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A Setback for Smart Grids?

Author:Larry Fisher | Research Director, NextGen Research

2010-07-13

When the Maryland Public Service Commission (PSC) denied Baltimore Gas & Electric’s initial $835-million proposal for the deployment of smart
meters, BGE executives attributed the rejection to members of the PSC not understanding parts of their proposal. James L. Connaughton, Executive
Vice President, Corporate Affairs, Public and Environmental Policy at Constellation Energy, BGE’s parent, was cited in the press as blaming the
rejection on “fear of innovation” within the PSC.

Disappointment, Frustration, Surprise

BGE said in a statement that it was “deeply disappointed, frustrated and frankly surprised” by the decision to deny its application to deploy smart
meters to its 1.2-million customers. After all, “The Obama Administration wholeheartedly endorsed BGE’s Smart Grid initiative,” to the tune of $200
million in DOE stimulus grant funds to help get it done.

Smart grid industry organization Gridwise Alliance said it too was “extremely disappointed” and :”surprised at the Commission’s decision, given that
BGE seemed to demonstrate that smart grid would benefit all consumers regardless of income level” in trials over the past two years.

An Untenable Solution
It’s not that the PSC doesn’t approve of smart grids; the Commission, in explaining its denial of the BGE proposal, said quite plainly, “Nothing in this
Order should be construed as a vote of ‘no-confidence’ in smart-grid technology’s ability ultimately to lower energy bills, improve customer service
and relieve peak-time pressure on the transmission and distribution infrastructure.”

On the contrary, the Public Service Commission said, it considers the BGE proposal “untenable” because any cost savings to be derived from the
installation of smart meters would be “indirect” and “a long way off.”

It also criticized the BGE plan as submitted because it would do nothing to strengthen the main electrical transmission system. Another feature of the
proposal, indicating that smart meters would communicate directly with smart appliances, enabling customers to better control their electric bills by
shifting usage of power-guzzling products to less-expensive times, was criticized by the commission because no such appliances are currently on the
market.

The PSC also objected to mandatory “time of use” billing rates, which it said could adversely impact low-income consumers and the elderly.

Who Benefits?
The power company said it expects end-users to pay for their smart meters because, as BGE senior VP for regulatory affairs Mark D. Case explained,
they receive “100 percent of the benefit.” However, while surcharges to pay for the new equipment would have begun immediately under the
proposal, rollout would not begin for another two years.

Maryland Governor Martin O’Malley agreed with the PSC decision, that the BGE proposal would require the customer to bear “too much of the cost
and almost all of the risk and not enough of the upside.”

That upside, in BGE’s view, was that smart meters would save the typical BGE customer $1,400 over the 15-year life of the meters, and that typical
consumer would only have to pay $217 in surcharges to pay for the meters over that same period. That’s a savings of just under $8 a month, versus a
monthly surcharge of about $1.20.

Let’s Be Partners
However, since consumers would wind up paying all the costs of this smart grid upgrade, PSC commissioners considered the proposal a “no-lose
proposition” for BGE and its investors. “We simply think it more equitable that BGE and its ratepayers venture into this relatively unknown territory
as partners.”

Smart grids are definitely the way of the future, and the benefits far outweigh any downside, but BGE should not have expected PSC approval to be a
slam dunk. The Public Service Commission’s purpose includes ensuring public service companies operate in the interest of the public. When the
proposal has consumers paying for their own smart meters (when they didn’t have to pay for their old meters), and BGE is making money on the deal
(8 percent, or $22.4 million, on an investment of $280 million, which the company calls “a reasonable rate of return”) even as it’s about to receive
$200 million in federal grant money, it’s hard not to agree that BGE should foot more of the bill and assume some of the risk.

The PSC wants the smart grid initiative to proceed, but wants a better deal for consumers. It’s hard to disagree with that.

RELATED RESEARCH
Smart Grid Applications
Smart Meters, Demand Response, and Distributed Generation
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