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Rethinking Prices

The changing architecture of demand response in America.

Fortnightly Magazine - January 2010

regulatory commissions. 10 These intervenors have argued that dynamic pricing will harm an eclectic group comprised of low-income customers, the elderly, the very young and the disabled. In most cases, these intervenors have presented no empirical data to back up their claims. Even then, commissions are taking their concerns seriously, since they are wary of engendering a customer backlash.

An additional barrier is posed by newly emerging concerns about privacy and cyber security that are associated with the digitization of the economy and the rapid penetration of the Internet. For some people, the smart grid conjures up an image of an Orwellian Big Brother intruding into customer lives. To the extent these concerns slow down the penetration of AMI, they’ll slow down the penetration of dynamic pricing.

Among all the barriers, concerns about equity dominate the conversation in the regulatory arena. They need to be addressed if the benefits of dynamic pricing are to be realized. 11 Indeed, a leading university in the East Coast plans to hold a conference this spring to discuss the equity issues. In the absence of hard empirical data, these concerns can be addressed only at the theoretical level. Appropriately, the conference is being sponsored by the department of philosophy! Once empirical information becomes available on customer acceptance and satisfaction with dynamic pricing rates, fears about a ratepayer revolt should abate.

A new crop of pilot projects studying customer satisfaction with dynamic pricing rates have produced very encouraging initial results. One of the newest pricing pilots is the Smart Energy Pricing (SEP) pilot carried out by BG&E in Maryland during the summers of 2008 and 2009. Customers who participated in the pilot overwhelmingly supported dynamic pricing. 12 Two thirds of the participants (63 percent in 2009 and 62 percent in 2008) said they were “very satisfied” with the pilot program, and nine out of 10 participants stated they were either “very satisfied” or “satisfied” (92 percent in 2009 and 93 percent in 2008). Notably, when asked if they would like to continue with the smart energy pricing program, 99 percent said yes in 2009 and 98 percent said yes in 2008.

When asked if dynamic pricing rates should be made the standard offer rate, 93 percent of 2009 pilot participants who were on the peak-time rebate said yes. In 2008, 80 percent of the pilot participants (some of whom were on peak-time rebates and some on critical-peak pricing rates) had said yes.

The Plan-It Wise Energy Program (PWEP) pilot carried out by Northeast Utilities in Connecticut during the summer of 2009 also shows very positive early results. When asked to rate their experiences with the dynamic pricing tariffs on a scale of 1 to 6, with six being the most favorable, participants gave it a satisfaction rating of 5.1.

Dynamic Pricing Potential

The FERC report provides an estimate of the current impact of dynamic pricing for all 50 states and the District of Columbia. In 35 of them, dynamic pricing has no impact today. Dynamic pricing rates either aren’t being offered in those states or customer participation