SmartGrid: Moving Toward Regulatory Uniformity

Expert Contributors: Stephanie A. Joyce, Esq. and Stephen Thompson, Esq.

WASHINGTON, November 18, 2011 – The development of SmartGrid technology, which generally refers to devices that monitor, and possibly control, energy use via telecommunications-enabled devices, is proceeding apace, though not as quickly as many had hoped or anticipated.

At the most recent Broadband Breakfast that was focused on SmartGrid, panelists were in agreement that among the reasons for this slow development is the lack of regulatory uniformity at the state level regarding how SmartGrid-related services are treated and, more specifically, how SmartGrid-related costs are recovered.  According to the panelists, until energy companies sense some degree of regulatory support for SmartGrid, coupled with a relatively normalized set of costing rules, the deployment and offering of SmartGrid will remain limited.

It appears that many states already have heard the call of industry on this matter.  According to research conducted by the Edison Electric Institute, in the last two years, several state commissions have adopted rules and orders focused on SmartGrid ratemaking.  These commissions have recognized the need to incentivize energy companies, through favorable cost recovery mechanisms, to invest in the network facilities and devices SmartGrid requires.  The possibly unwitting result is that a significant degree of regulatory uniformity is spreading across the country.  Today’s status quois not perfect, but it’s a start.

Through either general rulemakings or company-specific rate cases, the commissions of many states have decided to permit energy companies to recover SmartGrid costs through their rates, with some limitations.  These states include California, Colorado, Illinois, Massachusetts, New Jersey, and New York.

Some states, such as California and Colorado, limit the amount of recoverable investment to the figures presented in the companies’ initial SmartGrid plans.  Illinois, in reviewing Commonwealth Edison’s proposed “Advanced Metering Pilot”, identified specifically which costs the company may amortize within its rate design.  New Jersey and New York are allowing companies to recover costs through existing mechanisms.

Still other states, such as Delaware and the District of Columbia, have approved the concept of cost recovery for SmartGrid in theory, and will determine specifically which costs may be passed through, and to what degree, in forthcoming rate cases.

In all, 21 states have agreed that some portion of the costs associated with SmartGrid facilities may be recovered through rates, whether base energy rates or specific surcharges (of these, Montana will permit NorthWestern Energy to begin pass-through in 2013).

This permission has been withheld, in some instances, from certain companies whose applications were deemed incomplete or implausible, but these states at least have accepted the concept of SmartGrid cost recovery as a reasonable policy choice.  At this time it appears that, of the state commissions that have addressed the issue, only Indiana and Nevada have not approved some form of cost-recovery mechanism for SmartGrid.

Unfortunately, about half of U.S. states have not yet addressed SmartGrid ratemaking.  The considerable work done by several other state commissions may spur those states to action, and certainly their decisions can be instructive examples to states that will tackle these issues in the future.

The more regulators display an understanding of the need to address SmartGrid costs and rates, the more comfortable the industry will be that they can invest in this technology safely and profitably.