Puget Sound Energy pioneers variable electricity pricing for residences

In a landmark pilot program, hundreds of thousands of Washington state residential consumers can cut their power bills by choosing to buy electricity at the cheapest time of the day.

Many states lay claim to deregulating their electric industries. Some allow consumers to choose an electricity supplier other than the regulated utility. But most suppliers do not give consumers the option of buying electricity based on when it is most and least in demand.

In many regions of the country, electricity deregulation retail trials have failed miserably. California is only the most visible example of the problem. States such as Nevada have turned back the clock and, in others, consumers simply aren’t leaving the regulated utility for an alternative supplier.

With these trials in shambles, the approach taken by Puget Sound Energy (PSE), the utility subsidiary of Puget Energy Inc., Bellevue, Wash., could point to a way out of the mess. Economists say competitive markets will not work unless supply and demand curves are in balance, and the demand curve is especially important for electricity.

For years, industrial and commercial concerns have been able to buy power priced according to on and off peak use, but PSE is a pioneering technology that allows residential consumers similar choices.

“One year ago FERC [the Federal Energy Regulatory Commission] didn’t think this technology was available,” says Gary Swofford, PSE chief operating officer. Compared to installing a few meters at commercial and industrial locations to record electricity use and match it to the time of day, installing hundreds of thousands of meters “was a lot harder to do,” Swofford says.

At the outset of deregulation, PSE determined to stick with the decidedly unglamorous retail distribution business, while most other energy companies were focusing on becoming large wholesale suppliers and international players. Since then, many companies have pulled back from the overseas markets and a continuing shakeout suggests just few large wholesale energy players will survive, not a “few hundred,” Swofford says.

But PSE executives also determined new technology would have to be deployed to execute its strategy. Three years ago PSE set out to build a system that includes a fixed wireless network, allowing the company to read meters remotely and gather other data on customer electricity use, plus a new billing system. The electric and gas meters are capable of sending energy-usage data from customers’ homes and businesses every 15 min.

“Our goal was not to read meters from afar but to provide information back to our customers,” Swofford says. Customers could access their accounts on the internet and see how much electricity they were using and how much it was costing them.

Awareness high
Surveys showed 80% of residential customers and 70% of business customers acted to alter their energy use based on the information they were getting via the internet and in their bills. The surveys also found 91% of residential consumers and 72% of industrial users were aware of the program.

“These were numbers like we had never seen before,” Swofford says.

With the approval of Washington state regulators, PSE moved to the next phase of the program and introduced the time-of-use price concept to 300,000 customers in May. The company will begin seeing responses in customers’ June bills. Under the program, power is priced in four blocks during a 24 hr period.

At 6.25à‚¢/kw-hr the price is highest during the morning and evening peaks. Between 9 p.m.-6 a.m. and on Sundays and holidays, the price falls to 4.7à‚¢/kw-hr. At mid-day, the rate is 5.36à‚¢/kw-hr. PSE’s fixed rate for customers who aren’t participating in the pilot program is 5.36à‚¢/kw-hr. Less than 1% enlisted in the test have asked to opt out.

If customers shift use to off -peak periods as expected, PSE will be able to reduce wholesale purchases of electricity during peak demand when power is most expensive. The company spent $492.6 million on purchased power and electric fuel costs in the first quarter, compared to $216.2 million in the same period a year ago.

If peak demand falls, PSE will need fewer peaking plants that may run only 1 day/year. A study by an electric industry consultant showed if California reduced peak consumption 2.5%, the state could have saved $700 million.

“We don’t think 2.5% will be difficult to achieve,” Swofford says. Puget Sound’s studies suggest relatively small cuts in demand can have a substantial impact on wholesale power prices. One study suggested US wholesale power prices would fall more than 50%, if peak demand declined 10%.

Swofford says another study showed real time pricing could save US consumers up to $15 billion/year in electricity costs, including avoided costs of not building power plants, reduced fuel consumption, and reduced charges to consumers. The estimate doesn’t include the benefits of lower air emissions.

If the PSE pilot goes well, the company expects to have up to 700,000 customers enrolled in the program by yearend. Nearly 1.1 million automated meters have been installed at customer locations. Swofford says the system paid for itself through improved efficiencies, including labor savings and reduced calls to the service center when power goes out. The system is already alerted to the outage.

The company has begun to win recognition for courting its bread-and-butter customers, and automated meters recently received an endorsement from President George W. Bush’s energy task force. Bush’s energy plan urged the use of “smart” electric meters to give consumers accurate signals about the cost of power. PSE won the Edison Electric Institute’s highest honor this year for combining advanced technology with practical consumer applications.

For too long the electricity deregulation debate has focused on supply and not on demand, says John Hanger, CEO of Citizens for Pennsylvania’s Future, a consumer group. He says demand has been a “orphan” in market and policy circles because no market participants have pushed it to the front of the policy agenda.

“It is perhaps more important to get demand infrastructure in place to create a healthy market,” Hanger says. “You cannot have a competitive market without the ability of consumer to respond to prices.”

Consumers have begun pressing state regulators to consider time-of-use pricing. This past week in a proposed settlement with consumer groups that will allow their merger to proceed, GPU Inc., Morristown, NJ, and FirstEnergy Corp., Akron, Ohio, agreed to offer customers automated metering that will allow time-of-use pricing.

“I think utilities will come around to this,” says Swofford, who predicts in 5-10 years “all customers will have it.”

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