Main Menu8/10/2004
Copyright 2004. All rights reserved.
The state of California has taken a step toward empowering smaller electric customers who want to save money on their energy bills. On July 21, 2004, the California Public Utilities Commission issued a ruling ordering the three large investor-owned utilities in California to submit business cases and plans for deployment of an Advanced Metering Infrastructure.
The CPUC definition of AMI includes six functional areas and requires remote meter reading and hourly interval data collection. If the business case supports deploying AMI, based on the operational and demand response benefits from AMI, then the CPUC is expected to approve utility plans for the deployment of AMI and importantly, approve cost recovery for the utilities. Then, after the deployment, the utilities and regulators would have the infrastructure in place required to support energy rates that more closely track the cost of the energy.
Coolin' Off
Energy demand is rising across the state once again as the economy kicks into high gear. Demand during the peak hours is increasing at an even faster pace, as air conditioners crank up. There's a fear that tight supplies could lead to rolling blackouts or high prices once again. With the CPUC's plan, on a very hot summer afternoon when it typically costs more to generate energy, the customer's rates might eventually reflect that higher cost. Customers could save money by reducing their energy usage at those times and would pay less money for energy used at other times.
California has already been testing variations of these rates, known as time-of-use or critical peak pricing rates. With these rates, the prices vary depending on the day of the week—weekday vs. weekend or holiday—and the time. The price at 3 p.m. on a Thursday would be higher than at 3 a.m. on a Thursday, for example. And on a very hot weekday, the price might be higher still. These days would be called “critical days” —hence the term “critical peak pricing.”
In the Statewide Pricing Pilot begun last year, a sample of residential and small business customers was asked to volunteer to be on one of these rates. Metering was upgraded for the participants and for other consumers who continued on the current rates, to test several things.
One key issue was whether customers would like the new rates better than the old rates. It turns out that most customers did prefer the new rates. After being on the rate for several months, customers reported that they found the new rates easier to understand than the current rate. They also liked the feeling of being in control of their energy bill, managing not only how much energy they used during the billing cycle but also deciding when they used the energy. This feeling of empowerment has been noted in other rate trials. In Commonwealth Edison's real time pricing trial in Chicago, Anthony Star, assistant manager with Community Energy Cooperative that manages the program for ComEd, reported the same response by residential customers.
Another key issue in the California pilot was whether the customers would respond to the rates by reducing peak energy usage. Preliminary results indicate customers did respond, and in many cases, surpassed expectations. Also of interest was the impact on low income customers. These customers typically use less energy than the average customer, and it was feared that they would be unable to shift usage to lower cost periods. A rate structure change that would significantly increase the bills for lower income customers would be seen as regressive. Fortunately, it turns out that the typical peak usage for a low income customer is low enough that these customers paid less under the new rates than under the current rates, and were able to save even more by further reducing peak usage.
Sanguine About Savings
With these preliminary results, California regulators are optimistic about a partnership with the smaller retail customers, perhaps beneficial enough to prevent another energy crisis. By giving smaller customers the right price signals, California expects to dampen the large price swings in the cost of energy by reducing demand when the prices rise steeply. This should bring more stability to the energy marketplace, and result in lower long-term energy costs. The CPUC has adopted a goal of meeting 5 percent of system peak demand with price responsive demand by 2007.
California is not alone in taking this approach. Idaho's Public Utility Commission ordered Idaho Power to install AMI in 2003, but then rescinded the order due in part to procedural questions. After that tussle, Idaho Power and the regulators came to an agreement that will allow the utility to install AMI at a slower pace and recover reasonable costs. Currently, Idaho Power is in the midst of the first installation phase of 23,500 endpoints in two areas of its service territory. Both Idaho and California have forecast a deficiency in peaking generation in the not-too-distant future, and are seeking ways to provide reliable electric service at the lowest cost.
