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Direct Investment in Conservation Measures by a Public Utility

Abstract:
During the period 1978-1980, public policy toward U.S.-regulated utilities mandated residential conservation programs. Public utilities encouraged residential customers to invest in home conservation measures to help meet the national goal of energy security. The actual programs growing out of this legislation can be grouped as information programs (such as the energy audit program), financial incentives or subsidy programs, and direct investment programs. Our focus is on the third type wherein the public utility itself does home-retrofit conservation work (weather stripping, caulking, storm windows and doors, and attic and wall insulation), and the residential customer pays no direct charges. (In Marino and Sicilian (1986) we provide an economic analysis of information and financial incentives programs.) Our principal goals are: (a) to give an economic explanation of why a regulated utility would want to provide conservation measures that reduce the demand for its primary product and (b) to examine whether existing regulatory structure and utility programs are likely to lead to economic efficiency in conservation investment. We also provide an idealized regulatory structure and conservation program that does lead to economic efficiency.

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Energy Specializations: Energy Investment and Finance – Corporate Strategy; Energy Efficiency; Electricity – Policy and Regulation

JEL Codes:
D92 - Intertemporal Firm Choice: Investment, Capacity, and Financing
Q55 - Environmental Economics: Technological Innovation
E60 - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook: General

Keywords: Residential energy conservation, Public policy, Utilities, Investment, Rate of return regulation

DOI: 10.5547/ISSN0195-6574-EJ-Vol8-No2-10


Published in Volume 8, Number 2 of The Quarterly Journal of the IAEE's Energy Economics Education Foundation.