Path uncertain for electricity industry and regulators, experts say

The term smart grid is an evolving concept. Some see it as a set of slick home appliances (like refrigerators, dishwashers and dryers) working in energetic lock-step to deliver cost savings and predictable bills. Some envision an intricate transmission grid, able to coordinate power from wind turbines on the coast with coal power from the valley, while incorporating solar panels peppered on the housetops of suburbia.

The true state of the smart grid is all of these things and none of these things. The benefits of having two-way communication between utilities and consumers have not been fully realized outside a handful of pilot projects.

But during the inaugural GridWise Global Forum, hosted by the GridWise Alliance and the US Department of Energy in Washington, D.C., industry executives and government officials examined a host of issues involving the build out of a national smart grid. The weeklong conference covered topics ranging from interoperability and the role of wireless technologies, to consumer education strategies and workforce development.

In a panel convened Wednesday morning, electricity distribution executives, non-profit and state government officials discussed the complex regulatory environment in which the smart grid is beginning to take root. Panelists from Europe, Australia and the United States agreed that more customer engagement and industry/government cooperation on standards would be needed if the benefits of a smart grid were to be realized. But how a simplified regulatory framework evolves is less clear.

“Regulation is the neck of the funnel when looking at the challenges of the smart grid,” said Chuck McDermott, panel moderator and general partner of the venture capital firm Rockport Capital Partners. “The 100 year history of our modern electrical grid and regulatory model has remained largely the same. That model is going to have to change.”

Currently, each state has a body of regulators known as Public Utility Commissions (PUCs) that are responsible for regulating prices and safety practices of utilities. Utilities, though, range in their makeup to include several classifications: Cooperatives, municipal entities, investor-owned utilities, public utility districts and federal utilities. Specifically, PUCs are obligated to ensure the establishment and maintenance of retail energy utility services, as well as ensuring that such services are provided at “just and reasonable rates.”

“Just” and “reasonable” are guiding principles for regulators, says Commissioner Phyllis Reha of the Minnesota Public Utilities Commission, but there’s confusion over how industry should present cost benefits and how governments should analyze industry claims.

Disputes between regulators and industry generally occur around the practice of rate recovery or periodic rate adjustments. If the utility wants to use a commercial-off-the-shelf product to enhance the networked infrastructure, customers can be charged to compensate the company through rate recovery. Generally, rate recoveries are pennies added to household bill and are not permanent. PUCs decide what rate recovery mechanisms are prudent for the investments the utilities make. If rate recovery is not granted the utility has trouble justifying the cost to improve or enhance their grid.

From the industry prospective, PUCs are burdensome and create a tremendous backlog, especially when the utilities find themselves in multiple jurisdictions. “When an energy company can get approval for a [smart grid] project in North Carolina, but then is denied in Indiana for the same project, it’s tough,” said Sharon Allen, Accenture’s North American lead for smart grid, in a separate briefing. “The state-by-state process is crippling us…It’s taking way too long.”

But according to Commissioner Reha until recently, most grid investments were examined under actual and realized benefits. “Smart grid technology is a challenge because of the incremental way they’ve been implemented,” she said. Smart grid investments have been looked at in a patchwork way, Commissioner Reha admitted, but utilities have not come with a smart grid plan that is long-term, as they would with an integrated resource plan, she said.

“Its sort of a chicken and the egg situation – do you accept policies before technologies or technologies before policy?”

A law enacted by Minnesota in 2007 may have a few legislative prescriptions for states moving forward. The 2007 Next Generation Energy Act contains a number of provisions that seem to be helping regulators and utilities provide enhanced service at lower cost for consumers. Some of the provisions include statewide goals for reducing energy use and greenhouse gas emissions, and increasing energy conservation and use of renewables. The legislation allows Minnesota regulators to judge proposed projects against these three goals, while keeping cost benefit concerns in mind, Commissioner Reha indicated.

In addition, the 2007 Act defines a number of other important issues, according Reha. For instance, the Act decouples energy sales from revenues, which helps reduce a utility’s disincentive to promote energy efficiency. It also defines what kind of renewable project is worthy of cost recovery.

“It changed an objective definition [on renewable energy sources] to a standard,” Commissioner Reha said.