THE NEED FOR ESSENTIAL CONSUMER PROTECTIONS: WHITE PAPER ON SMART METER AND DYNAMIC PRICING

1. THE NEED FOR ESSENTIAL CONSUMER PROTECTIONS: WHITE PAPER ON SMART METER AND DYNAMIC PRICING Barbara R. Alexander Consumer Affairs Consultant 83 Wedgewood Dr. Winthrop, ME 04364 (207) 395-4143 E-mail: barbalex@ctel.net Note: Ms. Alexander is a consultant to the Attorney General, but this presentation should not be interpreted as the views of any client

2. PURPOSE OF THIS PRESENTATION THE NEED FOR ESSENTIAL CONSUMER PROTECTIONS: SMART METERING PROPOSALS AND THE MOVE TO TIME-BASED PRICING (August 2010) AARP NATIONAL CONSUMER LAW CENTER NASUCA CONSUMERS UNION PUBLIC CITIZEN • Summary of Recommendations with additional supporting information • Stimulate Discussion MA Grid Modernization Collaborative 2

3. A. COST EFFECTIVE; RISK SHARING • Smart Meter proposals must be cost effective • Surcharges and trackers should not be adopted • Utilities typically want assurance of cost recovery for these significant investments; seek pre-approval and surcharge or tracker to assure cost recovery outside of a base rate case: as a result, consumers bear full responsibility for actual costs as they occur • What assurance is there that promised benefits will actually occur? When? By all customers? How are benefits reflected in rates? • New technologies: who bears risk of wrong choice? [VCRs vs. DVDs vs. DVRs] PG&E obtained approval to increase AMI costs by $1 B due to its mistaken smart meter technology choice; same occurred in Texas • These are very costly investments and the new metering system is just the beginning: enhanced web portals, home energy reports, upgraded billing systems, in-home devices, smart thermostats, customer education; cybersecurity programs and consultants • California customers paying $2-3 per month; same in Texas MA Grid Modernization Collaborative 3

4. A. BENEFITS MUST BE PROVEN AND DELIVERED AS PROMISED • Benefits are estimated over a 15-20 year period; many variables highly speculative • To document cost effectiveness, utilities sometimes seek demand response and supply side benefits that are crucial to getting to positive net benefits • Demand Response benefits are estimates: customer participation rates; persistence of results; impacts of wholesale market structure on value of DR and how to return this value to customers • Who bears the risk that these estimates are wrong? • What are the bill impacts for cost recovery for this initiative in light of other mandated programs for efficiency programs and renewable energy contracts? MA Grid Modernization Collaborative 4

5. EXAMPLES OF BASE RATE RECOVERY DECISIONS • Maryland Commission Order on Smart Meter proposals rejected separate surcharge/tracker and requires BGE and Pepco to seek cost recovery in a future base rate case when actual benefits can be documented as a condition of cost recovery. The Order specifically identifies risk sharing as key to its decision. Case No. 9208, Order 83410 (June 21, 2010) • Nevada Commission: “…at the time the Companies seek cost recovery for the project, the Companies must produce evidence of the progress in achieving the benefits that were used as the basis to support this application, including verifiable savings relating to meter reading, field services, revenue protection, distribution planning, billing, credit collections, and load research.” MA Grid Modernization Collaborative

6. RATE RECOVERY; NEED TO DOCUMENT ACTUAL BENEFITS • Michigan Ct. Appeals rejected Commission’s approval of cost recovery for smart meters by Detroit Edison on the grounds that the record lack sufficient evidence to support the alleged benefits: At best, the actual evidence presented by Detroit Edison to support the rate increase was aspirational testimony describing the AMI program in optimistic, but speculative terms. What the record sadly lacks is a discussion of competing considerations regarding the program or the necessity of the program and its costs as related to any net benefit to customers. In re Detroit Edison Co., Case No. 296374, decision released April 10, 2012; See also, In re Consumers Energy Co, 279 Mich App at 188; MCL 24.306. MA Grid Modernization Collaborative 6

7. B. DYNAMIC PRICING SHOULD NOT BE MANDATORY • Time-varying rates have been available for many years; customer enrollment is very low in most states (AZ is a significant exception) • Smart meters allow for different pricing options, traditional TOU, as well as as Critical Peak Pricing (charge high rate for usage during wholesale market critical peak days); Peak Time Rebate (credit for reducing usage during wholesale market critical peak days) • Theory: customers can shift usage or reduce usage according to their “sensitivity to price” MA Grid Modernization Collaborative

8. BUT WHAT DO CUSTOMERS WANT? • Be careful of “average” results! • Most pilots show that small group of total pilot volunteers provide most significant results • All pilots show “winners” and “losers” • ComEd’s 8,000 opt out pilot was an expensive failure: no valid usage or peak load reduction “on average” compared to customers on flat rates • Rate stability is highly valued by residential customers, particularly low use and low income or fixed income customers (AARP survey results in CT and PA) • What do the smart grid pilots in MA tell us? MA Grid Modernization Collaborative

9. DYNAMIC PRICING: PEAK TIME REBATE IS PREFERRED • Time of Use and Critical Peak Pricing do not “empower” customers; it presents a Hobson’s Choice to many low use, low income, and elderly customers who must use electricity during peak hours for health and safety reasons (Chicago heat wave; over 700 deaths, mostly seniors living alone) • A voluntary approach to dynamic pricing and relying on Peak Time Rebates is preferred approach; PTR has been successfully demonstrated to result is peak load reduction without punitive “sticks” in the form of volatile or high peak load prices. • States that are moving to PTR as primary pricing program to justify demand response for smart meter business case: SDG&E in CA, SCE in CA, ComEd and Ameren in IL, Pepco and BGE in MD MA Grid Modernization Collaborative

