AES VP on Smart Grid and Discussion of These Issues

I recently  attended the AES annual stockholders’ meeting.  I should duly note that I am a small shareholder and have been for more than a decade.  Nothing I write here will affect my wealth very much, given that I do not own that many shares and AES is not a huge presence in US power markets. Most of its operations are international.

Ned Hall, Executive VP, answered some of my questions on why utilities are not rushing to invest in the smart grid, but are happy to allow the US government to provide funding.  If I misquote or otherwise mangle his responses, he or any AES representative is free to respond.  I have no transcript of the conversation.  I am writing from memory.  I am seeking answers, not either promoting or casting blame on power companies.

His first thought was that with the steady rise in energy prices prior to the sharp drop last fall, utilities were looking for ways to cut costs in order to keep sales from falling, rather than increasing their investments and rate bases.  I can easily understand this concern. People are in business to sell products, not create barriers to sales.

His second claim was that there is no incentive for utilities to become more efficient, because that might also cause them to lose sales and the public utility commissions did not offer ways to compensate for these losses.  I am somewhat skeptical of this answer, especially since many state commissions have offered incentive regulation and demand side management programs for years.  Let me break things down into smart grid functions to get a better grip on the problem.

The first function I would mention is the use of the smart grid to improve path efficiency on the grid, discover outages faster and with greater accuracy,  reroute electricity along the most efficient path and improve system security.  In other words, to increase reliability.  This saves the electric company money in the long run, while not affecting demand.  If anything, it improves sales, because when electricity does not flow to the customer, it cannot be billed.

Another aspect of the smart grid is time-of-day metering.  Half a century ago, Ma Bell and the baby Bells were capable of breaking long distance service into 3 billing periods, with day rates being  higher than evening rates, which were in turn higher than late night rates. The company seemed to be able to do this  noticeable loss of revenue.  Yet the nation’s electric utilities (which were instrumental in the break-up of the phone monopoly when they were allowed to build microwave stations on their own rights-of-way for internal company communications) are not capable of doing this?  Granted that separate meters at every location are not necessary for telecommunications billing as they are for electricity useage billing (is there no feasible way to use the smart grid for billing and eliminate meters on the home or business forever?).  Current meters may need to be replaced at considerable cost.  However, when the telephone monopoly was broken up, new equipment was added to each home and place of business, and this did not bankrupt phone companies.

The third function I would mention is the most problematic for electric companies and I understand why they would want to move slowly or even balk at this use of the smart grid.  That is, there are proposals that homeowners and other users of the system be allowed to add electricity to the grid from their renewable sources such as solar, wind and perhaps co-generation.  Imagine if Walmart were required to accept products from its customers on demand for it to resell, regardless of supply and demand conditions.  Even if the products were made in accordance with specific standards, the coordination problem would be tremendous.  So I would expect and even advise a cautious approach here.

I still believe that much of the problem is simply electric company management inertia.  I believe many were burned seeking to make big bucks on fiber optic cable along their rights-of-way,  but during the era of deregulation, little data were collected on this issue by those willing to make it public.  Mergers and other factors decimated white collar employment. Also, if Uncle Sam is providing free money, why not sit back and wait for it like an orchard pig waiting for an apple to drop?

But which public utility commission is going to allow a rate of return on free money?  That is my concern for the long run health of the industry.


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