Contrary to conventional wisdom, electricity demand isn’t immune to price elasticity, and rate designs can encourage conservation. In particular, inclining block rates coupled with dynamic pricing...
Regulators to Blame? How Competitive Metering Has Failed
How Competitive Metering Has Failed
It's time for regulators to face facts and move forward.
Advanced metering-hourly data retrieved daily-and price signals could have prevented California's energy crisis. So says the Congressional Budget Office, which said rolling blackouts would have been averted, 1 and the Electric Power Research Institute, which found that electricity costs in California would have been between as much as 19 percent lower in 2000 with real-time metering in place. 2 Groups from the Bush Administration to the National Governor's Association to the Consumer Federation of America are calling for real-time meters or demand response programs predicated on them-even in electricity markets without retail competition. 3 On the cost side, McKinsey forecasts consumer savings of $10 billion to $15 billion per year resulting from time-based pricing. 4 And Puget Sound Energy's highly successful 300,000 customer voluntary residential time-of-day program is yet another in a long line of evidence proving that consumers do, in fact, lower electricity demand in response to voluntary time-based prices. 5 ()
In spite of such compelling support, regulators have failed to develop successful policies to promote advanced metering installations. Quite the contrary; in attempting to protect consumers, regulators have unwittingly created an environment where energy users are led to believe there is no limit to available capacity and utilities are encouraged to construct power (peaking) plants that often operate less than 10 days per year. The former, since prices remain fixed even during the highest summer peaks, and the latter, since utility earnings are increased through adding to the rate base. The UK's Office of Gas and Electricity Markets documented that cost-plus regulation of distribution utilities actually discourages investment in advanced metering. 6
The advent of wholesale competition with 1992's Energy Policy Act, combined with the availability of silicon-based technology, has made regulatory policies for metering obsolete. Few other resources have such a disconnect between wholesale costs and retail prices. Even such a critical commodity market as gasoline has demand response; high prices lead users to form carpools, reduce non-essential driving, and use more efficient vehicles. The cost/price disconnect for electricity renders consumers impotent: having no knowledge of when costs are high, they have no ability to reduce those costs by withholding demand. At the same time, wholesale providers enjoy a significant information advantage-a phenomenon in recognition of which the Nobel Prize in Economics was just awarded-and exploit that market power to their benefit. 7 The result: wholesale price spikes in virtually every region.
Policymakers need to empower consumers with information and the ability to control wholesale costs by voluntarily responding to peak prices. Regulators need to ensure that the basic electricity infrastructure is upgraded to meet the current and future realities of the competitive wholesale market (whether or not retail electric markets ever become competitive is irrelevant). The infrastructure must include time-based rate options, real-time meters, and information systems that can deliver that usage information and bill those customers.
The Original Idea
One policy option, competitive metering, has been touted as the best way to bring innovation to metering. So far, it has