u.s. energy conservation policy : themes and trends

Policy Studies Journal, Vol. 20, No. 1,1992 (114-123)

U.S. Energy Conservation Poliq^:Themes and Trends

Gordon A. Kingsley

One of the primary goals of U.S. energy conservation policy at the fedo-allevel during the last 10 years is to allow maiket prices for energy to determine the extentto which consCTvationprogramsand technologies are adopted. TheBush administrationrecently unveiled the latest energy policy proposal, and, as in the past, energyconservation was not central to the policy program (Department of Energy [DOE],1991; Idelson, 1991). Strong evidence is cited from the energy markets in support ofthis conservation policy. Consumption of energy has increased only 10% since 1973(DOE, 1991). Similarly, the consumption ofoil is less than in 1973 (DOE, 1989). Theeconomy has continued to prosper while the price of energy has retumed to relativelylow rates during the 1980s (DOE, 1991; DOE, 1989). Recent volatility in crude oilprices due to the Persian Gulf war seems to have been absorbed to date without muchdisruption to the U.S. economy (Berry & Caimcross, 1990). Though recent trends ofincreases in energy consumption are troubling (Blesviss, 1990), there is much tosuggest that the market strategies have been successful in promoting energy conser-vation.

It is interesting that, in light of this success, energy conservation policy is onceagain an issue in the legislative and regulatory arenas. The stimulus for energyconservation is not to be found in the markeq)lace for oil, kilowatt-hours, or natural gas.Nor is it found in legislative and executive decisions regarding the social welfare of thenatirai. This is curious, given that there is some evidence that a balanced energy policy(i.e., between conservation measures and supply strategies) results in a better competitiveposition fw a country's manufacturing base, as opposed to policies that emphasize thesteady supply of energy (Bourgeois, Criqui, & Percebois, 1988). Instead, the stimulusfor the promotion of energy conservation comes fiom a coalition of interests betweentwo political actors: regulatory agents, in particular public utility commissions(PUCs); and environmental activists. Both agree on the solution of energy conservationstrategies. However, they come to their conclusions while answering very differentquestions.

Public utility commissioners are faced with difficult decisions regardingadditions to the eno-gy production capacity of utilities. Many states are finding that themost cost-effective way to increase energy capacity is to reduce the consumptionthrough conservation measures. The high costs of building new power plants, coupledwith tight slate budgets and low tolerance in the electorate for higher utility rates, havecontributed to greatCT intervention by PUCs in the operation of many utilities(Barkovich, 1989; Gromley, 1983). This movement is spurred by experience gainedin the 1980s which suggests that conservation woiks (DOE, 1991).

The difficulty thatPUCs face also stems bom the high political costs involvedin granting rights to utilities to expand production. Environmental groups have been

Reviews/Essays: Kingsley

extremely active in grass-roots campaigns blocking the development of nuclearfacilities (Barkovich, 1989). Similar resistance has also applied to other forms ofpower generation plants. Various grass-roots groups concemed with such issues as theenvironment, low-income rate payers and life-line programs, and nuclear power, havefound common cause in addressing PUCs (Gromley, 1983).

This essay reviews current U.S. energy conservation policy. Of particularinterest are the prevailing policy trends of (a) reluctant involvement by the federalgovernment, and (b) increasing regulatory interventionism by PUCs. It is argued thatunderlying the policy trends is a fundamental uncertainty regarding the market priceof energy and the appropriate role of government. This uncertainty also explains whyissues of energy conservation and efficiency have not stood on their own merit but haveachieved political potency only during periods of high market prices for energy, orwhen combined with environmental conservation issues.

U.S. Energy Conservation Policy

Energy conservation policies are designed to ensure stable and adequatesupplies of energy through the development of altemative resources or technologies,and through the efficient use of existing energy production and conversion systems(DOE, 1991). The conservation policies adopted to date have emphasized enhancingthe efficient use of energy through programs targeted at the residential, commercial,industrial, and transportation sectors. This is done either through regulations estab-lishing performance standards and practices, or by developing incentives for the{plication of altemative technologies (DOE, 1989). Emphasis has also been given toresearch and development of altemative sources of energy such as hydroelectricpower, renewable resources, biomass fuels, and cogeneration (DOE, 1989).

