Microsoft’s Jon Arnold called smart grid a disruption as he released a survey this week of 200 energy utility industry professionals on the impact of smart grid on their business.  The survey reported that only 8% of the utilities surveyed were ready for smart grid and more than half had done little or nothing as yet to get ready.

The bad news is that he is probably right, the good news is more than half of the utilities surveyed have not yet been sucked into the disruption and thus may learn from the heartburn of others before they take the plunge.

“As this study clearly shows, the disruptive nature of the smart grid revolution, and the innovations it brings, has caught many in the industry by surprise, including many utilities that already have embraced smart grid technologies. Some incorrectly assert that the utility industry is unwilling to change, but the survey shows the opposite. It’s the magnitude of change to everything from business models to systems that’s overwhelming, especially given utilities’ existing asset and technology investments combined with the need to ensure profitability and reliability.”[1] —Jon Arnold, Microsoft

Smart Meters are a Dumb Idea if Customers are Turned Off !

No good deed goes unpunished— is the clear lesson from the front lines of smart grid implementation as smart grid technology is stimulated by Federal grants and thus rolls out before customers are educated about what it is and what it means.

Those on the bleeding edge of smart grid have lessons to teach others ranging from Xcel Energy’s Smart Grid City surprise that implementation can often cost more—much more than expected.  PG&E learned that its Bakersfield customers were caught by surprise and reacted angrily when the combination of rate increases and peak summer temperatures drove up demand and thus energy bills just as the utility was installing smart meters in Bakersfield and inviting politicians to join in the high tech celebration.  Those surprised customers showed up and surprised both the utility and politicians with their protests of high bills.  Oncor is facing similar pushback in Texas as it rolls out its own smart meter program.

“While the need for and benefits of Smart Grid and Smart Meter may seem obvious to industry insiders, this is not the case with consumers. In light of the huge investments about to be made that ratepayers will ultimately be responsible for, utility companies need to formulate, test, and launch a sustained communication strategy.”  —Tish Pasqual, Senior Research Director, Harris Interactive

The Harris Poll of 2,576 adults surveyed online between January 18 and 25, 2010 found that two thirds of Americans have never heard the term Smart Grid (68%) and 63% have not heard of Smart Meter.[2] Many of those surveyed (57%) said they knew how much electricity they used, and (67%) said they would cut their usage if they could pinpoint what was causing it. But 22% of those surveyed said they did not want their utility to know how much energy they used each minute and on what because of smart meters.

All the Pain and No Gain Fear of Customers

Smart grid promised customers feedback on energy use and the information technology tools to put it to work to reduce their energy consumption and, presumably, their bills.  But it isn’t likely to work out that way at least for a while.

While utilities involved in smart grid are focused on procuring and installing smart meters to take advantage of the Federal Stimulus grants offered, the architecture of the smart grid has not yet solved the problem of providing user-friendly end to end solutions that take that smart meter data and turn it into actionable information customers can use to make decisions or take actions.  In fact, most utilities are simply unprepared to manage the tsunami of meter data incoming so they likely will make little use of it initially except to reduce their own costs for meter reading labor.

PG&E will be one of the first utilities to begin disgorging utility meter data from its smart meters to customers and enabling them to use online PG&E programs to compare their own usage to other customers in their neighborhoods.  While interesting this is not yet useful if customers lack the sensors and home energy management software and tools to assess their own internal energy uses by appliance or source and make pragmatic adjustments.

It is going to take a while for the customer focused end of the smart grid technology roll out to catch up.  The question is how long customers will tolerate the pain of higher energy bills before they get any gain in the form of actionable information—since they surely will get no relief in rates themselves.

What the Stimulus Giveth, will the Taxman Taketh Away?

The Federal Government created a smart grid firestorm when it leaked out that the Federal Stimulus Grants being dispensed by the US DOE may be taxed by the IRS as income to the utilities.  This raised serious questions about whether all the hassles associated with making applications for smart grid money was a big waste of time if the utility just had to pay a significant share of it back as taxes.

The National Association of Regulatory Utility Commissioners jumped in on behalf of all the state regulators suddenly facing prospects of a new round of rate cases by every jurisdictional utility seeking to recover the taxes to be paid on Federal stimulus grants.  In letters to Treasury Secretary Geithner and Energy Secretary Chu, NARUC said effectively—you have got to be joking![3]

Finally, after a flurry of lobbying on all fronts the IRS issued Revenue Procedure 2010-20 on March 10, provides tax guidance on how it planned to treat the grants for tax purposes. [4] It was not exactly the ‘get out of jail free’ card the utilities and regulators had been seeking.

The ruling does create a safe harbor under which the IRS “will not challenge” how a company treats Smart Grid grants as non-taxable contributions to capital. But—and this is no minor matter—the safe harbor is available only if the grant recipient reduces the tax basis of tangible property by the amount of the grant.  Expect a lot of accountants to be employed trying to figure out the fine print on this ruling.

What was also unclear in the ruling which was written to focus on primarily on NARUC concerns about investor owned utilities receiving smart grid stimulus grants was how the ruling affected municipal utilities or other tax exempt entities receiving grants—are they taxable to them because they do not have a tax basis otherwise to reduce taxable tangible property in an amount equal to the grant?

The consequence of this tax ruling for investor owned utilities is a reduction in tax benefits such as depreciation over the life of the property and higher taxable gain (or reduced losses) on its eventual disposition. By treating Smart Grid stimulus grants as capital contributions, the IRS is effectively only allowing a deferral of income, rather than a permanent exclusion.

In other words, the revenuers will back off taxing the grants, per se, to stop the politicians from screaming at them now but the recipients of the grants have to make it up by giving up tax deductions elsewhere by reducing the tax basis of other tangible property equal to the value of the grant.

Lesson to the Industry:  If you are going to lobby Congress for an earmark or subsidy make sure you write the tax treatment for it into the actual bill so the IRS does not take back the benefit tax time.

So what?

I suspect we have not yet heard the end of this story because implementation of smart meters is new and the full costs of pulling it off are still uncertain—ask Xcel Energy about Smart Grid City. So far being an early adopter is not necessary a good strategy if you are a utility unless you have understanding regulators, a powerful Congressman in the majority and can manage your other costs including rate cases, renewable energy additions and emissions reduction costs to avoid rate spikes for customers.

The other lesson is that utilities are proving clumsy and tone deaf at dealing with their customers confusion, uncertainty and fears in the introduction of smart grid technology and the impacts of other changes affecting rates such as the growing cost of renewable energy and emissions reduction compliance requirements.  This is not good news for utilities if they want to retain control over the gateway to customers.

On the other hand, vendors offering  Home Area Network (HAN) energy management solutions that provide insight, actionable information and the equipment and services to make it work may find receptive customers unless these utilities learn to do better—much better at being perceived by customers as looking out for their interests rather than looking for another excuse to raise rates.


[1] http://www.microsoft.com/presspass/press/2010/mar10/03-11SmartGridPR.mspx

[2] http://news.harrisinteractive.com/profiles/investor/ResLibraryView.asp?BzID=1963&ResLibraryID=36455&Category=1777

[3] http://www.naruc.org/Testimony/10%200125%20NARUC%20letter%20to%20Treasury%20re%20SG%20Grant%20taxation.pdf

[4] http://www.treas.gov/cgi-bin/redirect.cgi?http://treas.gov/press/releases/docs/rp-10-20.docx

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