Utilities: Consumers adapted and cut demand. Understanding why will be key in forging post-deregulation policy.

Source: Jerry Hirsch - LA TIMES 2001.10.28

Nearly half of the residential customers of the state's two largest utilities spent less on electricity in August than in the same month a year earlier, defying predictions
that California's energy crisis would peak this summer with millions of households diverting milk money to pay higher power rates. Even the most conservative of estimates indicate that higher prices, cooler weather, incentives and other factors conspired to help Californians trim demand by at least 8%.

To some, this phenomenon validates arguments that if the state had acceded to utility demands to raise rates a year ago, the market would have adjusted to the
shock and the power crisis would have been short-lived. But now, as the energy crisis wanes, policymakers are working to understand why consumers adopted the
conservation mantra so quickly, and to what degree weather played a role in curbing usage.

Economists and others say this will be crucial in forging energy policy in a post-deregulation environment.About 1.9 million, or 50%, of Southern California Edison's residential customers paid lower electricity bills in August 2001, compared with August 2000. In Northern California, more than 1.7 million, or 43%, of Pacific Gas & Electric residential customers saw their August bills drop. Similar savings were seen during most of the summer. Many analysts attributed the trend to an unseasonably mild summer, which allowed households to turn down their electricity-guzzling air conditioners.

But there are conflicting data about whether summer was any cooler than a year ago. Clearly, rebates for energy-efficient appliances played an important role in lowering bills. Such investments will continue to reduce energy demand for the foreseeable future. A state plan that rebated 20% of customers' bills to those who trimmed consumption 20% during the summer months was another key factor. One-third of Edison's residential customers qualified for the rebate this summer.

Whether conservation stemmed from good citizenship or favorable weather, many residents found their lower electricity bills as surprising as the lack of predicted
rolling blackouts this summer. "We laughed every time we opened up the bill," said Valerie Rodriguez, an Edison customer in Westlake Village. Rodriguez expected to pay more because the rate increases instituted by the PUC. Instead, said Rodriguez, who lives with her husband and two children in a 2,000-square-foot home, her bills totaled about $290 from June through September, a savings of $230 from last summer. "I guess we became more energy-conscious," Valerie Rodriguez said. "We turned off the hot tub and started turning out lights." All told, the Rodriguezes slashed their usage by nearly half, to 2,212 kilowatt-hours, from summer 2000. That qualified them for the 20/20 rebate.

Understanding how people will react to future price swings will help policymakers decide how much they can let prices float and what types of conservation
incentives and rebates will work best to keep supply and demand in balance. "There is a whole lot of work going on trying to figure out the answers to these questions," said Richard Rohrer, chief demand forecaster for the California Energy Commission.

Severin Borenstein of the UC Energy Institute in Berkeley, after adjusting for weather, estimates that Californians cut usage by 8% to 10%. "If you have enough of a price increase, people change their behavior," he said. "This proved there was a whole lot of low-hanging fruit to be picked. Most households can cut back 10% to 20% pretty easily."

Consumer advocates say the evidence is still far from conclusive, noting that when retail rates were allowed to float in San Diego in summer 2000, residents and
businesses made only modest conservation efforts, even as their bills doubled and tripled. And California businesses, which account for about 60% of electricity demand, in most cases have paid higher bills as a result of a series of rate increases instituted by the California Public Utilities Commission this year.

In any case, policymakers should get a clearer picture of residential consumer behavior in coming months. The state's 20/20 rebate plan ended with the September
billing period. Consumers could react to that change in two ways. Absent the incentive of the big rebate, they might relax their conservation efforts. But as they get higher bills, they also could continue to reduce power consumption to blunt the pain of rate increases of as much as 40%. At least one-third of Edison's customers paid less for power in any month from June through September. And no more than 44% saw bills increase. Savings ranged from a few dollars ($3.63 in the July bill for Barbara and Steve Sperling's family in Seal Beach) to the hundreds ($115.99 in the August bill for the Rodriguezes). Although the Sperling and Rodriguez families live in different climates, separated by at least an hour of Southern California freeways, their responses to the energy crisis followed classic economic theory, said UC Berkeley's Borenstein.

Borenstein believes consumers reacted to a misperception that electricity rates had risen far higher than they had. He said businesses have shouldered the majority of the rate increases. Because of the way rates are designed, consumers have seen about an 18% increase. Not everyone buys the argument that the state's experience during the summer represented a classic market test of supply, demand and consumer behavior. Michael Shames, executive director of the Utility Consumers' Action Network, said that even with the latest statistics on billing and conservation, there is still no conclusive evidence that consumers respond quickly to electricity price increases by reducing consumption. "We believe the opposite has been proven in the past year," said Shames, whose group is based in San Diego. Freed from a rate freeze that prevented Edison and PG&E from raising rates when wholesale electricity prices spiked, San Diego Gas & Electric was able to pass on its higher energy spending to customers in summer 2000. Residential and business users saw their bills double or triple--and in some cases rise tenfold, Shames said--before the state stepped in to institute price caps. "During that three-month period when rates jumped, the smaller customers cut use by only 10% to 15%," Shames said. Rates this summer were lower, he said, "yet 40% of the customers were achieving savings of more than 15%. So the level of energy savings rose as rates went down." Shames believes that a broad public conservation education campaign, fear of blackouts, the 20/20 rebate program and cooler weather were far greater inducements to reduce electricity consumption than the price of power.

The coming months will allow experts to determine how big a factor weather played in reducing electricity demand this summer. The conventional wisdom was that a cooler summer in much of the state allowed people to use far less air conditioning than a year earlier, resulting in much of the energy saving. But was the summer as cool as most people believe? According to the National Climatic Data Center, statewide summer temperatures this year were about the same as last year; the summer, in fact, was California's 25th-warmest in the last century. The California Energy Commission used those data to calculate that after adjusting for weather and the economy, conservation efforts in California cut electrical use from 8% to 14% this summer.

Scott Stephens, a meteorologist with the climatic center in Asheville, N.C., said its data are culled from reporting stations throughout the state, a technique that is
"apples and oranges different" from the method of the National Weather Service to derive temperature averages for individual locations. The weather service reported that the average July temperature in downtown Los Angeles was 71 degrees, or 3.9 degrees cooler than average. The average in August was 72 degrees, 4 degrees below average. The climatic center, by contrast, said the average temperature for California was 74.8 degrees in July, only slightly below the normal 75.3 degrees, and 75.4 degrees in August, actually an increase from the historical average of 74.3 degrees.

For many consumers, the lower bills might be temporary. The expiration last month of the 20/20 rebates probably will reverse the trend toward lower residential
bills, said Christy Dennis, a spokeswoman at PG&E, the San Francisco utility. And it also removes a big financial incentive to conserve. Still, the utilities say, many residential customers are taking long-term steps to conserve, spurred by rebates for energy-saving products and appliances. Edison estimates it will receive 1 million calls this year about its refrigerator recycling and rebate program, compared with 200,000 last year. Its rebate payout for refrigerators will more than double to $7.4 million. PG&E says it has issued nearly 80,000 rebates for energy-efficient refrigerators this year, more than four times what it processed a year earlier.