A utility proposal to install smart meters throughout Maryland has been rejected by the state's Public Service Commission, jeopardizing if not ending what had been one of the Obama administration's leading investment commitments to smart grid technologies and consumer energy conservation.
The decision by Maryland's PSC late Monday is a sharp rebuff to Baltimore Gas & Electric Co., the state's largest utility and part of the Constellation Energy Group, in a state where politicians and power companies have feuded for years.
Officials of BG&E expressed shock at the decision by the Public Service Commission. They have sponsored one of the leading pilot programs incentivizing customers to conserve electricity by reducing appliance usage in peak demand periods, according to smart grid advocates.
BG&E's current $835 million plan to install 1.36 million new "smart" electric meters and 730,000 advanced gas meters, with communication ties between customers and the utility, appears dead, BG&E said. The Energy Department pledged $200 million toward the BG&E program, most of which was ticketed for advanced meter installation. It was one of the top six state awards announced by DOE's Smart Grid stimulus grant program last year.
"Quite frankly, we are very disappointed and quite surprised," said Mark Case, BG&E's senior vice president for strategy and regulatory affairs. "At this point, we are still trying to digest the commission's order and make sense of [it]."
He added, "We actually do not see any clear path to move forward."
The Energy Department and smart grid advocates expressed dismay at the decision. The National Association of Regulatory Utility Commissioners, through a spokesman, backed the Maryland commission's action.
Regulators 'frozen in time'?
Ahmad Faruqui, a consultant who has been a major contributor to federal government analyses of demand response programs, said the Maryland action -- the first such state commission rejection of a smart grid project -- reflects a pattern that seriously undermines smart grid and demand response goals.
While some state utility commissions are willing to back smart meter deployment, they are reluctant to approve new "dynamic" electricity rate plans that allow prices to rise during the day when power demand peaks and fall when demand is slack. Such real-time pricing plans are essential to prompt customers to shift energy usage to slack times and reduce overall consumption, he said.
"There is no doubt in my mind that without state commissions approving the business cases for advanced meters and the smart grid, this is not going anywhere. They control the dollars; they set the rates for the customers," said Faruqui, an economist and principal with the Brattle Group. Faruqui testified before the Maryland commission in support of the BG&E plan and declined to comment on the commission's decision in that case.
But he said that around the county, commissions are heeding warnings from state consumer advocates and retiree organizations about possible cost impacts on customers if electricity rates are linked to actual generation costs, hour by hour.
"Most of the state commissions are frozen in time. They are being subjected to these very, very pessimistic, worst-case arguments," he said.
The Maryland commission's ruling noted predictions by an AARP witness that up to 40 percent of low-income customers would see higher summer energy bills and up to 15 percent would see higher annual energy bills. Faruqui said Brattle's research shows that around the country, lower-income customers would be affected least, because they typically do not have large central air conditioning systems and other high-demand appliances.
The Maryland commission said it would not approve an advanced meter plan that includes mandatory dynamic or "time of use" electricity rates.
A need for more outreach
"BG&E's project was one of the more solid examples of how to quantify the consumer benefits of smart grid," said Katherine Hamilton, president of the GridWise Alliance, an advocacy group supporting smart meter and smart grid strategies. "I think this means we have some work to do in outreach to the consumer and the state commissions," she said. "Whatever gets approved [around the country] will have to be pretty simple. And you need to give low-income and fixed-income consumers the same opportunities to save power that tech-savvy people will have."
BG&E proposed to replace 1.36 million electric meters and 730,000 gas meters for customers over three to five years, installing new advanced digital meters and a new communications network connecting the meters to the company's control center. The estimated cost of the meter deployment was to be $486 million, $136 million of which was to be paid from DOE's Smart Grid grants. The company said it anticipated $2.6 billion in benefits over 15 years, from conservation, lower prices, reduced capital expenditures for new power sources and other sources.
The utility proposed to create a customer Web portal that would allow customers to review hourly electricity usage from the previous day over the Internet. The commission criticized BG&E for not including in-home displays to alert people that power prices were rising.
