Conservation Funds Paid by Utility Users Went Unspent

Millions of dollars that California’s big three utilities collect from customers each month for energy conservation have been lost to waste, indecision and extra profits for the utilities, records and interviews show.

With little rigorous oversight by the state, much of that money has gone unspent. Even more of the $228 million earmarked annually for conservation has been used for programs that officials now admit were ineffective, if not misguided.

In fact, state figures show, less electricity is being saved today than five years ago.

The California Energy Commission estimates that if conservation programs had been run as effectively as they were in the early 1990s, the state would need 1,000 fewer megawatts--the equivalent of the output of two large power plants. That would have been enough to head off January’s blackouts.

Now Gov. Gray Davis and the Legislature want to commit even more money in a last-minute bid to dodge outages this summer. Past performance is not inspiring confidence.

“We are glad that the state is looking seriously at energy efficiency,” said Marcel Hawiger of the Utility Reform Network in San Francisco. But, he added, “we want to make sure that the programs will not continue the waste that we’ve seen in the past few years.”

Since the mid-1970s, the utilities have taken a small bite out of every customer’s bill to feed a state-mandated conservation fund that primarily provided rebates and vouchers to businesses and individuals who bought energy-stingy appliances or undertook other power-saving measures.

But five years ago, with chaos swirling around California’s foray into deregulation, the program fell victim to neglect and a failed long-range strategy by the Public Utilities Commission, which wanted more money to go for underwriting cutting-edge conservation.

PUC Commissioner Richard Bilas acknowledged that his panel did not stay on top of the problem. He said policymakers were so focused on bringing deregulation to California that issues involving the conservation money “sort of got dropped by the wayside.”

“Now in retrospect,” he said, “there is probably a tremendous loss to customers.”

The state’s three private utilities--Pacific Gas & Electric, Southern California Edison and San Diego Gas & Electric--said they are proud of their conservation record. Utility executives blame confusion over deregulation and shifting directions from the PUC, which reviews how the money is spent.

“It wasn’t until this year that the PUC said, ‘You now have the flexibility to make energy savings your greatest priority,’ ” said Gene Rodrigues, director of Edison’s conservation programs.

“We have stepped up to that because it’s Southern California Edison and the other utilities who have turned around these programs, to turn them back into energy-saving programs.”

Consumer advocates, however, call the utilities’ stewardship of the conservation fund lackluster because of an inherent conflict: They make money by selling electricity, not by encouraging customers to cut back.

The PUC recognized this problem in 1997, shortly after the state’s electricity market was deregulated and the utilities faced competitive pressures to sell even more electricity. The commission wanted to transfer the huge conservation fund to an independent state agency. But then-Gov. Pete Wilson blocked the effort, saying the private sector could do a better job of running the program than the government.

The record has not been favorable to either. Among other things, the utilities failed to spend millions of dollars that were earmarked for conservation efforts--despite mandates under the state’s deregulation law requiring that all of it be used. It was not until last August that the PUC, faced with a growing electricity crisis, found that there was $70 million in unspent cash and ordered the utilities to devise a plan to spend the languishing funds.

Between 1994 and last year, the amount the utilities spent on conservation programs dropped more than 30%.

The utilities offer various explanations, depending on the time frame.

“It’s easy to say the utilities didn’t spend all the money. It’s easy to say there is a conflict of interest,” said Yole Whiting, director of consumer programs at SDG&E.; “But if you look carefully at all those things, I don’t think the charges are supported.”

Edison said that some money parked in its conservation account went unspent because it had been earmarked for customers who had pledged to save electricity but never did. PG&E; said that in recent years, the problem has been in figuring out how to spend money on programs that conform to the PUC’s shifting requirements.

Utility critics, for their part, say the companies’ chronic inability to spend conservation funds should prompt the state to tighten the reins.

“It was very clear to everyone last year that conservation was critical,” said Michael Shames of the Utility Consumers Action Network. “For that money not to have been spent last year borders on criminal.”

Consumer advocates said the commission also must shoulder blame for policy miscues that eroded conservation. In a pivotal 1997 decision, the PUC adopted a new strategy that scaled back rebates to consumers who bought energy-efficient appliances.

The goal of this new strategy--dubbed “market transformation”--was to use ratepayer money to subsidize a fledgling conservation industry. The commission hoped that by providing cash incentives to manufacturers of efficient appliances, lighting fixtures, windows and building materials, conservation eventually would be built into daily life.

It didn’t work.

After three years--and the onset of an energy crisis--many believe the strategy actually derailed conservation. In 1999, less than half the ratepayer money for conservation actually went to consumers in the form of rebates or incentive payments, according to PUC data.

Records show that conservation began falling after the plan’s implementation. By the end of 1999, the amount of electricity conserved had plummeted by more than a third, reversing a decade of steady increases.

“I don’t see anything transformed here except the market for brochures,” said Jeff Nahigian of JBS Energy Consulting.

The new system made it easier for the utilities to earn so-called incentive bonuses from ratepayer bills. The bonuses were created in the late 1980s as a way to coax utilities into backing conservation without taking a financial hit from lower sales. Back then, the companies had to document actual consumer cutbacks to collect the cash.

But under the new system, the standard was lowered, making it easier for the utilities to reap bonuses. They also were allowed to collect bonuses by showing simply that they had encouraged customers to conserve through brochures, training meetings and other educational efforts.

Critics said this opened the door wider to exaggerations that regulators said the utilities sometimes made to get bonus money.

In 1999, the PUC’s Office of Ratepayer Advocates accused PG&E; of inflating energy savings in 14 of 20 conservation projects. Negotiations on the findings are still in progress.

That same year the office found that PG&E; claimed it deserved money for energy savings for buildings that had long been vacant. The PUC denied the utility’s request for a $160,000 bonus.

Bill Miller, a manager of evaluation and energy demand policy at PG&E;, said these cases do not represent attempts by the utility to cheat ratepayers or mislead the state. Rather, he said, they illustrate an honest difference of opinion between PG&E; and the PUC.

“That’s the nature of an adversarial review process,” he said.

Utility officials also said they should not be held responsible for the “market transformation” strategy.

“We weren’t doing market transformation because we said it was a good idea,” said Edison’s Rodrigues.

Today, the once highly touted market transformation program is gone. On Jan. 31, after California’s insatiable demand for power triggered unprecedented rolling blackouts, the PUC abandoned the strategy and ordered the utilities to start spending money for direct energy savings.

“We are not going down that road again,” commission President Loretta Lynch said. “I care about whether the homes are weatherized, not whether we subsidize people to get into the energy-efficiency market. We had been the leaders in energy efficiency, and then we got off track.”