GE's John McDonald: regulatory changes needed

IEEE interview highlights smart grid thinking

Phil Carson | Feb 19, 2012


If you haven't seen IEEE's interview with John McDonald, director of technical strategy and policy development at GE Digital Energy, I recommend it. Here are a few highlights with a little kibitzing tossed in, gratis.

Asked whether "the media"—hardly a monolithic beast—has miscommunicated smart grid, McDonald noted the seemingly hard-and-fast linkage between smart grid and smart meters and suggested that "a dramatic shift" in spending will soon focus instead on "distribution systems." Because meters belong in the distribution system, I take McDonald to mean distribution automation. Indeed, that's what we're hearing as well.

The smart grid-smart meter linkage is, of course, completely understandable, given that utilities have managed to obtain regulatory approval to install them and charge customers for them. The general public will never see or notice distribution automation unless it results in markedly fewer and shorter outages, and even then, that's not likely to be a topic of persistent discussion. The appearance of a new, digital meter on one's home, in contrast, raises a lot of questions. In service territories where a utility has carefully laid the groundwork, those questions have been answered. In other cases, as we've detailed in these pages, persistent headlines often couple "controversial" with "smart meter." 

Asked about the efficacy of IEEE's 2030 guide for interoperability of energy, communications and IT systems, McDonald characterized interoperability as "the most critical key" to smart grid's success. But he cautioned that standards hardly guarantee interoperability.

"A standard can only define a certain level of detail for a technology," he said. "Compliance to a standard doesn't necessarily ensure interoperability."

"The only way to achieve interoperability in industry standards groups is to get all the vendors for a particular standard together, connect all the products to make sure they can interoperate and flush out incompatibilities that occur."

So IEEE 2030 will help drive compliance and it will help the industry grasp that a separate step is needed to ensure actual interoperability, McDonald said. Further, a third step is performance testing, as we documented in articles about, for instance, Consumers Energy. (See "Consumers Energy's Measured Steps.")

McDonald discussed the "three-legged stool" of smart grid: technology, standards and policy. The first two are adequately addressed in the United States, but "policy is the wild card right now."

"Utilities need decoupled rate structures so they don't have to worry about losing revenues when they implement energy conservation and efficiency programs," McDonald said. "Right now, fewer than 10 states allow decoupled rates."

Other regulatory changes needed: accelerated depreciation to bolster the business case for smart grid investments and dynamic pricing.

What topics of industry concern does McDonald hear a lot about? Privacy, he said.

"Utilities are developing and deploying solutions for this but privacy is something the industry, overall, needs to pay attention to and actually implement," he said.

(Indeed, we've been raving and ranting about privacy issues for the past two years. Two of our latest pieces are "Colorado Mulls Data Privacy Rule," and "Data Privacy: Ohio Ponders." An earlier piece provides the privacy rationale, "Data Privacy Issues.")

There's more food for thought in the cited interview with McDonald. I'll just cite one more. Asked how important smart grid's early years are, McDonald offered a little free advice.

"I want to make sure that as an industry we're thinking things through before we act, because one stumble will take ten positives to neutralize," he said. "Before utilities deploy smart meters [for instance], they should educate customers to ensure they understand the technology, the value they're being provided and the additional services available to them."

Of course, that depends on whether services are being made available in a timely way following meter deployment, but that takes us back to the initial points in today's column.

Food for thought.

Phil Carson
Intelligent Utility Daily

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Decoupling is not a Silver Bullet]

Firstly John McDonald is a real asset to the smart grid industry and his message regarding regulation and polcy is right on target.  We are deploying 21st century technology based on an early 20 century regulatory system. While I understand the desire to place utilities in a supportive mindset towards energy efficiency by making them agnostic about revenues, I worry that it is the easy way out and not the whole solution.  For decades prior to the onset of DSM utility rate increases were rare because growth in revenues outpaced costs.  Over the past three decades there has been tremendous emphasis towards  consume less electricity, and thereforedownward pressure on utility revenues.  Absent an equal downward adjustment in costs, retail rates paid by consumers would go up, and they have.  The argument became its the bill not the rate.  Perhaps for some consumers that became true but not for all.

If there is a de-linking of the rate from revenues all motivation for the utility will be gone and in essence they are held harmless financially.  If de-linking is to make sense, there must be two other things that occur concurrently.  Consumers must have smart meters armed with dynamic tariffs, and utilities must have incentives to lower operational costs.  In any other industry that has added digital technology and automation that has occurred.  If there does in fact become an inexorable rise in the unit price of electricity, the least we can do is the arm the customer with the means to adjust and offset the impact.  Further regulators would be wise to asking the questions around the savings, efficiencies etc. that are possible with smart grid enabling technology.

Also, I want to plant the seed that perhaps we revisit the assumption that electricty consumption is a bad thing.  If in fact using electricty is better environmentally and economically, then why not.  And if that in fact occurs, there will be more revenues feeding the system relative to fixed costs that do need to be recovered in retail rates.

David O'Brien

Director Regulatory Strategy and Compliance

Bridge Energy Group

Chew on that one


Thanks for joining the forum on the important points that John McDonald raised and where you took them.

I judge the value of such comments sometimes based on how much they make me think, rather than talk. Which, as everyone knows, is of extremely high value.

Again, thanks.

Regards, Phil Carson


Thanks for your comments.

Another way to phrase all this is that "customer engagement" can be achieved by ticking off customers who increasingly will find their way to utility alternatives.

I love a good revolt, but what form would this one take? And would it in fact result in what might pass for full-scale "engagement"? Meaning, that once a broad-based awareness of utility issues becomes common, IOUs will be treated according to how they have treated their customers. The "good" utilities will be allowed to continue and the arrogant utilities will be subject to greater scrutiny, resulting in fewer rate increases.

Low-cost technology will soon empower many Americans. They likely will not "exit" the utility equation, but their demand may approach zero. It's painful to observe that many homes in my neighborhood in suburban Denver have passive solar hot water panels prompted by the oil embargo in the early 1970s, which produced local incentives to do so. Here we are, nearly 40 years later, and history is about to repeat itself.

Regards, Phil Carson  

Decoupling is a Dead End

I agree with Mr. McDonald call for dynamic pricing.  Without it, efforts by regulators and politicians to lower costs by improving generating asset utilization will continue their decades-long journey to nowhere.

I disagree with Mr. McDonald's call for revenue decoupling, with the possible exception of rates for distribution.  For one thing, decoupling tends to keep utility revenues constant, which means consumer bills are likely to change little, if they change at all, in response to conservation efforts.  Put delicately, consumers are going to find this sleight of hand somewhat annoying.  However as the cost of solar PV drops while utility rates under decoupling increase, there's an even bigger threat, which is large-scale customer bypass of utility service.  As customers either depart the grid entirely, which would be facilitated by cheap storage, or displace grid power with rooftop solar, the upward pressure on utility rates from decoupling is going to feed the trend.  I can't say how far this might go other than to point out a couple of possible outcomes:  low income customers who can't afford the up-front cost of solar will find their rates soaring; regulators may have to take the politically risky decision to impose exit fees on residential consumers (also known as "voters"), or there could be a general consumer revolt against utility monopolies and their regulators.

Water and sewer systems are already facing the first consequence of something like rate decoupling in places like California, where conservation efforts are reducing sales volumes, which in turn is driving the need for price increases to offset those volume declines.  Particularly in urban and suburban areas, drilling wells to bypass the local water utility isn't a practical option, but rooftop solar is.  Electricity regulators ought to keep this in mind as they consider revenue decoupling.

Jack Ellis, Tahoe City, CA