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Regulators to Blame? How Competitive Metering Has Failed

Fortnightly Magazine - November 15 2001

for New York, Arthur Andersen reported that one-by-one installation costs six times more than contiguous installation for residential meters, and eight times more for commercial meters. 16 And customer acquisition costs vastly exacerbate deployment costs. Cost-effective deployment of real-time meters requires capturing of these scale and scope economies.

How to Fix It

The current lack of advanced metering and time-base pricing has resulted in price spikes, brownouts, rolling blackouts, and higher power costs. Policymakers need to act and empower energy users with the information and other benefits of such metering.

While the evidence is not favorable, some believe that, in the long run, competitive metering may support an advanced metering infrastructure. 17 In the short-run-up to 10 years-regulatory leadership is clearly needed. This occurs for two reasons: 1) the greatest benefits of real-time metering accrue to customers as a group, because demand response reduces wholesale prices for all customers (this is economics' classic "tragedy of the commons"); and 2) utilities have no incentive to invest in advanced metering. Utilities would make no greater profits and would take the risk inherent in any change.

Regulators and legislators need to do two things. First, they need to examine the extensive research already done and satisfy themselves that real-time metering will save consumers substantially. A five to ten percent reduction in generation costs means the investment in advanced metering would have a payback of just over a year. Many other benefits would come along, as cited by Massachusetts: 18

  1. price reductions, both at the wholesale and retail levels;
  2. improvements in the reliability of supply;
  3. the development by suppliers of new products and services (e.g., multiple pricing options);
  4. improvements in the wholesale financial settlement process administered by the Independent System Operator - New England; and
  5. incentives for investment in energy efficiency measures. In addition ... price- responsive demand would improve distribution service reliability and would lower the costs incurred by distribution companies in providing this service.

Second, policymakers must provide appropriate incentives to utilities-good public policy would suggest mandates. The proper incentive depends on the state, the status of incentive regulation, and other factors. Some examples of good incentives are low-cost state financing, assured long-term cost recovery, tax credits, accelerated depreciation, and allowing utilities to earn profits-at their risk-on the sale of value-added information services.

  1. Causes and Lessons of the California Electricity Crisis, Congressional Budget Office, September 2001.
  2. , Steven Braithwait and Ahmad Faruqui, February 1, 2001.
  3. Remarks by the President to the Capital City Partnership, President George W. Bush, May 17, 2001; Electricity Deregulation and Consumers-Lessons from a Hot Spring and a Cool Summer, Mark Cooper, Consumer Federation of America, August 2001; Comprehensive National Energy Policy, National Governor's Association, Policy Position NR-18, August 7, 2001. Note that the Consumer Federation specifically supports demand response programs for commercial customers and is silent regarding residential customers.
  4. , McKinsey, May 1, 2001.
  5. , Brattle Group, August 30, 2001.
  6. , OFGEM, March 2001.
  7. , Working Paper, Frank Wolak, Department of Economics, Stanford University and Robert Patrick, Graduate School of Management, Rutgers University. February 1997.
  8. , California Public Utilities Commission,