The primary actors in energy conservation policy are conservation programsempowered through a legislative process (fedwal, state, or local), and regulatorypolicies and programs determined by PUCs and other fedo^, state, and localregulators. The intergovemmentai effects related to these policies are quite strong anddominated by the federal govemmenL For example, much of the funding for stateenergy offices has been provided through federal appropriations and programs.Similarly, when regulations conflict between levels of govemment, it is the federalregulation that will take precedence. Nevertheless, much ofthe current emphasis onenergy conservation policy is developing at the state level.

The legislation underlying many conservation programs was developed atthe federal level in the late 1970s. This body of legislation reflected the Carteradministration's view that eno-gy conservation was to be a comerstone for U.S. policyin responding to the oil shocks of the 1970s (Cohn 1981). Some of the major piecesof legislation include the following: Energy Policy and Conservation Act (1975),Energy Production and Conservation Act (1976), National Energy Conservation Act(1978), PubUc Utilities Regulatory Policies Act (PURPA) (1978), Energy Tax Act(1978), Emergency Energy Conservation Act (1979), Energy Security Act (1980)(Riposa, 1988).

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Since that time the Reagan and Bush administrations have sought to reducethe level of federal involvement regarding energy conservation. The role of govem-ment was reduced to encouraging conservation through information services andremoving govemmental regulations that protect individuals and business from themarket cost of energy. This policy perspective was implemented by cutting federalfunding between 40% and 70% for different conservation technology programs oraltemative resource research & development (R&D), (Riposa, 1988), and 100% in thecase ofsynthetic fuels development (Cohn, 1986). Only the intervention of Congressspared many of the programs addressing energy conservation technologies and[KOgrams involving the states (Cohn, 1982).

Part of this reduction included the Conservation Service Reform Act of 1986.Early evaluations of the Residential and Commercial Services programs found lowresponse and low success rates in pilot programs (Pickels & Audet, 1987; Hirst, 1984).However, this was not true of some evaluations of pilot programs reported in articlesincluded in this FS/symposium. In any case, the legislative response was to terminatethe federal Residential Conservation Service in 1989 (DOE, 1989). However, in doingso, the federal govemment did not prohibit states fiom pursuing similar efforts andpermitted states to design programs reflecting their individual needs (DOE, 1989;Sponseller, 1988). The TaxReform Actof 1986alsoeliminatedmanyoftheincentivesfor renewable and altemative energy sources (Goodwin, 1989). A similar type ofretroichment can be found in the regulation of the automobile industry whereCwpwate Average Fuel-Economy (CAFE) standards that were to go into effect in themid-1980s were rolled back to later dates (Liberatore, 1990).

At present, the federal programs addressing energy consCTvation are prima-rilyqxeadbetween the DepartmentofEnergy(DOE)and the Environmental ProtectionAgency. Federal programs at the DOE have emphasized R&D, information services,and intergovemmentai transfers of funds to state agencies to enact federal programs.Areas of emphasis under the assistant secretary for conservation and renewable energyinclude the following: buildings and community systems, industrial programs,transportation, and energy utilization programs.

In recent years, some legislative initiatives stimulated by environmentalconcems reestablished energy conservation standards. These include the following:congressional appropriations for the Least-Cost Utility Planning Program at the DOEin 1986; the National Appliance Energy Conservation Actof 1987, with Amendments

in 1988; theSteel and Aluminum Eno-gyCaiservationandTechnology CompetitivenessAct of 1988; and the Clean Air Amendments of 1990, which renewed the strength ofCAFE emission standards (DOE, 1991). Similarly, there are signs that the Bushadministration is easing federal hostility to consolation programs through a series ofinitiatives which repackage old programs with more funds and which call for thecreation of a federal energy conservation laboratory (Yates, 1990).

