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Selling the Smart Grid - The Policy

Why many state regulators still have qualms about endorsing smart meters.

Fortnightly Magazine - April 2008

“should include system benefits that may accrue to the electric distribution utility,” plus “customer benefits and societal benefits.”

To perform such an analysis, the commission staff said the first priority “should be to conduct the cost-benefit analysis in a uniform, transparent format,” and recommended that utilities employ the so-called “McKinsey Model.”

The commission agreed on the use of the McKinsey Model (or any demonstrably superior model), but the problem remains on how to measure societal and intangible benefits.

The McKinsey Model is available to the public for download from the McKinsey & Co. web site . It includes a 26-page user guide plus some 40 pages of Excel spreadsheets. Those spreadsheets provide real-world numbers for costs, benefits, net present values and internal rates of return that might be expected over 20-years for a hypothetical, 5-year project to deploy 1.1 million smart electric meters (1 million residential; 100,000 C&I), plus 550,000 smart gas meters. That’s a pace of 1,374 meters per day.

The model recognizes and analyzes virtually all conceivable categories of costs and benefits, including taxes, equipment, software, labor (both union and contract), and O&M (meter reading, billing, and of course collection).

Speaking on condition of anonymity, a veteran utility consultant (not from McKinsey) explained that the model has gained popularity with many state PUCs, but is not designed to be an off-the-shelf model requiring only a set of input data to produce an immediate result. And it doesn’t resolve doubts about intangible factors.

“As yet the McKinsey model doesn’t provide any framework to capture societal benefits such as impacts on reliability, energy efficiency, reduction of greenhouse gases and overall carbon footprint,” he said. Nor does it currently analyze intangible customer benefits such as increased satisfaction due to better service and billing, or wider offerings and choices.

“Depending upon the regulatory environment,” he added. “These benefits … can be credited even though not all directly impact the bottom line.

“These benefits, though hard to quantify, are benefits nevertheless.”