Policy makers in the E.U. and the United States are taking different approaches to facilitating smart grid development. While both regions are setting standards that the rest of the world likely...
The Law of Unintended Consequences
The transition to distributed generation calls for a new regulatory model.
The only rule universally observed in the electric power industry is the law of unintended consequences. There are so many different entities with an interest in, and in some cases control over, the power sector that it’s often difficult to align policy with practicality. In the case of technological developments in distributed generation and net metering, a new regulatory scheme will be necessary to ensure the recovery of utilities’ costs for maintaining the system that delivers electricity today.
Failing to adopt a regulatory strategy to manage the transition to new technologies can have a dramatic effect on cost allocation to consumers—and the reliability of their energy supplies. The evolution of telephone service provides an excellent example. The lack of coordination between the costs of wireless and the costs of legacy networks that still provide landline service across the United States has resulted in a heavy burden on non-participants in wireless, and threatens their system’s reliability.
The opportunity was there. Twenty years ago state regulators exercised control over all telephone services and their costs. Today, in New York State, one telecommunications company is a dominant provider of both copper wire and wireless telephone service. Yet by virtue of a regulatory scheme that didn’t factor in the success of a new technology, revenues from the moneymaking wireless services aren’t available to support the money-losing landline business, whose customer service metrics are in free fall. As a result, wireless users today contribute nothing to the cost of providing telephone service over landlines, and landline customers contribute nothing to the cost of providing wireless service. As the copper wire customer base rapidly shrinks, only its users—not all telephone customers—bear the cost of maintaining a system that’s easy to opt out of. However, many of the users of landlines who are unable or unwilling to switch to wireless also receive government support for living expenses, including landline telephone service, so taxpayers ultimately bear the cost of maintaining an obsolete technology.
The same regulatory standard that states apply to the telephone industry, “safe and adequate service at just and reasonable rates,” has always applied to utility services throughout the United States. Yet telephone service is an ongoing example of a new technology disrupting regulators’ ability to honor this standard and to treat all ratepayers fairly—whether they’re wireless participants or not. Had state regulators acted more thoughtfully, and then aggressively, this misalignment of interests could’ve been dealt with appropriately from the beginning.
In the electric sector, an analogous technological change is underway, and its long-term consequences have yet to be considered in depth by regulators. The effects of encouraging distributed generation (DG) behind the meter, through