The fedoal govemment has also sponsored several intergoverrunentaltransfers in support of energy conservation. The Office of State and Local AssistancePrograms (OSLAP) at the DOE funds several state programs through OSLAP grantsand Petroleum Violation Escrow funds (i.e., oil overcharge retums). The primaryITOgrams under OSLAP are as follows (DOE, 1989; Randolph, 1985):

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1. State Energy Conservation Program. This program provided the funds,offices, and policy framework that created most state energy offices. This program wasestablished through the Energy Policy and Conservation Act of 1975 and amended bythe Energy Conservation and Production Act of 1976.

2. Energy Extension Service. This program provides funds for the state todevelop projects assisting small businesses, local govemments, and residential users.This program was established by the National Energy Extension Service Act of 1977.

3. Institutional Conservation. Many not-for-profit organizations such ashospitals, local govemments, schools, and nursing homes have been slow to adoptenergy efficiency measures. This program provides matching, cost-shared grants(50% from the federal govemment and 50% from the participating institution) to suchorganizations. The state can then encourage energy audits, energy efficient operationsand maintenance, and conservation equipment retrofits. This program is organizedunder the National Energy Conservation Policy Act of 1978.

4. Weatherization Assistance Program. This program provides funds so thatlocal weatherization agencies can retrofit the residences of low-income individualswith energy efficient technologies. The weatherization program is authorized by theEnergy Conservation and Production Act of 1976, as amended by the National EnergyConservation Policy Act of 1978, the Energy Security Act of 1980, and the HumanServices Reauthorization Act of 1984.

5. Residential Energy Conservation Programs. This program required gasand electric utilities, upon request, to provide customers with residential energy auditsof their residences and services to improve energy efficiency. This program wasterminated at the federal level in 1989 under the authority of the Conservation ServiceReform Act of 1986. However, as noted above, this same act also provided the stateswith great flexibility in designing and supporting similar programs.

While federal legislation and programs have vacillated on the question ofenergy efficiency, the national regulatory bodies have become more interventionist inthe cause of energy conservation (Barkovich, 1989). In particular, efforts to promotecogeneration have been supported. Cogeneration is the process of producing energywhile engaged in another process such as manufacturing. This energy is then used bythe organization or sold back to the power grid. Under PURPA, such cogeneration wasto receive favraable treaUnenL But state utility regulators made it difficult forcogenerators to sell by-product electricity outside the firm (Fox-Penner, 1990). In thisenvironment, utilities were charging high rates for hooking into the grid. They werealso offering low fees for the energy produced, thereby discouraging the spread ofcogenerating facilities. Rulings by the Federal Energy Regulatory Commission(FERQ recommended guidelines for utilities to follow in the purchase of cogeneratedenergy even under circumstances when the extra capacity was not needed.

PUCs have been the primary promoters of energy conservation measures inrecent years. The impetus for this is the high cost of creating additional energyproduction capacity (Barkovich, 1989; Sponseller, 1988). This has led to the adoptionof "least-cost" approaches to providing the needed energy. Least-cost policies addressnot (Mily the primary costs of energy production, but also secondary effects, such as"costs of ensuring the reliability of a utility system, equity, safety, and environmental

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and economic impacts" (DOE, 1989). However, least-cost policies are controversialbecause they raise fundamental issues about how utilities are paid for their services.The regulatory structure has designed the incentive system so that utilities haveiraditionallymade money byprovidingmore kilowatt-hours (Schuler, 1990). Thishascreated a preference in the utility industry towards creating additional capacity forproduction in the face of increased demand (Barkovich, 1989; Moskovitz, 1989). Themost controversial aspect of least-cost plans has been the incentive systems designedso that utilities could make money from energy conservation programs. Plans offeringcust(Mners rebates, loans, or other financial incentives for reducing consumption orpurchasing high-efficiency appliances are particularly controversial (Sponseller,1988). Many of these programs are developed under the sponsorship of the respectivestate Residential ConsCTvation Services. Major initiatives found in states include:

1. The submission ofconservation plans by the utilities to the PUCs. Suchplans are to place an emphasis upon the dissemination of technologies as opposed tothe dissemination of information about conservation.

