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Utilities: Stop or Go?

October 9, 2013 by David O'Brien

Remember the kids' game Red Light / Green Light? When the kid who was "It" faced away and called out "Green Light," we'd all go running. When that same person shouted "Red Light," we’d try to come to a screeching halt before he/she could turn around and catch us moving. To win, one had to be able to anticipate when the red light would be called.

When I talk to utility managers, many are experiencing Red Light / Green Light anxiety. Regulators seem to support smart grid for all the right reasons, including enhanced outage restoration, better support for distributed generation and so on. Sounds like a Green Light.

Yet those same regulators cannot get comfortable with the benefits — at least not comfortable enough to sign off on the evidentiary record with conviction. The regulators I talk to say they are frustrated by what they have to work with in terms of net consumer benefit and that they face, in many cases, a contentious political environment. And so when it comes to ultimate cost recovery of smart grid investment they are simultaneously saying Red Light.

As a result, utilities are trapped in a game they can never win, and society’s benefit is therefore stalled, at the moment it seems, indefinitely.

To be fair, there are plenty of things for regulators to worry about — new technology, new approaches, new variable rates, and how customers will react to all of these. So regulators have not trusted the benefit data provided on the evidentiary record as they have with, let's say, a new distribution substation or a power purchase agreement. It is only human — especially in a governmental or political environment — to be cautious and to hedge one’s bets. This is all so new, the thinking seems to be, that we can't rely on it in a lasting way.

Maryland gives ... and Maryland takes away

A case in point is the order handed down on May 8, 2013 (Case No. 9207), by the Maryland Public Utility Commission approving Delmarva Power’s Advanced Metering Infrastructure, or AMI, proposal. In the affirmative, the Public Utilities Commission concluded “...that Delmarva’s modified business plan complies with the AMI Order, satisfies our previous concerns and likely will be cost-effective to Delmarva ratepayers."

GREEN LIGHT. Got it. Go!

However, the order also included some significant caveats to that approval:

  • “The authorization granted by this Order allows Delmarva to proceed with deployment of its AMI program, but does not constitute a determination as to the prudency of the program’s costs.”
  • The PUC “will require Delmarva to demonstrate in the context of a future rate case that it has incurred a level of costs and delivered a level of benefits that render its AMI projects cost-effective programs for its Maryland customers before we will authorize cost recovery.”
  • “In the event that the Proposal, as implemented, falls short of that standard, we will determine what level of cost recovery the public interest requires.”
  •  “Therefore, the risks that the parties identified during the course of proceedings will be borne by Delmarva, not its ratepayers.”

Translation: “We support you in principal, but are uncertain and want bona fide proof down the road that this stuff all works and was worth the effort (cost). If this all doesn’t work out as hoped, then we reserve the right to find you responsible and withhold reimbursement of your costs.”

RED LIGHT. Got it. Stop! Wait, are we supposed to go forward or not?

A pox on both houses

In Maryland and elsewhere in the regulatory community there is a pursuit of certainty that simply cannot be realized. This is creating a hot potato issue that is the central barrier to grid modernization post stimulus. Utility executives cannot expose their investors to that sort of financial risk. Not if they want to remain employed. As a result, utilities will stay on the smart grid sidelines until further notice.

Make no mistake — this is not a simplistic problem of overly cautious regulators. In many cases regulators are responding to smart grid proposals that lack clear and convincing consumer benefits. Let’s be honest — the utility community has not tackled digital technology with the same sort of transformative zeal as competitive industry. Further, regulators do not have a clear state policy framework to rely upon as they weigh the evidence. In reality, as we all know, “it takes two,” and here there is a pox on both houses. Affixing the "blame" is further complicated by the fact that regulators are utilizing a rule book that is ill-suited to reconcile investment in grid modernization.

These issues may seem daunting, yet I see opportunity instead — assuming that both sides can exit their comfort zones.

David O’Brien is the Director of Regulatory Strategy and Compliance at BRIDGE Energy Group. He was Commissioner of Public Service in Vermont from 2003-2011 and was a conference participant at the Bush Institute’s September 12 energy conference

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