The McDonnell Group

ATLANTA - June 11, 2009 - Are decoupled rates required to reach the full potential of the smart grid?  Today, Fortune ran an article by GigaOM’s Justin Moresco reviewing the results of a recent Gartner Group research study. The article entitled “Electric Utilities Fail To Promote Their Energy-Efficiency Initiatives” was a bit pejorative and perhaps too sweeping. Don’t get me wrong, our company’s vision is to help in some very small way to transform the efficiency of the utility industry and in doing so help preserve the environment and facilitate economic growth, but this article vilifies an entire industry for following – and albeit helping make - the rules of the game to date.

Notwithstanding the biased tone, the article was well done and outlined an important study conducted by highly respected and veteran utility analyst Zarko Sumic who now works for Gartner. The article and the Gartner study both raise vital questions about the importance of smart rates for the smart grid.

Do smart grid and decoupled rates go together like peanut butter and jelly (PB&J) -- or are smart grid and decoupled rates the equivalent of a fried peanut butter and banana (PB&B) sandwich that are ok for Elvis and maybe for California?  While they won’t overtly advertise it, most utility executives with strong state level regulatory incentives to increase returns based on increases in volumetric consumption (i.e. those with integrated asset bases and generation capacity to support this objective) are eager to monetize that capacity.

Clearly, for the majority of investor owned utilities in the USA today, rate decoupling is quietly treated like a fried peanut butter and banana sandwich which --- while edible with the right caveats -- is also capable of inducing an Elvis like sudden death heart attack of the supply side status quo.

Just as many extreme opponents of AMI and home area networks spout populist and alarmist Orwellian arguments about the “government coming to take control of your clothes and dishwasher schedule,” many argue as a central oppositional thesis that decoupled rates pose problematic incentives that could result in some lower income or naturally conserving consumers paying more than they should for their power. These folks are missing the point -- the importance of looking at system wide efficiency rather than site efficiency as a critical driver for aggregate improvement in utility efficiency.

If UPS got paid for the extra gas they used to drive around and find our house to deliver a package would they ever have deployed GPS, AVL and delivery optimization programs and computing? This is how I view system loss tariffs that don’t provide the right mechanisms for energy efficiency improvements.

Smart rates and the smart grid must by design go together whether those rates are decoupled or not.  Ultimately state level voters, public utility boards, cooperative boards, as well as consumers and the regulators who represent them by proxy in the market should drive this choice with incentives for energy efficiency from the Federal level.

With the right regulatory carrots placed in the maze, utility companies will eagerly sniff out the “fifth fuel” of energy efficiency to the benefit of all stakeholders.

If you are a utility executive, engineer, or smart grid market participant and you want to join our discussions on this topic, please consider joining The Smart Grid Executive Forum we facilitate at:
http://www.linkedin.com/groups?about=&gid=1715027&trk=anet_ug_grppro.

By the way, I had my first ever fried PB&B at Graceland this year on Spring break with the kids...it was pretty darn good…a lot better than carrots!