“The Proposal would not, in and of itself, enhance the electricity transmission grid or the Company’s distribution ‘backbone,’ and therefore it doesn’t justify the proposed customer surcharge by BG&E.”

- Public Service Commission of Maryland, IN THE MATTER OF THE APPLICATION BEFORE THE OF BALTIMORE GAS AND ELECTRIC COMPANY FOR AUTHORIZATION TO DEPLOY A SMART GRID INITIATIVE  AND TO ESTABLISH A SURCHARGE FOR THE RECOVERY OF COST CASE NO. 9208 (June 22, 2010)

The smartest guys in the electricity room believe that a path to energy efficiency and environmental goodness is to hook up so-called smart meters for us little users. The smart machines would signal (jolt?) us to use less power in peak times when the price is high and to use power more when the price is low.

But the very concept has problems aplenty. First, time-of-use pricing for residentials (versus commercial and industrial customers) is a nice ‘green’ theory, not fact. Some states like California do not want or allow such residential pricing because of equity concerns. 

Second, so-called smart meters are all about government (taxpayer) and class ratepayer subsidies, not stand-alone economics between willing buyers and sellers. 

Third, there is the hassle factor (called transaction costs) of setting up appliances with time-of-day usage. Relatedly, (in)flexibility costs are incurred.

And last but not least, smart meters are intrusive. Big Environmental Brother lurks behind each smart meter to tell you what to do and when to do it. Civil libertarians take note of this government-dependent machine. 

Smart meters as ENERGY POLICY appear to be penny-wise and pound foolish. But members of an eco-energy elite want to individually pay by the pound to impress the neighbors and save the world, let them be ‘early adopters’. And perhaps these special users should also pay the costs of utility manpower in setting up time-of-day pricing to leave nonusers whole. Such is life under public utility regulation.

Make no mistake: smart meters are not a ‘let-the-market decide’ proposition. If they were, utility customers could decide individually and on a stand-alone basis whether or not to buy and install the meters. This should be an individual demander-to-provider proposition without other ratepayers or taxpayers involvement.

One final point: the federal budget is in horrendous deficit. Smart-meter money earmarked for Maryland should not be redistributed by the Department of Energy to other states as planned. The monies should be axed from the budget, reducing the deficit on a dollar-for-dollar basis.

And by removing this component of the program, the broader Smart Grid investment concept, which has all the earmarks of a rate base perversity as explained by Robert Michaels, can be given a reality check as well.

From the PSCM Decision

“Although the Proposal boasts a “robust” Total Resource Cost (“TRC”) benefit-to-cost ratio of 3.2 (inclusive of DOE funding), a TRC ratio is only as useful as the assumptions on which it is based. On the projected cost side of the cost-benefit equation, the Company’s business case does not include many costs that are inherent in, or will inevitably flow from, the Proposal. It does not include the approximately $100 million in undepreciated value of existing, fully operational meters that would be retired before the end of their useful lives, for example, or the estimated $60 million it will cost the Company for the new billing system necessary to implement the R-SEP rate schedule. Nor does it include the cost of in-home display devices, which easily could exceed another $100 million dollars, or the cost of new customer appliances that the Company projects will one day be able to communicate with the proposed ‘smart meters.’ And it does not include the cost of retrofitting or replacing the emerging technology the Company proposes to install – technology that never has been tested in a full-scale deployment – in the event it becomes obsolete far earlier than its projected 10-to-15 year useful life.”

“[S]upply-side benefits … depend upon fundamental changes in residential customers’ energy use and the way most residential customers think about energy pricing, upon the operations of relatively new and difficult-to-predict energy and capacity markets, and upon the results of small-scale pilot programs that differed in important respects from the Proposal before us….. The nature and magnitude of the uncertainties underlying the Company’s business case raise serious doubts regarding whether the Proposal is, in fact, a cost-effective means of reducing consumption and peak demand of electricity in Maryland.”

“Although BGE claims that the assumptions underlying its business case are sound, the Company would have its customers bear all of the risk in the event those assumptions prove incorrect. We strongly support the overall goals of BGE’s Proposal, which are consistent with many of the energy efficiency, conservation, and demand response initiatives that we have approved previously, but we conclude that BGE ratepayers should not exclusively shoulder the burden in the event that costs associated with the Proposal are greater than expected, or that anticipated benefits do not materialize.”