2. Offering loans, rebates, and incentives for utility customers to adoptenergy-efficient appliances and weatherization technologies for their residences. Aparticular target of these programs has been low-income and senior citizen groups.Other programs have targeted rental properties for weatherization programs.

3. Offering institutional programs to schools, industry, and govemments topromote the adoption of conservation measures in their buildings.

4. Promotion of cogeneration programs. This has been given particularemphasis in northeastem states whwe utility systems are operating at capacity andbelow market demand.

5. The development of recoupment plans for utilities that initiate conserva-tion programs. Under such plans, utilities are given permission to assess surchargesfor the energy conserved (Burkhart, 1990). In one case, the State of WashingtonSupreme Court has allowed utilities to issue revenue bonds for conservation programs(Ml the grounds "that the purchase of consCTvation of municipal utilities was thefunctional equivalent of purchasing new electric capacity" (Sponseller, 1988).

Price Externalities and Political Leadership

Throughout the retrenchment of energy conservation policy during the1980s, the Reagan and Bush administrations have undertaken policies that encouragedthe supply of energy resources to the U.S., ensuring a low price of energy (Gibbons &Gwin, 1989). In doing so, the policies undercut much ofthe potential for conservationmeasures to have an effect in the energy markets.

Such measures demonstrate curious contradictions in U.S. energy policy.The first contradiction is the tremendous faith in the market price as a mediator in theselection of technologies that will be used in a market (Cohn, 1981). Second, byreliance on market prices, the policy effectively ignores the limits on the infwmationcontained in that price (Hogan, 1984).

Gibbons and Gwin (1989) argue that there are numerous extemalities not

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accounted for in the price of oil. These include: (a) environmental costs of energyproduction and use, (b) the costs of defending Middle East oil production, (c) the costof purchasing and storing oil to meet emergencies, (d) the various costs in our massivedeficit in balance of payments (more than a third of which is due to energy imports),(e) the oppOTtunity costs of tying up capital in costiy supply technologies when lesscosUy demand reduction technologies are available, and (f) the cost to our allies andimpoveri^ed Third World countries of U.S. competition for petroleum in the worldmarkeL Thecausesoftheseextemalitiesinclude(Savitz,1982): (a) low energy prices,(b) imperfect information among consumers regarding energy efficiency, (c) privatesector investment distortions arising firom a focus upon initial costs, (d) constraints oninivate sector research and development of energy efficiency measures, and (e) legaland regulatory constraints such as local building codes, electricity rates, or restrictionson the sale of electricity from cogeneration plants. Recognition of such extemalitieshave led to recommendations of selective conservation strategies (Fisher & Rothkopf,1989), as well as tariffs and oil surcharges (Hogan, 1984).

The existence of extmialities not captured in the market price has long beenan argument for govemment intervention. However, there are three dimensions to theproblem of extemalities that have discouraged an active govonmental response. Thefirst is concem over worsening the competitive position of U.S. industry. The UnitedStates has the lowest energy prices of the industrialized nations and has been in a periodof economic growth through much of the 1980s. During the same time period,relatively high energy prices encouraged energy conservation measures by consumersand producers (DOE, 1991). The combination of these two facts has led many topromote the wisdom of energy conservation policies (Gibbons & Gwin, 1989).However, the competitive position of the nation as measured through market sharesand productivity indicators has led administration officials to be reluctant to distort theIffice of oil through taxes (Cohn, 1981). This position is also argued on grounds ofpolitical pragmatism, as well as economic welfare, due to the pwception that such taxesare highly unpopular.

