Review of Industrial Organization
13: 467–486, 1998.
1998 Kluwer Academic Publishers. Printed in the Netherlands.
Analysis of United States’ Utility Conservation
Otto-von-Guericke University Magdeburg, Department of Economics, P. O. Box 4120, D-39016
Vienna University of Technology, Gußhausstr. 27–29, A-1040 Vienna, Austria
Abstract. This paperreviews the United States’ experiencewith utilitysponsored energy conservation
programs. Such programs are central to the recent discussions about electric utility regulation in the
United States and elsewhere. First it is shown that these programs are exposed to three problems on
the consumers’ side – rebound, adverse selection and moral hazard – which lower the effectiveness
of conservation incentives and impede in most practical cases a reliable quantiﬁcation of the achieved
conservation. Moreover, the utilities have under the regulatory practice an incentive to invest in
conservation measures but to limit factual conservation through a proper design of the program.
Reviewing the recent literature shows that these four crucial points, which affect many of the applied
conservation programs, are either insufﬁciently covered (rebound and adverse selection) or neglected
entirely (moral hazard and regulated utilities’ interest in little conservation). We conclude, that this
undertaking has resulted in insigniﬁcant conservation and doubt the adequacy of these programs to
reduce external social costs from energy use.
Keywords: Conservation programs, strategic reactions, efﬁciency.
JEL codes: L50, Q30.
Demand side management (short DSM) is one of the most topical issues of reg-
ulating electric utilities, in the United States and internationally. What is DSM?
DSM consists of various measures at the level of demand (households, commer-
cials, industry and others), which are at least partially ﬁnanced by electric utilities
and which should either conserve energy or reduce the peakload. The practice of
DSM originates from The Public Utility Regulatory Policy Act of 1978 (PURPA)
that provided the political and legal framework to set energy conservation as a
national goal, which encouraged regulatory commissions to initiate utility conser-
vation programs; see e.g., Nowell and Tschirhart (1990) and Fox-Penner (1990).
Moreover, integrated resource planning, which must account for DSM on a level
playing ﬁeld with supply, is written into the 1992 Energy Policy Act as the U.S.
Government’s preferred method of electric power planning. Although PURPA set
energy conservation as a national priority, the implementation was left to the states