“We … invite BGE to submit an alternative proposal that:

(1) foregoes any expectation of recovery by way of a tracker surcharge mechanism;

(2) provides a detailed business case that addresses the costs and benefits of proceeding without mandatory TOU pricing;

(3) includes a concrete and detailed plan for how BGE intends to educate its customers regarding its new proposed rate structure; and

(4) provides a workable methodology by which BGE will mitigate and more fairly allocate between the Company and its customers the risk that the proposal will not provide the benefits underlying BGE’s business case, or that it will cost significantly more than BGE currently projects.”

Appendix: Peter Behr, “Md.’s Veto of Advanced Meter Deployment Stuns Smart Grid Advocates,” E&E News, June 23, 2010.

A utility proposal to install smart meters throughout Maryland has been rejected by the state’s Public Service Commission, jeopardizing if not ending what had been one of the Obama administration’s leading investment commitments to smart grid technologies and consumer energy conservation.

The decision by Maryland’s PSC late Monday is a sharp rebuff to Baltimore Gas & Electric Co., the state’s largest utility and part of the Constellation Energy Group, in a state where politicians and power companies have feuded for years.

Officials of BG&E expressed shock at the decision by the Public Service Commission. They have sponsored one of the leading pilot programs incentivizing customers to conserve electricity by reducing appliance usage in peak demand periods, according to smart grid advocates.

BG&E’s current $835 million plan to install 1.36 million new “smart” electric meters and 730,000 advanced gas meters, with communication ties between customers and the utility, appears dead, BG&E said. The Energy Department pledged $200 million toward the BG&E program, most of which was ticketed for advanced meter installation. It was one of the top six state awards announced by DOE’s Smart Grid stimulus grant program last year.

“Quite frankly, we are very disappointed and quite surprised,” said Mark Case, BG&E’s senior vice president for strategy and regulatory affairs. “At this point, we are still trying to digest the commission’s order and make sense of [it].”

He added, “We actually do not see any clear path to move forward.”

The Energy Department and smart grid advocates expressed dismay at the decision. The National Association of Regulatory Utility Commissioners, through a spokesman, backed the Maryland commission’s action.

Regulators ‘frozen in time’?

Ahmad Faruqui, a consultant who has been a major contributor to federal government analyses of demand response programs, said the Maryland action — the first such state commission rejection of a smart grid project — reflects a pattern that seriously undermines smart grid and demand response goals.

While some state utility commissions are willing to back smart meter deployment, they are reluctant to approve new “dynamic” electricity rate plans that allow prices to rise during the day when power demand peaks and fall when demand is slack. Such real-time pricing plans are essential to prompt customers to shift energy usage to slack times and reduce overall consumption, he said.

“There is no doubt in my mind that without state commissions approving the business cases for advanced meters and the smart grid, this is not going anywhere. They control the dollars; they set the rates for the customers,” said Faruqui, an economist and principal with the Brattle Group. Faruqui testified before the Maryland commission in support of the BG&E plan and declined to comment on the commission’s decision in that case.

But he said that around the county, commissions are heeding warnings from state consumer advocates and retiree organizations about possible cost impacts on customers if electricity rates are linked to actual generation costs, hour by hour.

“Most of the state commissions are frozen in time. They are being subjected to these very, very pessimistic, worst-case arguments,” he said.

The Maryland commission’s ruling noted predictions by an AARP witness that up to 40 percent of low-income customers would see higher summer energy bills and up to 15 percent would see higher annual energy bills. Faruqui said Brattle’s research shows that around the country, lower-income customers would be affected least, because they typically do not have large central air conditioning systems and other high-demand appliances.

The Maryland commission said it would not approve an advanced meter plan that includes mandatory dynamic or “time of use” electricity rates.

A need for more outreach

“BG&E’s project was one of the more solid examples of how to quantify the consumer benefits of smart grid,” said Katherine Hamilton, president of the GridWise Alliance, an advocacy group supporting smart meter and smart grid strategies. “I think this means we have some work to do in outreach to the consumer and the state commissions,” she said. “Whatever gets approved [around the country] will have to be pretty simple. And you need to give low-income and fixed-income consumers the same opportunities to save power that tech-savvy people will have.”