Ontario, a province in Canada that is also facing a shortfall of available generation capacity, has adopted a policy to deploy AMI across the entire province. Ontario has opted to shut down its coal generation by 2007 and to reduce its dependence on hydropower. To achieve this, Ontario has to replace 25,000 MW of capacity by 2020. Without the coal plants, and with the forecasted growth in demand, it is critical for Ontario to embrace energy efficiency and reduce peak usage.
Speaking in April 2004, the minister of energy for Ontario, Dwight Duncan, said that “residential and small business customers in Ontario would be offered a standard rate plan. Not a price, a plan….It would also ensure that consumers can take advantage of time-of-use rates so that they would have the opportunity and incentive to shift consumption from periods of high demand and prices to periods of lower demand and prices.” On June 23, Duncan issued an order to the Ontario Energy Board to implement the Ontario Government's “targets for the installation of 800,000 smart electricity meters by December 31, 2007, and installation of smart meters for all Ontario customers by December 31, 2010.”
That's a Lot of Meters
The impact of such regulatory decisions is likely to be enormous on the AMI industry. If all of the regulated utilities in California and Ontario were to deploy AMI over a period of five years beginning in 2005, unit shipments in North America for AMI would more than double from the current shipment rate to the electric utility industry, increasing from approximately 2.7 million AMI units per year to 5.3 million per year.
Major AMI suppliers as well as smaller suppliers all hope to supply the equipment and services necessary to support this effort. This would include automatic meter reading suppliers of the more sophisticated AMR systems, electric meter suppliers, data repository/data management vendors, AMR and meter installers, energy consultants, and potentially, third party suppliers of all or some of these services.
What factors favor these deployments? Utilities and customers stand to gain a host of operational benefits from AMI. The CPUC ruling says that it expects most of the near term benefits to come from these operational savings. As the following table demonstrates, utility and customer benefits for a typical AMI business case are now exceeding $3.24 per meter per month, or $39 per meter per year, without regard to any additional benefits provided by a complementary time-of-use and critical-peak pricing program. With all-in endpoint deployment costs now dropping below $150 per meter, regulators and utilities are starting to find attractive payback opportunities with AMI.
Law May Need to be Changed to Gain Full Benefit from AMI in California
Current law in California prohibits raising the energy rates for most residential customers on the first 130 percent of the established baseline usage until the Department of Water Resources' contracts expire in 2018. The intent of the law was to protect the residential customers served by the large investor-owned utilities. Since that time, the sentiment of many has changed with the recognition that rather than protecting customers, rate structures that do not take into account the variable cost of producing power can actually increase the cost of providing reliable electric service to the population. But until this law is changed or other steps are taken, the benefits of offering these new rate designs may be severely limited in California. Thus, until this issue is resolved, the demand response benefits will remain uncertain. However, this constraint does not apply to the Idaho and Ontario markets.
California's IOUs are required to file preliminary business cases for both partial and full deployment of AMI by October 15, 2004. In these preliminary filings, the IOUs are to compare the preferred AMI deployment selected by the IOU against the current method of reading meters and providing the other services that might be impacted with the deployment of AMI. Costs of the deployment will be compared to current costs. Tangible benefits that stem from a network automatic meter reading system will be evaluated. The goal is to carefully assess whether the benefits of AMI are clear and compelling.
By December 15, 2004, each IOU will submit its final business cases and proposed deployment plan, including cost recovery. The suppliers of AMI and other associated equipment and services will be closely watching the California and Ontario markets. However, it would be prudent for regulators from other states and provinces, investors, independent energy producers and utilities to also keep an eye on these developments. California has been known to stumble, but one shouldn't assume that California cannot dance.
UtiliPoint's IssueAlerts are compiled based on the independent analysis of UtiliPoint consultants. The opinions expressed in UtiliPoint's IssueAlerts are not intended to predict financial performance of companies discussed, or to be the basis for investment decisions of any kind. UtiliPoint's sole purpose in publishing its IssueAlerts is to offer an independent perspective regarding the key events occurring in the energy industry, based on its long-standing reputation as an expert on energy issues. Copyright 2004. UtiliPoint International, Inc. All rights reserved.
