High Power Prices Lit Fire Under Conservation

Higher electricity prices are inducing significant conservation in California, demonstrating how regulators might have acted more quickly to defuse the energy crisis, avoiding blackouts and maintaining the financial health of the state’s large utilities, economists said Friday.

Almost a third of electricity customers in areas of the state served by the three largest private utilities are slashing their electricity consumption and qualifying for 20% rebates, according to an early reading of billing statistics.

State officials expected that only 10% of customers of the big utilities would get the rebate, triggered by cutting their power usage by 20% over the same month last year. The program is scheduled to end in September.

After processing more than 900,000 bills for June, Southern California Edison said Friday that 31% of its residential customers are qualifying for the rebates, trimming their electric bills by a collective $2.5 million for the month.

Meanwhile, 19% of businesses reached the threshold by reducing their electrical usage.

“This is a basic economic lesson that applies to electricity, water. . . . When you provide something at a low price, people will use a lot of it. When prices go up, they use less,” said Alec Levenson, an economist at the USC Marshall School of Business.

Moreover, economists said the experience highlights the slow reaction of state government and regulators to the electricity supply crunch and price spikes of the last year--problems that brought rolling blackouts to California, bankruptcy to Pacific Gas & Electric and insolvency to Edison.

“If we hadn’t played the blame game for four or five months before raising rates to reflect the reasonable and true rate of power, all of this would have been better,” said Stephen Levy, director of the Palo Alto-based Center for Continuing Study of the California Economy.

“Most economists thought that passing on the cost of power to customers earlier would have been a good idea,” he said.

In May, the California Public Utilities Commission approved a five-tier rate increase for 9 million Edison and PG&E; customers.

Average residential rates were projected to rise 47% for Edison customers and 55% for PG&E; customers using more than 130% of their baseline.

Industrial and small-business rates were projected to rise 49% and 35%, respectively. The new rates went into effect last month. But for those qualifying for rebates, those price increases are greatly moderated.

Economists said the rate increases sparked an immediate conservation effort by consumers.

Californians used 12% less power last month than in June 2000, according to state officials. And during peak consumption hours, usage was down 14%, about equivalent to the output of 10 major power plants.

The reductions computed by Edison so far are based on about a quarter of its 4.3 million customers.

In Northern California, 30% of the 1.3 million electric bills processed by PG&E; so far this month qualify for the rebate, the utility said.

And 38% of San Diego Gas & Electric Co. customers are earning the rebates. SDG&E; customers need to cut usage by only 15% to qualify for a rebate, a nod to their higher electric bills and conservation efforts of last summer.

Roger Salazar, a spokesman for Gov. Gray Davis, shrugged off the idea that Davis could have helped the utilities by supporting rate hikes and consumption-reduction incentives earlier.

“You can armchair quarterback all you want,” he said.

The rate hikes and incentives, he said, are just two of many factors behind the move to conserve power. He also cited tax credits for energy-saving measures and a general awareness of the magnitude of the crisis.

Yet since it takes years to bring significant new electrical generating capacity on line, rising consumer prices and incentives to conserve were the obvious short-term strategy, Levy said.

“It is the best tool we have for summer 2001. And it turns out that if you can knock out 10% to 12% of the demand, you won’t have the blackouts,” he said.

Ironically, the people who are gaining the most from the rebate program are the ones who once were the biggest energy hogs, Levenson said, because they have the easiest time cutting back.

“Someone who has always been frugal will have a lot of trouble cutting electricity usage by 15% to 20%,” he said.

Levenson believes that price increases alone would have fostered conservation and might have been a more equitable approach.

Levy said the next step regulators should take is to move to time-based rates, charging more during periods when electricity is in high demand and less at off-peak times.

Some California residents are offered rudimentary types of time-based pricing plans, but they are not widely used. Such plans make sense for residential customers, who often have flexibility in their electrical usage, Levy said.

“Consumers will tailor what they do to take advantage of pricing, such as using their washers and dryers after 8 p.m. or very early in the morning,” he said.