BG&E proposed to replace 1.36 million electric meters and 730,000 gas meters for customers over three to five years, installing new advanced digital meters and a new communications network connecting the meters to the company’s control center. The estimated cost of the meter deployment was to be $486 million, $136 million of which was to be paid from DOE’s Smart Grid grants. The company said it anticipated $2.6 billion in benefits over 15 years, from conservation, lower prices, reduced capital expenditures for new power sources and other sources.

The utility proposed to create a customer Web portal that would allow customers to review hourly electricity usage from the previous day over the Internet. The commission criticized BG&E for not including in-home displays to alert people that power prices were rising.

To achieve savings, BG&E proposed to offer residential customers a “peak time rebate” from 2 p.m. to 7 p.m. on “critical” days declared by the company during heat waves when power supplies are stressed, and other emergencies called by the region’s grid operator. Customers would be notified the evening before and then could earn a rebate, initially $1.25 per kilowatt-hour, if they reduce their power consumption below a predetermined base case amount.

The utility also proposed to charge higher power prices between 2 p.m. and 7 p.m. during the summer months, and lower rates at all other times.

BG&E sought to recover the costs of the meter rollout as they are incurred through a “tracker” surcharge added to customers’ bills, rather than waiting to recover the costs in a traditional rate case proceeding.

AARP lobbies successfully in opposition

Although the staff of the PSC supported BG&E’s proposal with modifications, as did the Maryland Energy Administration, the commission sided with the Office of the People’s Counsel, a state consumer advocacy agency, and with AARP in challenging the case for smart meters and demand conservation by consumers.

BG&E asks ratepayers “to take significant financial and technological risks and adapt to categorical changes in rate designs, all in exchange for savings that are largely indirect, highly contingent and a long way off,” the commissioners said Monday. The commission singled out BG&E’s proposal to recover advance costs of the smart meter deployment through a surcharge on customers, calling it a “no-lose” proposition by the company.

“BG&E has provided no persuasive reason why its customers should subsidize this program in that manner.”

The commission noted BG&E’s testimony that the surcharge would raise the average electricity customer’s monthly rate by 38 cents beginning in 2010, rising to $3.78 in 2013.

James Connaughton, executive vice president of BG&E’s parent, Constellation, said that the Maryland commission’s stance may deter Constellation’s energy investment in the state. “I think the main and ongoing concern is a consistent pattern of wanting the utility to do really good work in Maryland, but making it very difficult to do so, including on economic grounds.

“There’s a suggestion that what was already a proposed bare-bones rate of return should be further diminished. We were prepared to put in $280 million of our shareholders’ money into advanced meter introduction. If we can’t earn a reasonable return, it forces of us to look for other, more productive ways to invest that money in clean energy, probably in other states.”

DOE may move funds to other states

DOE said that it was prepared to move on, too. “We are disappointed by the Maryland public utility commission’s decision. Smart grid programs hold the potential to give customers more choice, reduce operating costs, increase network reliability and improve the safety and security of the electrical grid,” said Matt Rogers, senior adviser to the secretary of Energy for Recovery Act implementation.

DOE’s preference is to work with BG&E and Maryland to try to get past this impasse, he said. “However, the Smart Grid program was significantly oversubscribed with great projects. If the Maryland public utility commission decision prevents BG&E from meeting their cost share requirements and implementing on time and on budget, we will have no choice but to explore moving the funds to other projects which have the backing of the state regulators.”

But DOE may have to contend with other state commissions unwilling to approve new consumer rate plans that allow rates to move up or down based on changing wholesale electricity prices during the day.

The Maryland commission took a fists-up stance toward its powers and prerogatives to rule on utility rates. “For one hundred years, since this Commission was created by the General Assembly in 1910, one of our primary functions has been to establish the rates that public service companies can charge their customers,” the commission said. Currently, it faces a growing trend by regulated companies to cover costs in advance through surcharges rather than subjecting costs to review after they have been incurred.

While it has approved such surcharges in some limited cases, it drew the line on BG&E’s current proposal, it said. “Surcharges guarantee dollar-for-dollar recovery of specific costs, diminish the Company’s incentive to control those costs,” and put those costs outside the commission’s reach, the commission said.

