States Need Nudging to Create Incentives For Utility Smart-Grid Investment, Experts Say

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By Paul Barbagallo  

The stark differences in how electric utilities and broadband providers are regulated at the state level could slow the development of smart grid technologies, several panelists at's Broadband Breakfast Club said Nov. 15.

The issue is one of enormous complexity for both state and federal policymakers. Electric utilities are heavily regulated, while broadband internet service providers are lightly regulated. Rate of return-regulated utilities have a narrow set of incentives to pursue new lines of business, offer new services, and, ultimately, innovate and compete, while high-speed data network operators, such as AT&T Inc., Verizon Communications Inc., and Comcast Corp., subject to scant regulation at the state level, have every incentive to innovate and compete.

Jeffrey Dygert, executive director of public policy for AT&T, said state regulators should, for starters, “rationalize” the treatment of investments by electric utilities in smart grid technology.

The reason: Right now, many utilities using commercial communications for smart metering, do not have their expenses treated as a “capital investment,” which means they are not a “recoverable cost.”

Sunil Pancholi, smart grid program manager for Pepco, said regulators have been reluctant in some cases to allow utilities to pass the cost of their smart grid investment on to consumers in the form of higher rates or surcharges.

Pepco Wins Smart-Meter Approvals.

Pepco recently secured approvals from the District of Columbia Public Service Commission and Maryland Public Service Commission on a ten-year smart metering plan, but Pancholi said the proposal curried favor with regulators only because of $175 million in smart grid grants from the Department of Energy.

“When they saw that our costs can be reduced by half—if we get the money from the [Department of Energy]—it was an easy business case for us to sell,” Pancholi said. “They did not believe our numbers otherwise,” he added.

In New Jersey, meanwhile, the state's Board of Public Utilities is still mulling Pepco's smart-metering plan. The company has 1.9 million customers in New Jersey, Delaware, Maryland, and the District of Columbia.

Paul Hamilton, a vice president of energy management company Schneider Electric, said more states should require utilities to separate, or decouple, their revenue and profits from their customers' energy usage. Under the current regulatory framework, if customers use less energy, the utility, naturally, loses money.

Decoupling May Save Money.

Decoupling would allow customers to pay one rate every month, no matter how much or how little energy they consume. If, in one particular month, a utility's revenues dipped below its fixed costs, the rate would be adjusted for all customers in that region.

Twenty states now allow for decoupling. California, where utilities are allowed to decouple, has experienced flat energy intensity growth. “Why isn't everybody doing this?” Hamilton said.

Aside from balking at these regulatory challenges, Hamilton said utilities so far have done a poor job of communicating the benefits of smart grid technologies to consumers.

“What do consumers care about? Safety, price, and outages,” he said. “After that, there are not a lot of drivers for energy efficiency … . But utilities giving free and open access to the energy use information on a real-time basis is going to be a key driver to the market evolving. The question is: Is the utility going to manage the energy use in your house or are you going to manage the energy use in your house using price signals and access to information?”

Schneider Electric offers a similar service called Wiser, which lets consumers control every electrical device in their home from a web interface.

In the communications industry, Verizon is currently testing a program called Home Monitoring and Control, which allows customers to go online and manage certain Verizon-provided electric devices, such as thermostats, cameras, security locks, door and window monitors, and appliance switches. From any broadband-enabled device, a consumer could turn lights on and off, lock and unlock doors, and change room temperature without even being home.

AT&T has been working on what it calls the “digital life project,” which would unify devices and appliances in the home in a central interface.


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