The second concem regards the effectiveness of govemment policy inidentifying the extemalities and developing a response. Though there are significantsavings to be gained from not building additional capacity, there are also highadministrativecosts associated with such conservation measures (Hirst, 1984; Costello,1987; Vine & Harris, 1989). Recall that early studies of the Residential ConservationService indicated that such programs have low participation rates and high costs, whichled to the Conservation Service Reform Act of 1986 (Hirst, 1984). In the same vein,there are concems that although energy conservation is the most cost-effective solutionin the short mn, it may not be the most economically efficient solution in the long runfor utilities or consumers (Costello, 1987).

The third concem is a philosophical opposition to govemment interferencein the marketplace which has characterized the presidential administrations of the1980s. According to the political perspective ofthe Reagan-Bush era, the market is themost efficient mediator of decisionmaking regarding energy technologies (DOE,1991). The federal govemment acts as a conservator of national resources "byestablishing a network of regulatory agencies and commissions as a response to

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specific, limitedand immediate problems" (Savitz, 1982). From this perspective, thereis no reason why regulatory instmments will be more effective than the marketplacein promoting energy conservation technologies. Utilities, which are designed to supplyand sell kilowatt-hours, and auto manufacturers are more effective in responding todemand conditions than implementing costiy innovations where there appears to beweak consume demand (Costello, 1987).

In many ways, the governance of the enwgy markets by the states hasmirrored the experience of federal goverrunenL States have found it difficult to pickup the slack during the era of federalism (Sawyer, 1985). First, they tend to follow theleadership of the federal govwnment because most state offices are sponsored byOSLAP grants. It is rare that state appropriations for energy programs reach even 50%ofthe federal support (Sawyer, 1985). Second, there are few chances for further statesupport given the tight budgets that most states face. Third, the abundant oil supply hasreduced the perception that energy conservation is a critical issue. Fourth, as in thefederal govemment, there is ambiguity OVCT the proper role of the state in energymarkets. Fifth, states' energy offices have not documented and publicized theirservices in an effective manner (SawyCT, 1985).

Several states have taken strong and active measures (New York, Califomia,etc.), but many have not, and studies have not found a common thread to explain thevariance in policy (Sawyer, 1985). Those states that have aggressively pursued energypolicies havedonesoin theenergy conservation arenarather than in theareaof resourcedevelopment They have employed carrots in the form of tax incentives, exemptions,rebates, and low-interest loans, as opposed to regulatory sticks, and have developedoff-budget methods for supporting such efforts (Randolph, 1985).

However, in the regulatory arena, there is a great amount of interest in energyconservation, particularly among state PUCs. The cost of constructing new capacityis soenOTmous that theconservationaltemativecannotbe ignored (Schuler, 1990). Forexample, generators "whose original cost may have avCTaged $200 pCT kilowatt (KW). . . arerq)lacedwithnewunits,whosecostmayrangebetween$l,500-2,000perKW"(Schuler, 1990). Similarly, the political costshavemountedforPUCs. Regulators findtheir working environment highly contentious (Barkovich, 1989; Gromley, 1983).Past regulatory relationships that left much of the management of utilities to thediscretion of the companies have vanished (Barkovich, 1989). . Regulators findthemselves between publics who hold a variety of stakes in the energy system andutilities that are cautious in the face of challenge (Baikovich, 1989). This mix of costshas led many regulators to the conclusion that energy conservation is a primary methodfor balancing between these forces. Such conclusions by regulators also suggest thatthe extemalities to the market price for energy may be played out in the deliberationsof PUCs and state programs.

Thenfies and Trends

In reviewing U. S. policy, two themes have emerged: (a) reluctance by federaland state govemments to embrace energy conservation programs, and (b) intCTest by

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PUCs in energy conservation, due to high economic and political costs. From thesethemes, three trends may be developed for U.S. conservation policy.

Trend 1: In the legislative arena, environmental conservation sells, energyconservation does not. Energy conservation sells when the price ofoil is relativelyhigh. This was tme in the 1970sand early 1980s,followingtheoil shocks, butthepricehas now retumed to a very modest level. For example, during that time period energyefficiency was the second highest priority in most auto consumers' list of preferences.Now, it is ninth (Liberatore, 1990). This is a remarkable demonstration of the powCTof the market, for in many ways circumstances mirrOT those prior to the first oil shockin 1973: "U.S. enCTgy prices are stiill low, domestic petroleum reserves are dropping,and oil impwts are increasing Nuclear advocates still jMomote their wares aseconomic (and now envirorunental) salvation. We're all still worried about pollutionand unrest in the Middle East" (Gibbons & Gwin, 1989).

