Smart Grid Blog 7

Smart Grid class # 7

February 21, 2011

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An overview of Economic, Institutional, and Rates issues affecting Smart Grid (SG) adoption, and OPUC SG activities.

-       Robert Procter, OPUC staff and lead for Smart Grid lead

Robert Procter is in charge of the Commission’s investigation of what requirements should utilities meet as they plan and invest in modernizing the electric system. Some of his time is also involved in working on, but not leading, the Commission’s investigation on infra-structure and power rates in support of electric vehicles. He is the commission’s point person for the Smart Grid. U.C. Berkley grad with Masters in Agricultural economics and 19 years on the BPA staff.

In keeping with someone who gives a prominent place on this resume for his extended time living and work in the remote community of Joseph, Robert gave a boisterous presentation of the challenges facing the adoption of the Smart Grid.

He started with an intriguing analytical structure for examining the development of public policy. This endeavor, he asserted could be subdivided into three parts:

Framework for policy:

-       Structure

-       Conduct – what do you have to change

-       Performance – where do you want to end up

Where do we begin to consider the structure? Let’s look at what’s out there. What’s written on the subject, etc?  And we find that “we have this patchwork quilt of oversight over the Smart Grid adoption”.

Proctor’s assertion is that “one reason it’s hard to come up with a systematic strategy is because this patchwork quilt makes it difficult to get to some solution.”

Robert Procter’s initial thesis was that:

“The vast majority of SG actions, applications, and benefits will be determined by policy enacted into law at the state level and/or by state-level (includes sub-state level) private and public stakeholders taking action.

•       The majority of emphasis in writings, panel discussions, conferences has been at the federal level.

•         Once you move off of the bulk power system you move from the federal to the state, and sub-state, level.

It’s hard to envision a systematic SG strategy since the supervision is scattered and incomplete:

-       Feds have little role in most SG adoption matters.

-       Local jurisdictions usually have code development/enforcement powers.

Locally the oversight is handled through:

-       OR utility rates proposals, and

-       Nearly 40 different entities involved

-       Including many participating NGO’s (e.g., SGO).

The division of Federal and local oversight adds to the complexity:

-       FERC has legal authority over rates for the bulk power system for both power (includes ancillary services) and transmission products (think transmission. i.e., lines > 115kV).

-       State Commissions have authority over all other power rates.

-       BPA Transmission rates impact IOU cost of service for power delivery.

-       Link Between Residential Exchange and IOU Rates.

At the sub-state level there is also regulation that affects the implementation of the Smart Grid, such as:

-       Local jurisdictions generally have the oversight of the respective building codes and processes.

-       Homeowners (and condo) associations also exert some control.

-       And owners preempt renter’s influence.

Here are a few examples of how these jurisdictional conflicts:

o   Sub-meters installation permitting and inspection issues.

o   Building codes and building systems control integration

o   OR law requires use of utility-owned meters,

o   Homeowner (and condo) association control over EV charger installation

o   In some locations in California the installation of AMI has even been criminalized!

So what is the Jurisdiction of the Oregon Public Utility Commission?

The Oregon legislature has defined the OPUC Mission as, “Ensure that (private utilities provide) safe and reliable utility service…(that rates) are just and reasonable…while fostering the use of competitive markets…”

The OPUC has economic regulation over IOU’s in electricity and Natural Gas. It has little influence over COU’s. All COU’s manage their own businesses including setting rates. The OPUC has no authority over non-utility private parties (e.g., third providers of equipment to utilities or to customers of the utility). It has very limited ability to consider costs other than what utilities incur to provide service to its customers. For example social issues, such as the impacts of carbon emissions and/or the economic development (Job creation) aspects of Smart Grid are outside its purview and writ. Even though the risk of regulatory change that may lead to higher costs can be included in their deliberations, the Commission has much greater ability to consider the costs of enhanced reliability as opposed to the fairness and societal costs. The OPUC also has more ability to consider “fairness” than societal costs. Once requirements are defined in law – then the OPUC only interprets the law. It’s not optional.