To achieve savings, BG&E proposed to offer residential customers a "peak time rebate" from 2 p.m. to 7 p.m. on "critical" days declared by the company during heat waves when power supplies are stressed, and other emergencies called by the region's grid operator. Customers would be notified the evening before and then could earn a rebate, initially $1.25 per kilowatt-hour, if they reduce their power consumption below a predetermined base case amount.
The utility also proposed to charge higher power prices between 2 p.m. and 7 p.m. during the summer months, and lower rates at all other times.
BG&E sought to recover the costs of the meter rollout as they are incurred through a "tracker" surcharge added to customers' bills, rather than waiting to recover the costs in a traditional rate case proceeding.
AARP lobbies successfully in opposition
Although the staff of the PSC supported BG&E's proposal with modifications, as did the Maryland Energy Administration, the commission sided with the Office of the People's Counsel, a state consumer advocacy agency, and with AARP in challenging the case for smart meters and demand conservation by consumers.
BG&E asks ratepayers "to take significant financial and technological risks and adapt to categorical changes in rate designs, all in exchange for savings that are largely indirect, highly contingent and a long way off," the commissioners said Monday. The commission singled out BG&E's proposal to recover advance costs of the smart meter deployment through a surcharge on customers, calling it a "no-lose" proposition by the company.
"BG&E has provided no persuasive reason why its customers should subsidize this program in that manner."
The commission noted BG&E's testimony that the surcharge would raise the average electricity customer's monthly rate by 38 cents beginning in 2010, rising to $3.78 in 2013.
James Connaughton, executive vice president of BG&E's parent, Constellation, said that the Maryland commission's stance may deter Constellation's energy investment in the state. "I think the main and ongoing concern is a consistent pattern of wanting the utility to do really good work in Maryland, but making it very difficult to do so, including on economic grounds.
"There's a suggestion that what was already a proposed bare-bones rate of return should be further diminished. We were prepared to put in $280 million of our shareholders' money into advanced meter introduction. If we can't earn a reasonable return, it forces of us to look for other, more productive ways to invest that money in clean energy, probably in other states."
DOE may move funds to other states
DOE said that it was prepared to move on, too. "We are disappointed by the Maryland public utility commission's decision. Smart grid programs hold the potential to give customers more choice, reduce operating costs, increase network reliability and improve the safety and security of the electrical grid," said Matt Rogers, senior adviser to the secretary of Energy for Recovery Act implementation.
DOE's preference is to work with BG&E and Maryland to try to get past this impasse, he said. "However, the Smart Grid program was significantly oversubscribed with great projects. If the Maryland public utility commission decision prevents BG&E from meeting their cost share requirements and implementing on time and on budget, we will have no choice but to explore moving the funds to other projects which have the backing of the state regulators."
But DOE may have to contend with other state commissions unwilling to approve new consumer rate plans that allow rates to move up or down based on changing wholesale electricity prices during the day.
The Maryland commission took a fists-up stance toward its powers and prerogatives to rule on utility rates. "For one hundred years, since this Commission was created by the General Assembly in 1910, one of our primary functions has been to establish the rates that public service companies can charge their customers," the commission said. Currently, it faces a growing trend by regulated companies to cover costs in advance through surcharges rather than subjecting costs to review after they have been incurred.
While it has approved such surcharges in some limited cases, it drew the line on BG&E's current proposal, it said. "Surcharges guarantee dollar-for-dollar recovery of specific costs, diminish the Company's incentive to control those costs," and put those costs outside the commission's reach, the commission said.
The Maryland commission's decision was supported yesterday by Rob Thormeyer, communications director for NARUC. "If the agency believes the proposal is not in the best interest of their ratepayers, they will reject it or ask them to reconsider. From my reading of the order, that is exactly what Maryland did. They determined that BG&E's proposal is clearly flawed, and they asked them to resubmit their plan to address their concerns. ... BG&E and others in the smart-grid community should not be slamming the PSC; they should improve upon their proposal so it will not be, as the commission determined, detrimental to the state's ratepayers."