services. The firms could use the funds allotted them to meet the costs of labor, materials, and capital incurred providing these services. The firm achieving the largest dollar savings in its sector by providing the most cost-effective conservation, would be deemed the "winner" and rewarded with a bonus of at least 10% of costs. These savings measured were the "conservation value," equal to the cost of the energy conserved plus the avoided capacity. The final score was based on a combination of the quantity and cost-effectiveness of conservation benefits achieved, to be determined from customer's electric bills.

According to Wisconsin PSC the competition was an "unqualified success." Total conservation value attributed to the competition was $13.6 million. Overall, conservation was worth 6.5 times cost.

Large Commercial & Industrial
Small Commercial & Industrial
Multi-family Rental
Conservation Value
Conservation Value
Conservation Value
A&C Inc.
(Dollar values reflect "conservation value.") Source: Electric Week, 1990

MG&E was awarded $200,000 for its performance while Honeywell received a bonus of $40,000. Three important effects were observed (Newman et al., 1992):
1) The competition stimulated significant increases in DSM programs;
2) The potential for monetary award was not as powerful a motivator as winning or losing;
3) Each of the competitors spent money on cost-effective demand-side measures and achieved significant savings.

The results of the competition were subsequently used as a benchmark for evaluating conservation initiatives by other Wisconsin utilities. MG&E itself was directed by PSC in a July 15, 1990 rate order to aim for a net conservation benefit of $16.0 million during the 1990-91 test year from an authorized budget of $5.7 million. Despite winning two of the sectors MG&E proposed retaining Honeywell as a vendor and considered the contracting of additional private vendors for future conservation projects, observing that some vendors have large staffs and may be able to leverage conservation funds more efficiently than MG&E.

Competition and DSM:
The MG&E competition shows that providing an incentive to DSM brings results. This example may prove especially pertinent as the energy industry faces deregulation. In situations in which utilities become exposed to competition from independent energy suppliers traditional methods of regulation are less effective at promoting DSM. The MG&E competition was not grounded in traditional regulatory theory and stands as an example of the type of creative thinking which may continue to advance DSM as a necessary facet of sustainable development.

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