Demand-side management or DSM refers to active efforts by electric and gas utilities to
modify customers’ energy use patterns. The experience in the U.S. shows that utilities, when
provided with appropriate incentives, can provide a powerful stimulus to energy efficiency
in the private sector. This paper describes the range and history of DSM programs offered
by U.S. electric utilities, with a focus on the political, economic, and regulatory events that
have shaped their evolution. It also describes the changes these programs are undergoing as
a result of U.S. electricity industry restructuring.
DSM programs began modestly in the 1970s in response to growing concerns about
dependence on foreign sources of oil and environmental consequences of electricity
generation, especially nuclear power. They grew rapidly during the late 1980s as state
regulators provided incentives for utilities to pursue least-cost or integrated resource planning
principles. Electric utility DSM programs reached their largest size in 1993, accounting for
$2.7 billion of utility spending or about one percent of U.S. utility revenues. The foundation
for the unique U.S. partnership between government and utility interests can be traced first
to the private-ownership structure of the vertically integrated electricity industry and second
to the monopoly franchise granted by state regulators.
Electricity industry restructuring calls into question both of these basic conditions, and thus
the future of utility DSM programs for the public interest. Restructuring does not, however,
call into question the basic rationales for public policies to promote energy efficiency; the
environmental consequences of electricity generation in particular, remain a strong argument
for continuing energy-efficiency programs. In many parts of the U.S., broad public support
for energy-efficiency programs will lead to continued ratepayer funding for them. At the
same time, many utilities are interested in using DSM programs to further their unregulated
business interests in a restructured electricity industry. Thus, future policies guiding
ratepayer-funded energy-efficiency DSM programs will need to pay close attention to the
specific market objectives of the programs and to the balance between public and private
interests