Why Smart Grid Advocates Should Learn About Utility Regulation
Posted on July 26, 2011 by Bob Jenks
Tags, Consumers and Utility Customers, Emerging Technologies
Many of us have heard of the Smart Grid and its potential to improve the electricity delivery system. Moving to a two-way digital grid will improve the grid’s reliability and offer a variety of new potential applications. Rather than shut down wind turbines at night when there is more power generated than the grid can absorb, a Smart Grid could use hot water heaters and commercial freezers to store excess energy. The Smart Grid can vary the charging of an electric car so the charging rises and falls with wind power production. The Smart Grid can also know when and where there is a power outage, rather than rely on phone calls from customers to report outages.
But as we have talked about Smart Grid in the region, CUB has come to realize that many Smart Grid advocates don’t understand the current regulated electric system. They don’t understand how we analyze utility investments or how prices are set. They don’t understand the incentives provided to utilities or protections required by customers. Put simply, they don’t understand the “regulatory compact” between customers and utilities.
The Smart Grid has the potential to change our electricity system in fundamental ways. But to effectively create positive change, it’s necessary to understand the present. I, like our current President, worked as an organizer after college and think one of Sal Alinsky’s rules for organizing is important to keep in mind anytime we are talking about fundamental change:
“As an organizer I start where the world is, as it is, not as I would like it to be. That we accept the world as it is does not in any sense weaken our desire to change it into what we believe it should be — it is necessary to begin where the world is if we are going to change it to what we think it should be.”
In other words, for the Smart Grid to live up to its potential by fundamentally changing the electric system, we have to begin with our current system. We can and should desire to change it, but it is necessary to begin by understanding and accepting the existing electrical grid.
In the Pacific Northwest, we rejected the Enron-sponsored deregulation proposals a decade ago. This means that we have integrated monopolistic utilities that are regulated by the states’ regulatory agencies or are accountable to locally-elected Boards. Regulators and local Boards have the responsibility to protect customers from monopoly abuses and get power at just, reasonable, and affordable rates. And that regulation is subject to legal requirements and historic policies and principles. Some of the key elements applicable to the Smart Grid:
1. Rate Base as an Incentive for Investment. The current structure of regulation for investor-owned utilities was developed in order to incent long-term capital investment. Building power plants, transmission systems, and distribution networks cost billions of dollars. The current system is designed to encourage capital investment by providing a utility with a return on invested capital–utility profits come from investing in power facilities, not directly from the selling of kilowatt hours.
2. Utilities can generally only charge customers for investments that are “used and useful” for providing utility service. It may take a utility more than a year to build a power plant or construct a transmission line, but it cannot put those costs into rates until the asset is up and running. Likewise, utilities are generally discouraged from keeping assets in rates after those assets stop providing service.
These two regulatory principles tell us a lot about utilities. In the 1990s, we heard a lot of complaints that utilities were not generally making investments in renewable resources, particularly wind turbines. Today there is not a utility in the region that isn’t investing hundreds of millions of dollars in wind turbines. This can be explained by the two principles above. Utilities like capital investment, once that capital investment is considered low risk. In the 1990s, utilities might have been concerned that wind turbines were untested, that their useful lives were not well-documented, and that shareholders would take on a significant risk that the investment would not be “used and useful” for a long enough period to recover the cost of the investment and see a return on the investment. Once wind facilities were well proven, utilities were happy to make huge investments in wind power. Similarly, once Smart Grid technology becomes mature and “safe,” getting utilities to invest in it will not be difficult. And so, the problem right now is: How do we get Smart Grid technology to the mature and safe level?
To begin to answer that question, CUB’s sister organization, the CUB Policy Center, is hosting an inaugural conference this fall here in Portland, Oregon. Titled “Smart Grid: Today’s Regulation and Tomorrow’s Technology”, the conference is specifically designed to engage stakeholders through the region in a thoughtful review of existing regulations combined with a thorough understanding of the possibilities of Smart Grid.
We hope you will join us. Please register today, as space is limited.
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03/24/17 | 1 Comment | Why Smart Grid Advocates Should Learn About Utility Regulation