Environmental Engineering Reference
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investments by IOUs were regulated by the state with a guaranteed rate of return for
approved projects which was usually around 10 percent. This guarantee made it possible
to attract private capital for investment, though the rate of return did shift with interest
rates and other economic factors. Thirty-one states remain traditionally regulated, with
“vertically integrated” utilities providing electricity to customers in exclusive service
territories. The remaining nineteen states have undergone varying degrees of restructuring,
which involves separating ownership of generation, transmission, and distribution
networks.
IOUs are private companies governed and regulated by state and federal laws and
regulations. In a traditionally regulated state, any new smart grid project or investment
needs to be submitted to the appropriate state Public Utilities Commissions (PUC). If an
IOU wanted to deploy 50,000 smart meters across its service territory, the IOU would
prepare a proposal outlining the technical, economic, and social costs and benefits; detail
any regulatory obligations the project would help fulfill; and submit it to the PUC. The
PUC would open a docket on the IOU's proposal and PUC staff would evaluate the
technical, economic, and social aspects of the proposal. The PUC would also hold public
hearingsontheprojectwheresupportersandopponentswouldhaveanopportunitytovoice
theirconcerns.Finally,afterweighingalloftheevidence,thePublicUtilityCommissioners
would decide to approve or deny the project. If approved, the project can go forward
and the additional costs can be included in the electricity rates which the IOU charges its
customers. Thisallows theutility torecoveritscostsplustheguaranteed rateofreturnfrom
its ratepayers (the electricity customers in their jurisdiction). This process, from opening
a docket to final approval, can take months to years. In a restructured state, there is more
variation in the utility's obligation to the PUC.
IOUs also work with and support other organizations. The Edison Electric Institute
lobbies Congress on behalf of IOU interests and has developed many information materials
on smart grid (Edison Electric Institute 2014 ) . The Electric Power Research Institute
(EPRI) conducts research by and on the industry and has prepared influential reports on
the costs and benefits of investing in smart grid (EPRI 2011 ) . These organizations work
with IOUs to set legislative and research agendas. IOUs also interact with energy system
consultants on smart grid. For example, influential reports by the Brattle Group on the
future of smart grid and demand response (Fox-Penner 2010 ) and by McKinsey on energy
efficiency (Booth, Demirdoven, and Tai 2010 ) have been influential in shaping popular
understanding of smart grid and the role of utilities.
Municipal utilities face different constraints than IOUs in developing smart grid. More
than 2000 public utilities serve 21 million customers and account for 15 percent of electric
sales in the United States. While the majority of public utilities are small, others, such
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