10. C. PEAK LOAD REDUCTION: ASSESS ALTERNATIVES • Do we need expensive smart meters to get where we want to go-- reduce system peak load and reduce generation supply prices? • Direct load control most effective; targets willing participants—”set it and forget it” is most successful in many pilots • BGE’s Peak Rewards has enrolled over 200,000 residential customers • Can peak load reduction be achieved with more targeted direct load control program rather than smart meters for all customers? MA Grid Modernization Collaborative

11. D. SMART METERS: KEY CONSUMER PROTECTIONS • Remote disconnection for nonpayment is often proposed as part of cost savings in smart meter business case; eliminates premise visits to obtain payment, declare medical emergency, or detect unsafe and dangerous conditions for very young, old, or infirm • Prepayment metering easily the next step—automatic disconnect • Remote disconnection for nonpayment should be prohibited until after the required premise visit and contact attempts have been completed • Prepayment for essential utility services should be prohibited • Any time-varying or dynamic pricing should be offered as an option and bill protection should be assured as part of the program MA Grid Modernization Collaborative

12. RECENT DECISIONS ON REMOTE DISCONNECTION • The Ohio Commission rejected Duke Energy’s proposal to waive the premise visit requirement for disconnection for nonpayment • The NY Commission has rejected any change in current premise visit requirements for smart meters • Maryland Commission has rejected any change in premise visit and attempt to contact requirements with smart meters. • California Commission has ordered premise visit for certain customer groups • The Illinois Commission has emphasized the requirement for a premise visit in reviewing smart grid investment proposals MA Grid Modernization Collaborative

13. E. CYBER SECURITY AND PRIVACY: NEED TO ADDRESS EARLY AND OFTEN • Privacy: who has access to detailed customer usage and appliance information? For what purpose? Under what conditions? • Who can link their “home area network” device to the utility’s smart meter? Who will certify which devices can be linked? • Does the meter’s remote switch raise serious concerns about disconnections of millions of customers by the bad guys? MA Grid Modernization Collaborative 13

14. CYBER SECURITY IS IN ITS INFANCY • Cybersecurity: Federal role is limited to recommendations and voluntary standards due to state jurisdiction over retail distribution utilities. Can the states properly supervise complex and highly confidential cybersecurity plans and programs for each of the electric and gas utilities that have “digitized” their systems and linked their data to the “cloud”? This issue is complicated and made more important when considering the distribution operations and “grid” related investments. Significantly more resources must be brought to bear by state regulators. MA Grid Modernization Collaborative

15. F. CONSUMER EDUCATION IS NOT CHEAP! • Any smart meter proposal that is being justified in part on changing customer behavior or selecting optional pricing programs requires a comprehensive educational program • Educational and outreach costs must be included in business case; • Utilities must be held accountable for results MA Grid Modernization Collaborative 15

16. G. SMART METER AND SMART GRID INVESTMENTS MUST MEASURE PERFORMANCE • Utilities should be held accountable for its estimates of costs and benefits • Detailed performance metrics should be linked to cost recovery • Performance must be measurable • Prudency reviews and audits should be routinely conducted MA Grid Modernization Collaborative 16

17. SUMMARY AND CONCLUSIONS • These principles or recommendations are no substitute for fact-based analysis of costs and benefits for any consideration for smart meter deployment; • Policies should not be adopted without a firm understanding of costs and benefits: • Very expensive: bill impacts are important part of decision • Consider purpose and cheaper alternatives • Document benefits; avoid aspirational conclusions • Allocate risks fairly • Link cost recovery to performance of promises • Don’t force customers to eat spinach! MA Grid Modernization Collaborative

18. RECOMMENDATIONS • SMART METER PROPOSALS MUST BE COST-EFFECTIVE AND UTILITIES MUST SHARE THE RISKS ASSOCIATED WITH THE NEW TECHNOLOGIES AND THE BENEFITS USED TO JUSTIFY THE INVESTMENT • TIME OF USE OR DYNAMIC PRICING MUST NOT BE MANDATORY; CONSUMERS SHOULD BE ALLOWED TO OPT-IN TO ADDITIONAL DYNAMIC PRICING RATE OPTIONS. MA Grid Modernization Collaborative

19. RECOMMENDATIONS • REGULATORS SHOULD ASSESS ALTERNATIVES TO SMART METERS TO REACH THE LOAD MANAGEMENT GOALS, PARTICULARLY DIRECT LOAD CONTROL PROGRAMS • SMART METER INVESTMENTS SHOULD NOT RESULT IN REDUCED LEVELS OF CONSMER PROTECTIONS, ESPECIALLY RELATING TO THE IMPLEMENTATION OF REMOTE DISCONNECTION, AND TRADITIONAL BILLING AND DISPUTE RIGHTS SHOULD BE RETAINED MA Grid Modernization Collaborative

20. RECOMMENDATIONS • PRIVACY AND CYBER-SECURITY CONCERNS MUST BE ADDRESSED PRIOR TO A SMART METER ROLLOUT • UTILITIES AND OTHER POLICYMAKERS SHOULD INCLUDE COMPREHENSIVE CONSUMER EDUCATION AND BILL PROTECTION PROGRAMS IN ANY EVALUATION OR IMPLEMENTATION OF SMART METER PROPOSALS MA Grid Modernization Collaborative

21. RECOMMENDATIONS • INVESTMENTS IN SMART METERS AND OTHER SMART GRID PROPOSALS NEED TO BE VERIFIABLE AND TRANSPARENT AND THE UTILITIES NEED TO BE HELD ACCOUNTABLE FOR THE COSTS THEY WANT CUSTOMERS TO PAY AND THE BENEFITS THEY PROMISE TO DELIVER. COSTS SHOULD BE REASONABLE AND PRUDENT. MA Grid Modernization Collaborative