Smart Technology and the Electricity Market

In late June, the Oklahoma Corporation Commission determined that Oklahoma Gas & Electric could proceed with its smart grid strategy. As a result, an OG&E worker soon will replace your old, "dumb" electricity meter with a new, "smart" meter.

For now, it's impossible to know how much this investment will cost OG&E customers. Initially, monthly utility bills will increase about $1.50, but that's only the tip of the iceberg. Starting in 2013, OG&E plans to start implementing "enabling technology" that will work with the smart meters to "empower" customers. As such, smart meters are only the "platform;" the rest of the strategy is ill-defined and probably expensive.

Then again, that's the point. Under state law, utilities like OG&E receive a "fair" rate of return on their investments, as determined by the Corporation Commission. The most direct path to this legally mandated reward is to build infrastructure, especially the kind that promises costly upgrades, like smart grid.

That's not to say OG&E's plan is a rip-off. Smart grid technology could become a boondoggle, or it could improve significantly the electricity industry. Ultimately, it's the state government's choice whether smart grid is smart policy. After all, the Corporation Commission holds all the cards.

The commission is a political body, so the electricity business is subject to political calculus instead of market forces. Politicians, of course, have every incentive to distort the cost of electricity to curry favor with the voters. That's why the price of electricity is the same at 4 p.m., when demand is high, as it is at 4 a.m. when demand is low.

Thanks to the politicization of the electricity industry, the price of electricity doesn't change. The problem is that the cost of providing electricity does change, according to the laws of supply and demand. On a hot summer afternoon, when everyone reaches for the air conditioner, OG&E has to accommodate this extra demand by turning on expensive marginal power generation. Moreover, the heightened demand strains the distribution network, which further increases costs.

In the face of these engineering challenges, the good news is that smart meters can facilitate a simple solution: real-time pricing. That is, they are capable of informing consumers how much electricity costs, at any time during the day. The technology could give OG&E customers a real-time price signal — a powerful tool to better manage consumption. With real-time pricing, Oklahomans could save money and make the grid more reliable. It's a win-win.

Freeing the electricity market would benefit everyone, but it would require the Corporation Commission to relinquish its power over utility bills, and it is still unclear whether the state is willing to sacrifice. For now, it is allowing a smart grid real-time pricing test in Norman (which is costing OG&E customers about 40 cents a month), but the experiment is needlessly nuanced, which suggests that the commission is making its presence felt. After all, it's not that complicated. Everyone can read a price.