Smart Grid program next step for the Carolinas: Duke again will seek to change regulatory practice in the state

Friday, October 3, 2008

Smart Grid program next step for the Carolinas
Duke again will seek to change regulatory practice in the state
Charlotte Business Journal - by John Downey Senior staff writer

Duke Energy Corp. expects to pay $730 million over 20 years in Indiana to install interactive meters and upgrade the power grid.

The program is called Smart Grid. Duke says it will allow for greater conservation and use of smaller, decentralized power plants. It’s an important piece of Chief Executive Jim Rogers’ vision for remaking the utility industry.

It reinforces other key initiatives such as the proposed Save-A-Watt efficiency program, solar and wind power development and infrastructure for widespread use of electric cars. And it will eventually come to the Carolinas.

When it does, expect it to be more expensive. Duke Energy Carolinas, with 2.3 million customers, is roughly triple the size of Duke Energy Indiana, with just under 800,000 customers.

The Carolinas can also expect that Duke will, once again, seek to change regulatory practice. It wants to collect the costs for improvements as it goes along. And it will want to do it without having to go to a full regulatory review of its rates.

That’s what it is doing in Indiana. Duke proposes to develop a rate formula to distribute the costs for Smart Grid. And those costs would include its “lost revenues” from lower energy sales through improved grid efficiency. That concept has already proved controversial in Duke Energy Carolinas’ Save-A-Watt proposal.

David Mohler, Duke Energy Corp.’s chief technology officer, says such a recovery program is vital to making a business case for Smart Grid.

“If you make an investment over — pick the number of years: five, six or eight or whatever — and have to wait to do a full-blown rate case, the costs have been hanging out there so long it kind of doesn’t work,” he says.

Also, he says, traditional regulation and cost-recovery systems were built for investments with useful lives exceeding 20 years, and often exceeding 40. Much of Smart Grid’s information technology will have a useful live of five to seven years.

Jerry Polk of Indianapolis sees it as one more attempt by Duke to bypass traditional regulation and scrutiny. He is counsel for the Citizens Action Coalition of Indiana Inc., a group skeptical of the Smart Grid proposal.

He says Duke has consistently sought ways to raise rates without going to the Indiana Utility Regulatory Commission for full reviews.

“It’s a strategy they have pursued for years to get small automatic rate adjustments,” he says. “I have one friend who says it’s like being nibbled to death by ducks.”

It’s a strategy Duke has pursued in the Carolinas as well. “They are constantly probing the edges of the regulatory model,” says Robert Gruber, head of the Public Staff of the N.C. Utilities Commission. “They want to avoid coming in for a rate case as much as they can.”

Duke’s argument is that the upfront costs for Smart Grid will be significant. More than half the capital costs — about $435.9 million — will be incurred in the first five years.

A lot of the costs will be for roughly 800,000 “intelligent” meters. Those meters will enable Duke to record power use at a central location and compile significant amounts of information about how energy is consumed — down to the level of individual appliances. The utility plans to use that information to work with customers to control energy costs.

But it also involves significant upgrades to the transmission and distribution grids. That will enable the utility to improve efficiency on the power lines, react more quickly to power outages and find problems before they lead to failures on the system, Mohler says.

That will lead to significant societal benefits, he says. The obvious ones are improving reliability and cutting energy use. But upgrading the grid will also allow for more effective use of renewable energy sources, particularly small wind and solar generators.

The same program has just been proposed in Ohio as well. Duke has not yet made those cost estimates public.

The Carolinas have provided the real-life laboratory for working out the program, Mohler says. By year’s end, 16,000 customers in south Charlotte and 7,500 in Upstate South Carolina will be on what amounts to a mini-Smart Grid with intelligent meters and new grid technology.

But rolling the program out across the Carolinas will lag a few years behind.

That’s because Duke made a big technology investment five years ago in new meters for automated reading. That makes the business case for installing new equipment in the Carolinas less compelling.

But Mohler says the program is coming here. And the plan is to put it on the same model as the one proposed in the Midwest.

“We will see over the next few years a fundamental shift in the model for electric utilities,” he says. “That new business model has to incorporate cleaner energy and more reliable energy with efficiency and still be affordable.

“What’s required to bring it all together and deliver it is an intelligent network.”