The question was also raised as to whether privacy issues may affect OPUC’s jurisdiction over Citizen Owned Utilities (COU)? And indeed they partially affect that jurisdiction. At a much higher national level there has been a wrestling match over whether “the energy folks and the security folks” have control over the development and implementation of the Smart Grid. For now the energy folks are in control.

Who is controlling the development and implementation of the Smart Grid by the COU’s? There are 36 COU’s in Oregon and each has its own board of directors, which in some cases are the local municipal or county governing body. These supervisory councils are ultimately accountable to customers. Typically the Director of a COU reports to the city council. Fundamentally, though, the OPUC has little authority of the COU’s.

However, these COU’s purchase almost all their power from the BPA, so there is a potential to address the oversight issue via the authority of the BPA. But the BPA has always been very sensitive about the degree of influence that it seeks to overtly exert upon its client utilities.

The OPUC’s regulatory “posture”:

What Robert means by “posture” is where and how the OPUC can weigh in on the issues affecting the implementation of the Smart Grid and the strength and clarity of their mandate to regulate in the interests of a more efficient rollout of the Smart Grid.

Given the forgoing discussion about the patchwork quality of the oversight and the depth of the regulatory framework that is affected, it is not surprising that the OPUC is not as proactive as some might like it to be. The current regulatory structure puts the Public Utility Commission in a reaction-based mode. The legislature “proposes” the extent and scope of the oversight and the Commission “disposes” the oversight. The commission responds to the utility proposals.

That is what the Dockets UM1460 and 1461 are all about.

The OPUC hold the right to exert economic regulation over the IOU’s. In return for being granted a monopoly franchise the IOU’s have agreed to cede economic oversight to the OPUC. This was the essence of the fundamental bargain first struck by Insull when he realized that the public benefits derived from consolidated monopoly investment were far more efficient than unfettered completion. This economic oversight was designed to assure that customers got the benefits of lower costs typical of a natural monopoly, while the utilities were allowed to earn an allowed rate of return.

In summary there are two points that Robert wanted to emphasize:

-       The commission has jurisdiction over only a portion of the electricity delivery market. It is the final arbiter of what costs the utilities can incur and what rates they can charge. The mandate is pretty substantive, but …

-       The commission is in a responsive mode reacting to proposals put forth by the utilities.

-       One more

Some economic/financial issues affecting the implementation of Smart Grid adoption include:

-       Discount rate – what’s the cost of capital? The cost of capital is a HUGE lever and affects whether the programs pass the cost benefit tests on a SG investment.

-       Payback requirements – it passes the benefit cost test, but we don’t get our money back fast enough. Is the payback period appropriate?

-       Fed and state tax policy – we see this with appliances and solar investments – rebates, tax credits and tax deductions.

-       Local tax incentives/disincentives – back in the ‘70’s there were cuts in property tax for solar implementations.

-       Projected building ownership length – residential, but also an issue for commercial buildings. This also includes the “split incentive” problems arising from the different time periods affecting the owner and tenants of a building.

-       New use of existing commercial buildings – how does the HVAC system complement or make it more difficult for the new use?

The Commission also considers the rate design options. Smart Grid rate options include:

-       Flat energy rates – kilowatt hours that we consume over time

-       Tiered rates (inclining and declining blocks)

-       Time of use rates – we actually have voluntary TOU rates in Oregon. PGE has also got a pilot project using Critical Peak Pricing. Rates that have Time Of Use usually have at least three periods.

-       Variable Peak Pricing is slightly different. It is the hybrid of Critical Peak Pricing and Real Time Pricing. Robert indicates “Real Time Pricing in theory goes down to the second/minute, but if you can get it down to the hour you’re really accomplishing a whole lot”.

-       Robert, speaking with his economist hat on, says that without these mandatory rates, Smart Grid benefits are being left on the table.

Smart Grid allows for greater variation in rates by time – than we can do today. So we can have a whole lot more variation in our rates than we have today. We can apply technology in to monitor outages and get faster outage response. But to get better system efficiencies we need to get prices signals that reflect what the system costs to provide electricity by time of day.

