BGE insider talks regulatory challenges, Silver Spring selection and smart grid benefits

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On Sept. 10, Macquarie Capital hosted a conference call with Mark Case, the head of smart grid initiatives at Baltimore Gas & Electric. (A replay is available; use the contact information at the end of this article.) In the call, BGE discussed:

·         The benefits of a smart grid rollout

·         Regulatory challenges

·         The decision to partner with Silver Spring Networks (private) for the AMI rollout versus Itron, with whom BGE had worked in the past

Macquarie analyst Andrew Weisel sent along these highlights:

Smart grid benefits

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Peak reductions demonstrate the value of demand response: The largest single piece of BGE's business case comes from peak load reductions, which are enabled by AMI and price signals and help justify AMI investments. In pilots, BGE achieved peak reductions of 18–28% without enabling technologies such as in-home displays (IHDs), and up to 37.5% with them in place. Importantly, these reductions increased year-over-year in subsequent pilots, demonstrating that the results are not only sustainable but can grow as customers learn. Technological advances in IHDs should drive even greater results. Baseload energy efficiency efforts reduced overall demand by nearly 1% in pilots. We note that BGE is somewhat unique in that it can sell this capacity (500MW) into PJM's annual auctions; these supply-side benefits (US$2bn) would be harder for most other utilities to achieve.

Regulatory issues

The regulatory environment remains challenging: BGE's original proposal was rejected by MD regulators in June. The project was only approved after the utility made meaningful concessions such as agreeing to delay cost recovery through a regulatory asset. BGE believes that the Commission would not have approved the project without a DOE stimulus grant of $200 million, referred to as a “once-in-a-lifetime” opportunity. Although Maryland is certainly a challenging regulatory environment, this reinforces our view that regulators are extremely cautious about approving expensive smart metering projects in today's weak economy.

Silver Spring Networks

Selection of SSN reinforces AMI competition: Despite previously using Itron for BGE's AMR rollout (drive-by vans), the utility selected Silver Spring for its AMI deployment. BGE was complimentary of Itron, but was more interested in SSN's IP-based AMI platform. Though Itron will move to an IP-based network through its alliance with Cisco, BGE notes that Itron isn't there yet, and may not be for years. We see this as a big advantage for SSN… at least for now.

Andrew Weisel is a sell-side equity research analyst for Macquarie Capital, which provides advisory and capital raising services to corporate and government clients. Andrew covers US utilities and smart grid companies. He can be reached at andrew.weisel@macquarie.com or 212-231-1159.

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