Post # 45 - A Regulatory Critique From a Smart Grid Proponent

This blog in the past has summarized many critiques by smart grid skeptics. In this post, we will discuss a detailed critique of both regulatory barriers and areas of opportunity for grid modernization by a smart grid proponent.

The Galvin Electricity Initiative is a non-profit organization founded by former Motorola CEO Robert W. Galvin to promote grid quality enhance through innovation on "microgrids" – modern, small-scale versions of the centralized electricity system (generally, low voltage distribution networks with distributed energy sources).

The Galvin organization is a smart grid proponent, believing that the smart grid promises to provide customers better and more timely information in order to influence more efficient behavior. At the same time, the organization is concerned that the country’s current regulatory structure, particularly at the state level, may create obstacles to the development of a fully effective smart grid. In that regard, this past week, the organization issued a new white paper, "Smart Grid Issues in State Law and Regulation," that examines electricity laws and regulations to identify both barriers and areas of opportunity for grid modernization.

The Galvin paper focuses on 11 states – California, Colorado, Connecticut, Florida, Illinois, Pennsylvania, Massachusetts, New Mexico, New York, Ohio and Texas – using the nation’s experience with state retail access initiatives as a lens through which the best regulatory practices can be viewed and, hopefully, pitfalls avoided. Looking back, the study concludes that many retail access states relied too heavily on the theoretical promise of free markets but often neglected to make that promise a reality. The states, according to the paper, need to do far more to educate customers and lower the barriers of entry to competitive suppliers.

More concretely, the paper puts forth the following recommendations for policymakers, regulators and other stakeholders:

1. Customer price signals should reflect real-time costs at the time of actual energy use. Utility incentives should be neutralized between demand- and supply-side resource options by tying profits to energy services provided, not simply kWh sales.
2. Smart grid investments before the meter should be recovered as fixed costs. The costs of meters and load-control equipment for customer-specific load control should be recovered on a variable basis, either as a variable cost or as part of an energy charge.
3. The risks associated with the deployment of smart grid assets should be symmetrically allocated so that those best positioned to manage assets and with the most at stake financially have the greatest potential for gain or loss.
4. All customer-specific data must belong to the customer for use as he/she determines. Aggregate system data should be considered public information.
5. Smart meters should be installed on a universal basis in order to capture their optimal benefits.
6. National standards are critical, and it is particularly important that meters and data systems are capable of bi-directional communication with customers and suppliers and can be transferred between suppliers.
7. Customers must have a specifically enumerated set of rights, including (but not limited to) the right to: (1) confidentiality of personal information; (2) ownership of information; (3) choice of supplier and/or portfolio of supply options; (4) real-time price information; (5) appliance control; (6) install equipment to improve service quality; (7) net metering; (8) subscribe to aggregation of demand; (9) select meter and post-meter devices; (10) avoid asymmetric allocation of risk and reward; and (11) choose level of service quality.
8. New smart grid products and programs must be evaluated to identify best and worst practices and cut losses for consumers when something has gone wrong.
9. Utilities should receive appropriate incentives that link earnings to performance and ultimate value to customers, rather than to sales of kWh. These incentives will also induce utilities to innovate.

Post # 28 - Smart Grid Speed Bump in Ohio: PUCO Says "Yes" But FirstEnergy Says "We Can't Afford"

In an interesting development, the Public Utilities Commission of Ohio last week approved implementation of a smart grid project by FirstEnergy Corporation. However, because the PUCO declined to act on the company’s request for associated retail rate increases, FirstEnergy’s Ohio initiative is now in limbo.

Coming on the heals of the Maryland Public Service Commission’s rejection of Baltimore Gas and Electric’s request for smart meter cost recovery (see Post # 25), this may be evidence of heightened regulatory sensitivity to shifting smart grid costs from utilities to their customers.

To return to FirstEnergy, on June 30, 2010 the PUCO approved the company’s Smart Grid Modernization Initiative – a three-year pilot program involving 44,000 customers in the service territory of the Cleveland Electric Illuminating Company (a FirstEnergy subsidiary). The program would credit participating customers for power they did not use during times of high demand for two weeks in the summer. The credits would be calculated at electric rates up to seven times higher than standard rates.

But there is a catch. The program also involves the purchase and installation of expensive and sophisticated smart meters, switching equipment, and communications devices. The total projected price of the pilot program is over $70 million, and while FirstEnergy won $36 million in project funding from the U.S. Department of Energy, the company sought to recover the remaining costs through retail rate mechanisms. However, while approving the project itself, the PUCO elected to hold off addressing cost recovery issues until some future time. In response – and almost before the ink was dry on the PUCO’s June 30^th order – FirstEnergy suspended the project (see here, here, and here).

In announcing the suspension, the company argued that the project “has potential benefits for our customers and would bring capital investments and jobs to our region.” Given “the widespread support we received for our federal stimulus application,” FirstEnergy also expressed surprise that the PUCO declined the company’s request for an associated rate increase. FirstEnergy said that “without [PUCO] approval of the matching funds, we are not in a position to move forward.”

But consumer groups had argued that further study was required to ensure that smart grid costs are allocated on the basis of kwh use – because, in the judgment of many consumer advocates, larger customers benefit most from a reliable distribution grid. Consumer groups also asserted that FirstEnergy should not receive lost revenues during this pilot program because FirstEnergy will not likely have any during the pilot program. They also argued that FirstEnergy should be required to credit its operational savings against the costs of the program before FirstEnergy collects any of the costs from customers (see, for example, the comments filed with the PUCO by Ohio’s Consumer Counsel).

As in Maryland after the BGE decision, it’s not clear what happens next – particularly since the PUCO (like the Maryland PSC) apparently remains supportive of the smart grid concept and the use of smart meters. Indeed, the PUCO may not have expected FirstEnergy to suspend its initiative in response to the June 30^th order. It will thus be interesting to see the PUCO’s response to AEP Ohio’s recent request for approval of smart meter-based dynamic pricing, see post # 26.

Certainly, the current PUCO/FirstEnergy stalemate is one more indication that the journey to smart grid nirvana is still very much at the starting point. As utilities move forward with actual smart grid implementation, regulators will ultimately have to address the key question: who pays?