The Maryland commission’s decision was supported yesterday by Rob Thormeyer, communications director for NARUC. “If the agency believes the proposal is not in the best interest of their ratepayers, they will reject it or ask them to reconsider. From my reading of the order, that is exactly what Maryland did. They determined that BG&E’s proposal is clearly flawed, and they asked them to resubmit their plan to address their concerns. … BG&E and others in the smart-grid community should not be slamming the PSC; they should improve upon their proposal so it will not be, as the commission determined, detrimental to the state’s ratepayers.”

Say, for example, you are on the train to work, and you get a SMS [ text message] notification that due to unexpected weather, there will be a higher-than-normal electricity price in the 9:00-10:00 hour. You may have already programmed your devices to respond to price signals, but what if the price is high enough that you want to change your settings? You can log in to your HAN [Home Area Network] from your mobile device, or from your computer at work, and change the device settings in the home through the web portal. … [i]f the home has e.g. solar PV panels the customer can program the network to reduce electricity use once the home’s consumption reaches the generation capacity of the solar resource.

But what is wrong with this picture?

Start with a seemingly unrelated question: why do department stores have sales? It’s not overstocking – this gets handled by price markdowns in the ordinary course of business. Instead think of how sales are actually staged. The January white sale discounts every bedsheet and towel in the store. Another week everything Tommy Hilfiger makes is discounted. This Saturday only, customers get 5 percent off everything in the store. Sales are a form of price discrimination. They follow the usual rule – give the discount to customers with more elastic (price sensitive) demands. You show your sensitivity by informing yourself about the upcoming sale and postponing your purchases until then. The store benefits because it makes a smaller margin over cost but from people who might not otherwise have purchased there. People who are less price-sensitive don’t look for ads in the papers and are more likely to shop on non-sale days. Much price discrimination involves small hoops like these that elastic demanders will jump through and inelastic demanders won’t. Grocery coupons provide a similar example.

That brings us back to Kiesling scenario. Say she pays $200 a month for electricity. With 700-odd hours in a month, when she is out of the house it consumes, say, 40 cents of power in an hour. In the usual morning blizzard of texts, emails, blogs, broadcast information, phone calls and newspapers she learns that unless she acts quickly she will have to pay 80 cents for power from 9 to 10 AM. (Remember this is not a recurring, programmable event.) Remotely changing the home settings involves an opportunity cost (other potentially lucrative communications or perhaps relaxation) in return for which she saves all of 40 cents. At least she is fortunate enough to be on a train – imagine doing this in your car.

No problem if she thinks the saved 40 cents is worth it. We’ve all read Free to Choose. Inelastic demanders prefer doing things other than tweaking their systems and tracking prices to save what they view as small amounts. Elastic demanders key in the new commands and benefit by their individual standards, but getting the benefit requires jumping through the hoop of becoming skillful programmers and watching for real-time price contingencies that they haven’t programmed for. (How much of your DVD recorder manual have you actually taken to heart?) Everyone faces the same real-time prices, but only those willing to take the trouble get a discount. The utility can make larger dollar profits, even if its rate of return is regulated.

This story helps to explain utilities’ infatuation with Smart Grid investments. Environmental policy and the continuing growth of non-utility power production both mean that they won’t be building as many powerplants as before. The Smart Grid hardware it installs on both sides of the meter is an alternative to rate-base generation and maintains the company’s economic and political presence. Discrimination also helps explain the seemingly inconsistent endorsement of interoperability standards by monopoly utilities. Utilities will own much of the basic hardware and earn returns on it. Customers who purchase their own gizmos to better track and adjust consumption facilitate finer price discrimination with no impact on the utility’s relationship with its other customers. This reasoning is also consistent with utilities’ tolerating and crediting home solar production, which generally occurs during peak hours.

Price discrimination also predicts that one thing will definitely not happen. Utilities will find it more than ever in their interests to keep competitive suppliers out of the retail market. Competitive sellers who offer rate plans that fluctuate less than real-time prices will attract utilities’ cash cow customers who don’t adjust to high prices, leaving them with elastic demanders who give them lower margins on low prices. Kiesling has correctly noted that a Smart Grid without retail competition creates a lot less value than one with it. The question to address is whether a large scale Smart Grid is worth having at all if that competition is absent.