Regulatory clouds linger over Great Lakes smart grid event

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By David O'Brien

 

I attended the Great Lakes Smart Grid Symposium this past week in Chicago at the Illinois Institute of Technology (IIT). It was a time to be greatly inspired by what is underway in Illinois.  With the passage of the Energy Infrastructure Modernization Act (EIMA) last year, there is a flurry of activity at ComEd and Ameren, the two large distribution utilities serving the state. They have both come forward with plans to deploy advanced metering infrastructure, distribution automation and critical upgrades to the base distribution system (poles, wires & substations).  In addition, both are developing a smart grid “test bed” within their territory as a place to try out new technology and as a proving ground for a myriad of new applications by third party vendors.

 

The total investment over 10 years is expected to top $3 billion, and will attract significant ancillary business investment as numerous vendors based in Illinois and new major players such as Silver Spring Networks establish operations in the state.  And, most importantly, the legislation mandates the creation of more than 2,500 jobs.

 

A negative vibe

Yet, there was a palpable negative vibe throughout the event because both utilities face a very uncertain road to cost recovery for their projects, which could delay or entirely derail the whole effort.

 

The setting of the symposium was appropriate since IIT is a center of advanced technology learning and recently added its own micro grid on site.  The young people at IIT represent the pivotal workforce that is needed to make the grid of tomorrow a reality.  For many Illinois legislators, it was the prospect of igniting economic development that drew their support for last year's legislation.  For others, including the utilities, it was the prospect of transforming the way utility customers are served and of increasing grid intelligence. 

 

(The legislation was not without the kind of drama all too common in the political realm.  The EIMA bill never enjoyed the support of the Governor, the Attorney General, the Chair of the Illinois Commerce Commission or the AARP. Throughout the process, all of them made their opposition known. In fact, the bill became law only after surviving a gubernatorial veto last fall.) 

What is really in ratepayers interest?

It is the norm for regulators and other interveners to seek to reduce the amount of money utilities collect. In isolation that could be viewed to be in the ratepayer interest. As a former regulator, I often drew a hard line on utility costs that could be recovered in rates. 

 

But there is a broader picture that regulators need to keep in mind as they deliberate over major cases such as the EIMA projects.  Unfortunately, utility rates are not set in a vacuum and there are numerous implications of ratemaking decisions.  At the end of the day, the utilities are like any other private business ‒ they have investors and creditors who make impersonal, fact-driven decisions with respect to stock and debt instruments. 

 

Both the ardent advocates at the Symposium this week and the Illinois General Assembly need a modernized grid ‒ and ComEd and Ameren are the delivery vehicles. Both have explained that absent fair and timely recovery of their investment they will not be able to attract the billions in capital necessary to underwrite the program. In response to the question, “why is rate recovery and regulatory so important?” Richard Mark, CEO of Ameren Illinois responded "it's the costs, utility investment is capital intensive, you cannot go to a utility board of directors and advocate for an investment without knowing how costs are going to be recovered.”

 

Without the investment there is no modernization, i.e. consumer empowerment, enhanced reliability. Of course without the modernization, the expected new jobs do not materialize either.

 

The end of the new bargain?

This goes to the essence of what the EIMA legislation was about ‒ a new regulatory framework, a new bargain that entailed clear and timely cost recovery in return for greater performance and accountability.  A “regulatory test bed” if you will, where old ways (year to year contested rate cases) give way to a dynamic environment focused on performance, accountability and clarity.

 

As it stands today the smart grid renaissance in Illinois faces tremendous uncertainty. The utilities that can deliver its core components must now fight for the cost recovery promised in the legislation.  It is a startling contrast between the energy and enthusiasm of the Symposium and prospect that it all could be brought to a halt in a hearing room. 

 

As Anne Pramaggiore said this past week, “the cultural change” implicit in a grid modernization project is far more daunting than the technology.  She could not have been more perceptive.  Utilities around the globe are finding that technology adoption presents tremendous change and many long established ways of doing business no longer fit.  Looking at the politics in Illinois, it is clear that cultural change is indeed the greater challenge to a modernized grid.

 

David O’Brien is a former Vermont Commissioner of Public Service and is now a strategic consultant to utilities at the BRIDGE Energy Group.  He is presently consulting to ComEd on regulatory matters.

 

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