Environmental conservation issues can and have been sold to the legislativeand executive branches. Concems for global warming, acid rain, ozone dqiletion, andgreenhouse effects have provided enough pause for the passage of Clean AirAmendments of 1990 and the various conservation measures discussed above.

Trend 2: In the regulatory arena, energy conservation sells because it is aninexpensive alternative. The stimulus in the regulatory sector of the govemment forenergy conservation is quite different as PUCs stmggle with the issues of ensuring thesui^ly of energy. This is because the general maiket for energy and the market forbuilding energy capacity are weakly linked. The consumer price of energy does not,as yet, reflect all significant extemalities. However, the cost of these extemalities isbeginning to demonstrate an influence in the delibCTations of PUCs and the producercosts of utilities (SchulCT, 1990; Barkovich, 1989).

This engages a debate, which dates back to the days of Edison, regarding thecompensation of utilities (Barkovich, 1989). Presently, PUCs and utilities areexperimenting with different recoupment plans so that utilities can make a profit byinvesting in consCTvation.

Trend 3: The real policy question is whether the current mixofir^uenceswillresultinrenewedconservationpolicyprogramsora "hiatus effect." The most strikingfeature of this debate over the years is not the efficacy of the arguments for one policyperspective over another. What is remarkable is the context of the argument which hasteetered between crisis and absence of crisis. Since the early 1970s, we haveexperienced three threats to the supply of oil through embargo, and two through war(the Iran-Iraq war and the Persian Gulf war). In all cases, the absence of the threat hascooled ardor ior a coordinated energy policy and energy conservation.

An analog for this situation can be found in the hiatus effecL The hiatus effectoccurs when policy starts and stops create an environment in which there is greatuncertainty regarding the support of govemmenL More importantly, the knowledgegained during the course of the project is lost when the policy is abandoned. Once theissue becomes supported again by policy, the personal knowledge developed in onegeneration has been effectively lost to the next Crow, Boseman, MeyCT, and Shangraw(1988) developed this hypothesis in analyzing the abandoned synfiiels project

Theeffective tie of energy conservation policy to the price of cmde oil creates

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a form of hiatus effecL First, there is great uncertainty regarding the importance of andtimeliness of conservation programs and technologies. When the price is high,conservation programs flourish. When the price is low, conservation programsdiminish or die. However, the price of energy does not capture information regardingthe costs associated with energy use which, if aq}tured, might stimulate demand forconservation programs. Federal reluctance to address these issues in the context ofenergy policy has reduced the capacity of govemment at any level to effectivelyaddress the extonalities associated with the market price of energy through conser-vation measures.

The recent resurgence of interest in energy conservation issues also carriesthe potential for a continuation of a hiatus effect because the strongest and mostfundamental stimuli for energy conservation measures are split between two issues.Politically, the mosteffective force for energy conservation seems to be environmentalcraiservation. Economically, the most effective force for energy conservation is thehigh costs that various regulatory commissions must approve for expanding the plantcapacity of utilities. The question that is currentiy being addressed in the policy arenais how environmental conservation programs and energy conservation programs, suchas least-cost plans, are connected in the future.

Energy conservation and environmental conservation are not always inharmony (Khazzoom, Shelby, & Wolcott, 1990). For example, the compromise thatsent proposed global warming legislation back to committee last year emphasizedleast-cost energy conservation options while de-emphasizing more controversialenvironmental issues (Perez, 1990). In other words, though energy and environmentalconservation issues have been linked together to promote consCTvation policies, theinteraction of the two separate issues may generate enough confiict to create a hiatuseffect for one or both types of conservation.

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