Ken Costello

By Kenneth W. Costello

Grid modernization (GM) investments encompass myriad technologies that digitize a utility’s distribution system. They have the potential to improve the reliability of the electrical grid, better integrate alternative energy, and enable pricing that reflects the marginal cost of generation.

The present grid was designed when power plants in central locations exclusively controlled a one-way flow of electricity to customers. A modern grid has the ability to accommodate greater consumer control and two-way flows of power.

Experience has shown that achieving public-policy goals at bearable cost to society frequently requires technological breakthroughs. Many experts assert that making the transition to a clean-energy future at an affordable or politically acceptable cost will demand new technologies, such as those rooted in GM. 

It seems then that it is a slam dunk for state regulators to approve utilities’ plans to modernize their distribution systems, even if the cost is high. But, to no surprise, things are rarely as certain as they seem. Public utility commissions face a formidable challenge in ensuring that utility investments in GM advance the nebulous public interest or are cost-beneficial.

Pressure for GM comes from different quarters: electric utilities, Wall Street, clean air and climate advocates, GM technology vendors, consultants, labor unions, and state and federal politicians and bureaucrats.  Utility managers themselves favor GM mainly because it will accommodate additional demands from electric vehicles and households for electric space and water heating (i.e., electrification).

Proponents of GM vastly outnumber both skeptics and opponents, making it challenging for regulators to reject GM plans proposed by utilities. We know that strong pressure from special interest groups with political clout can persuade policymakers to decide in their favor, even though it would be detrimental to society overall.

Since utility customers are the eventual payers of GM investments, the critical questions that PUCs need to ask themselves, are whether (1) the total benefits from GM to utility customers exceed the costs and (2) low-income households will overpay given that higher-income households will disproportionally benefit from purchases of electric vehicles and rooftop solar systems that GM tries to accommodate. Just because a Tesla is technologically superior to conventional vehicles does not mean that it is the right choice for everyone. It’s costly, and some car drivers might consider the technological benefits to be nominal.

I have seen too often where utility customers pay through their rates for utility investments directed at benefitting a special interest with political influence; that is, customers funding the advancement of political objectives through inflated rates without compensatory benefits. I ask whether we are seeing a repeat of this for GM investments. Or as one industry observer expressed to me, “Is grid modernization another way to line utility pockets and promote renewable energy and kill fossil fuels?” While this opinion seems extreme, it may not be so far-fetched. 

There is great uncertainty over the benefits and costs of GM investments. Costs overruns are common, and benefits are difficult to quantify and require different methods of varying complexity.

A serious problem is a utility’s capital bias combined with laxed regulatory cost controls.  Under traditional regulation, utilities collect capital costs only after the regulator considers them prudent or reasonable; utilities would be allowed to collect them only after a general rate case.

But for various reasons, regulators have accepted new cost-recovery approaches. Both utilities and climate activists have pushed for quicker and more certain capital-cost recovery when it comes to certain technologies like GM that advance their agenda. Wall Street has also supported these new approaches, fashioning an Iron Triangle that makes it difficult for PUCs to reject them.

Utilities should be held accountable for subpar performance from GM investments. These investments have often fallen short of achieving the benefits promised in utilities’ plans.

There is evidence that reliability has not improved in states that have so far invested the most in GM. Critics have also questioned whether it is too soon to replace the current infrastructure.

Advanced metering infrastructure (AMI) has in some jurisdictions failed to realize expected dispatch efficiencies and cost savings. Most utilities have also under-exploited the ability of AMI to enable granular time-of-use rates (e.g., real-time pricing, electric vehicle charging rates) that can produce large efficiency gains.  

Another problem recognized by PUCs is utilities proposing to make large-scale, multitechnology investments, some of which have questionable, ill-defined benefits that are unlikely to transpire for several years.

PUCs should not outright reject a GM plan just because it would require an increase in electricity rates or be prejudiced against a plan in spite of the evidence; or accept a plan just because it will support a popular clean energy agenda, while ignoring the effect on utility customers. There is danger that either of these scenarios can happen and probably has already in some states.

The experiences across states have shown that the benefits from GM plans are often overstated and costs understated. The burden falls on PUCs to ensure that this does not happen. Unaccountability by utilities for their large investments can have a devastating effect on customers and society as a whole. Getting the incentives right is the key element for achieving socially desirable GM investments.

Kenneth W. Costello is a regulatory economist and independent consultant. He previously worked for the National Regulatory Research Institute, the Illinois Commerce Commission, Argonne National Laboratory and Commonwealth Edison Co.