Robert then quickly reviewed the Commissions’ 4 types of procedures:

1.    Ratemaking – very formal, very legalistic

2.    IRP

3.    Generic investigation – much more flexible

4.    A way to change administrative rules.

The OPUC decided not to define the Smart Grid:

Robert feels that doing so would have been a great waste of time.

What does the staff do in the development of orders, such as in the UM 1460 docket?

-       Staff develops timeline

-       They scheduled pre-hearing conference where parties worked out mutually acceptable schedule for ALJ review and approval.

-       They developed and issued straw proposals, prepared initial comments and closing comments.

-       Hemmingway pointed out that the OPUC tends to works on orders, rather than engage in rule making – which require rule-making proceedings. Hemmingway stressed that in this case of responding to an order, “We have yet to see exactly what the commission is going to rule on”.  In a rule making procedure the citizens would see the rule, but in this case it is entirely up to the administrative law judge The OPUC staff also is not included in the deliberation.

The staff and the commission and the staff do not interact in a formal (or informal) way. Staff is a party to an investigation, just like other interveners. The Commission may not privately discuss the investigation with the staff.

Robert’s final question was, “Where is the consumer in all this development of the Smart Grid?”

This concluded Robert Procter’s comments.

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The Smart Grid a Multi-Institutional Approach:

- Roy Hemingway

Roy Hemmingway, was the OPUC commission chairman. He was one of the original members of the Northwest Power Planning Council from 1981 to 1986 appointed by Oregon Governor Victor Atiyeh. Hemmingway graduated with a BA from Stanford in 1968, and a Law Degree from Yale University in 1972.

Robert began his presentation by asserting that wanted to broaden the discussion from what Robert Procter had presented. He reminded us that electricity was a unique product.

-       Buyers determine how much is produced,

-       The same amount must be continuously generated or the grid frequency drops until the system collapses.

-       And, finally, the seller cannot refuse to supply electricity.

His second point was that “not all kilowatt hours are created equal”.

The value of a kilowatt varies by:

-       Location – the proximity of the energy source and implicit line losses

-       Time of day – changes related to the daily load factor

-       Time of year – seasonal and weather related changes

-       System status – constraints, capacity

-       Predictability – weather events, grid events?

-       Reliability – hydro is relatively predictability; Trojan was only about 50% reliable.

-       The sustainability of the resource producing it.

According to Roy, the Smart Grid can deal with these issues to improve value of kWh. The traditional set of relationships between the energy generator and the energy consumer can be summarized as:

1.    Utility sells power to customer

2.    Customer pays the bill

3.    Regulator – governs the entire relationship between the customer and the IOU.

4.    Customer has no role but to consume and pay bill

The Smart Grid will fundamentally change this relationship. It will, as a consequence:

-       Promote the more efficient use of the electricity system.

-       Facilitate the use and integration of renewable energy

-       Encourage the development of new uses and new markets.

-       Integration of new types of generation

Roy then focused on one prosaic example: Water heater load:

After considerable discussion it was agreed that there was approximately 8,000 MW in the Pacific Northwest (85% of water heaters are electric). This is about the same as the wind power generation capacity.

Water heaters are useful to control for:

o   Power loss emergencies

o   Reserves

o   Balancing

o   Economics

Controlling the water heaters is a good idea for all the foregoing uses. SO how do we make it happen? As obvious and easy it appears; it’s not!

When we bring in those other parties into the relationship it complicated the issue. So let’s look at these different parties.

-       Government(s) – (or trade assn.) set codes for control equipment, mixing valves, plumbing and communications so that all water heaters will act together.

-       Business –design equipment, react to proposed code, builds new water heater, innovate new equipment and uses aggregate customers.

-       Customers – who actually gets the consumer involved?

Who will control the water heaters?

-       Utilities – reward customers for installing new water heaters and allowing control. Will they control it or will customers do that or will there be a third party to do so?

-       Customers – buy new water heaters and contract for control.

-       Regulators – decide who controls the water heater for what reasons and compensation to customer for control.

When you consider this simple example you can see how easily it can become incredibly complicated – even though it’s a no-brainer. More complex issues become excruciatingly complex. Roy’s point was that in addition to the important work needed to be done on the technical and regulatory side, figuring out the institutional relationships to make it all work together will also require tremendous work.

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