Post # 25 - A Smart Meter Setback In Maryland

In a move that caught many observers by surprise, last Monday (June 21, 2010) the Maryland Public Service Commission denied the application by Baltimore Gas and Electric Company – the State’s largest gas and electric utility – to install smart meters for each of the company’s 1.2 million customers – largely to be funded by a mandatory customer surcharge. Is the MPSC's order a major setback to smart grid development? More likely, the order highlights what always has been the “sixty-four dollar question”: how are smart grid costs most efficiently and equitably apportioned between utilities and their customers?

On the one hand, the initial reaction in many quarters is that the PSC has dealt a major blow to smart grid development in Maryland -- see, for example this editorial from The Baltimore Sun. Certainly, BGE appears reluctant to take up the PSC’s invitation to submit a new proposal that does not include guaranteed cost recovery (see here and here). At a minimum, the PSC has hit a major-league “pause” button.

At the same time, it would be a mistake to view the MPSC as “anti-smart grid” or “anti-smart meter.” The Maryland Commission was not ruling on the desirability of smart meters or the smart grid. The question before the MPSC – and before public utility commissions around the country – is “who pays the freight?”

BGE estimated that its smart meter project would cost $835 million – $482 million during the initial deployment period and an additional $353 million over the expected life of the program. The company secured a $200 million stimulus grant for the project from the U.S. Department of Energy. The company then sought MPSC authorization to recover the balance though a mandatory smart grid surcharge that would start at 38 cents a month for electricity customers and an additional 44 cents for those who also use natural gas. Over the course of a 15-year schedule, it would rise to an average of $1.24 a month for electricity customers and an additional $1.52 for gas customers.

In addition, BGE sought authorization for a mandatory “Smart Energy Pricing” schedule for all residential customers that would vary electric rates during the peak months of June through September based on the time of day and time of week.

BGE asserted that its smart meters would lead to an estimated $2.6 billion in customer savings over the life of the project, but the MPSC ultimately concluded that those customer savings were uncertain and far off:

Although we share BGE’s (and others’) hopes, and even enthusiasm, for the long-run potential and importance of the infrastructure upgrades known colloquially as the “smart grid,” we find the business case for this Proposal untenable. The Proposal asks BGE’s ratepayers to take significant financial and technological risks and adapt to categorical changes in rate design, all in exchange for savings that are largely indirect, highly contingent and a long way off. We are not persuaded that this bargain is cost-effective or serves the public interest, at least not in its current form.

Of particular significance, the MPSC was concerned that BGE's proposal was actually too limited. Thus, the PSC noted:

BGE’s Proposal is not solely a request for approval of the deployment of [smart meters]. It also is a request to establish a customer surcharge for advance recovery of the costs of the Proposal, thereby shifting all financial risk to BGE customers. The Company seeks approval to recover those costs through a “tracker” surcharge that would begin appearing on BGE bills for both gas and electric customers almost immediately upon the Commission’s approval of the Proposal, but before any of the infrastructure is installed or any benefits are realized. In addition to recovering the Proposal’s capital and operating costs through the tracker mechanism, the Company proposes that the surcharge be used, among other things, to collect a return on the Company’s net investment under the Proposal, as well as to collect Company “incentives” tied to anticipated wholesale capacity revenue, wholesale energy revenue, and wholesale capacity price mitigation resulting from anticipated changes in its customers’ energy use. The tracker virtually guarantees that the Company will recover from its ratepayers the prudently incurred costs associated with the Proposal, a profit for its investors, and a portion of certain projected benefits, if they are realized. In other words, with the proposed tracker in place, the Proposal is a “no-lose proposition” for the Company and its investors. [Emphasis supplied].

The PSC also questioned BGE’s underlying business rationale, concluding that BGE's proposal was "in no small measure" motivated by the availability of federal stimulus funds. Moreover, and significantly, the PSC found that installation of smart meters itself "would not enhance the electricity transmission grid or [BGE's] distribution 'backbone.'" And it is just such enhancements that the PSC believed would normally be part of a true smart grid initiative.

In other words, while smart meters can be an important element of the smart grid, smart meters are not the equivalent of the smart grid. In Maryland, in any case, rate treatment for smart grid investments will require a clear demonstration of grid improvements tied to clear customer benefits. This appears the real “take-away.”