Selling the Smart Grid - The Backlash


California learns painful lessons from its proposal to mandate demand response.

Fortnightly Magazine - April 2008

When the California Energy Commission (CEC) proposed to include programmable communicating thermostats in the state’s new building codes, it expected some push-back from home builders. It didn’t expect what it got: a major public outcry.

An ABC News affiliate quoted Mark Toney of the Utility Reform Network saying it was a “Big Brother thermostat program.” Blogger Don Boudreaux called it a “huge leap down the road to serfdom.” The American Thinker called it an “invasion of the sanctity of our homes by state power.”

To find out what went wrong and what the CEC plans to do next, Public Utilities Fortnightly spoke with Jackalyne Pfannenstiel, CEC chairman, and co-author of a January 2008 Fortnightly article that examined the potential of a mandatory demand response program in California.


Fortnightly: What caused the public backlash against CEC’s proposed building code amendments?

Pfannenstiel: A couple things. Fundamentally, we had not thought through clearly enough how some people would perceive what we were proposing. They were concerned that we would be mandating, through the building standards, a device that had the potential of affecting people in their homes without them being aware of it.

The original proposal was to have all new homes equipped with a programmable communicating thermostat (PCT), which would work with utility-initiated radio signals. Through the PCTs, the utilities would have been able to affect the temperature in the house a few degrees, but only if the customers had signed up for a utility program or in certain emergency situations.

Part of the problem was that the Energy Commission has the authority to put devices in the home under the building standards, but we have no jurisdiction to define what constitutes an emergency. That authority resides with others, such as the California PUC and the Independent System Operator, so we couldn’t assuage customers’ concerns about the utilities’ use of PCTs in an emergency.

We pointed out there would be an override capability, and that the communication device would have an on-off switch, so the customer could decide whether to allow the utility to activate the radio control. But even that wasn’t enough to relieve people’s concerns about the presence of a device equipped with the capability to receive a radio signal.

In actuality, we had been pushing a technology before the market was ready for it. I concluded this isn’t about technology, but about human beings in their homes.

Demand response is ultimately about people’s choices and decisions. In our society it’s not about government controlling the device in your house, it’s about you choosing how you want to use your devices, including air conditioning.

The original proposal went way beyond what people were comfortable with. We need to reconsider whether this particular technology makes sense as part of the building code.


Fortnightly: Where do you go from here?

Pfannenstiel: Starting [in early March] the Energy Commission will be holding hearings—which have been long scheduled—on load-management standards. The question is this: what is the right combination of prices, policies and technologies that make sense? It could be the PCT is a very efficient enabling technology for load management, but a number of other competing technologies might make as much sense.

We need to look at the whole question of DR in terms of meters that are going in now, the rates that will be effective with those meters, and what the customers want to do to take advantage of those meters and rates. Do they want a PCT, and do they want to sign up for the utility to control their thermostat, or do they want to do other things?

We’ve decided that PCTs won’t go into the next iteration of building standards, and won’t be included in the standards at all until we finish an examination of where they fit in the greater scheme of load management.


Fortnightly: Your Fortnightly article suggested a mandatory DR program would have much greater benefit than a voluntary one. If California must accept something less than 100 percent participation, what does that mean for the state’s ability to meet its energy resource and environmental goals?

Pfannenstiel: I think we’ll get there. What we described in the article was largely an “opt-out” case, where customers were given certain technologies and, by default, a greater number would stay with the program. That is a very useful bookend, but it may be we need to look equally at “opt in” responses.

I’m a big believer in DR through price signals. Being trained as an economist, I believe people respond to price signals. Ultimately, they may be willing to go to Home Depot and buy a PCT to help them respond.

I should point out that the building standards apply to new construction only. At its peak, California was building about 200,000 homes a year. New home construction is obviously down a great deal from that, but those new buildings are where the PCTs would have been installed, starting in 2009. They’d be phased in over a long period of time. Meanwhile, utilities in California are already installing advanced meters in all residences (see “Selling the Smart Grid”). The advanced meters will be way ahead of PCTs in any scenario, and, with appropriate pricing, they will drive the market, if any, for PCTs.

Technology moves so fast that maybe the current form of PCT is not the right technology and never will be. PCTs have been under development for many years. When they first started being developed we didn’t have advanced metering. Now, with those meters going in, the technology that will take the best advantage of advanced meters may be something different. Perhaps in future years California consumers will want PCTs, because they don’t want to think about whether they change their thermostat settings themselves. Or maybe they won’t; that needs to be their choice.

Working collaboratively, the Energy Commission and the PUC are moving aggressively to provide better price signals to all customers. The load management proceeding will look at the different pieces of the load management puzzle and try to find out what’s the right combination of prices and technology that will give California the most response.


Fortnightly: What lessons were learned from this episode? What advice can you offer to regulators in other states considering DR programs?

Pfannenstiel: The first lesson we learned was the need to get information out in advance, make sure people understand what DR is and isn’t, and why it makes sense. We haven’t done that well anywhere in the country. Second, I’d stress economic benefits to customers, the potential savings that are available. Our society responds to prices but people don’t know much about electricity prices. We need to compress the learning curve to have effective demand-response programs.


Fortnightly: In the past consumers have been disappointed when utilities and regulators promised cost savings, and then prices went up anyway. Doesn’t it make more sense to tell consumers, “Prices are going up inevitably, and we’re giving you the tools to manage your costs”?

Pfannenstiel: It makes sense in general, but for an individual household or business it’s not necessarily the case. If you are a customer whose usage is primarily off peak, under cost-based time-varying prices, one would expect costs to go down. Those whose use is mostly on peak will see their electricity costs go up.

In moving to cost-based rates, the individual customer impact will vary enormously, and that variation may wipe out average cost variations. I believe a cost-based rate design is where we need to go, in California and across the country. We need to give people signals about the cost their usage is imposing on the whole electric system. This will be a difficult transition because we’re so far away from that now. But if we start now, it will make other issues we’re dealing with, such as technology applications, more tractable.