Smart meter business case: How to avoid a BGE-style screw up

More on smart meter business case ... . Maryland PSC order denying BGE’s original proposal . Maryland PSC order granting BGE’s revised AMI initiative . Crafting a persuasive smart meter customer experience . Societal, environmental benefits in the smart meter and smart grid business case . AMI: What regulators need to know about its value to residential customers . Utility Week UK: Does the business case for smart metering stack up? . Register for the webinar

How would you like to get this ruling back from your regulator?

“"Although we share the enthusiasm for the long-run potential of the 'smart grid,' we find the business case for this proposal untenable."

That’s an abridged version of the ruling handed down to Baltimore Gas & Electric earlier this year when it proposed a massive smart meter rollout. In other words: “We love the idea of smart meters… but your business case is so lame, we’re going to deny you anyway.”

At its simplest, a business case is financial justification -- a cost/benefit analysis. More than that, however, it is also a communication tool (for better or for worse, as BGE found out). And, once approved, it is a management tool for guiding future decisions.

There’s a lot riding on getting the business case right. In BGE’s case, the utility was at risk of losing $200 million in stimulus money. (Fortunately, BGE revised its proposal and received approval the second time around.)

So what’s the secret sauce? I’ve been talking lately with eMeter’s Chief Regulatory Officer Chris King in preparation for an Oct. 14 Lessons from the Real World Webinar: Making the Business Case for Smart Meters. I’m learning that it comes down to three things:

·         Getting the benefits right

·         Getting the costs right

·         Getting the payback formula right

Defining the benefit streams

The first place you can go wrong is in capturing and quantifying all the revenue streams. Chris (whose metering and regulatory pedigree is long and impressive), says utilities should consider at least these seven:

1.    System (utility) efficiency

2.    Reliability

3.    Energy efficiency

4.    Demand response

5.    Integrating renewables

6.    Emissions and environmental improvements

7.    Mandates and future readiness

Some experts estimate that operational benefits typically account for 60-80 percent of the benefits, but “societal” benefits such as integrating renewables and responding to mandates are gradually gaining currency and may be the things that push the business case over the top.

(Any other benefit streams that you’ve used or seen elsewhere? Use the comment form at the bottom to share your thoughts.)

Of course, it’s not enough to list the benefits. You’ve got to quantify their value -- ideally in dollars per month per customer. Those are the kinds of numbers both regulators and customers appreciate.

Then, of course, you’ve got to be prepared to defend and justify those numbers. Fortunately, enough rate cases and pilots have now been completed that you can often find proof points.

Defining costs and risk

When it comes to the cost side, Chris counsels that the operations side is relatively straightforward. Your big risks are on the IT side -- especially since so few utilities have implemented a company-wide enterprise computing architecture. Most still operate with loosely coupled standalone applications. Start wiring those things together one at a time and you’ve got a mess -- and a big budget overrun that will come back to bite you.

Getting it paid for

And now to talk about the elephant that never leaves the room – how to pay for it. For all of BGE’s screw-ups, it was the payback formula that got them in the most trouble. More and more experts say it’s time for utilities to speak up for new and better formulas. In some cases, decoupling may make sense. In many instances, however, ratebasing the assets could be even better.

Only a few years ago, such “radical” proposals didn’t stand much chance. Now, however, many public utility commissions understand that the current utility business model is breaking down. Now’s the time to speak up in favor of a better formula -- provided, of course, that you’ve done your homework to craft and justify a new model. And that you’ve socialized it in advance with key customers and consumer advocates. (Don’t do a BGE and strut in overconfidently only to get shot at by angry advocates.)

There’s much more to say on these subjects of course, so I hope you can listen in to the Webinar, which is free while space remains. Chris will be joined by Steve Sunderhauf of Pepco and Commissioner Richard Morgan of the DC Public Service Commission, so you’ll be hearing from insiders and experts.

Take a look as well at Smart Grid News’ Metering Channel, and at the business case links we’ve assembled for you in the sidebar. And please help us all get smarter by leaving your comments and suggestions.