“We Need Utility 2.0”

Montgomery County Council President Roger Berliner will testify in Annapolis at 1:30 p.m. on Aug. 21 in the first of several roundtable discussions in response to Governor Martin O’Malley’s Executive Order seeking recommendations on improving electric reliability and strengthening the state’s utility infrastructure.

Berliner will be joined by representatives from the Maryland Public Service Commission, the Energy Future Coalition and the National Regulatory Research Institute. He will testify from 1:30 to 4:30 p.m. in the Conference Room East of the Miller Senate Office Building.

The following are excerpts from his presentation:

• “Today, I represent a population of people who have totally lost trust in their local utility company. And the evidence is everywhere, from YouTube songs to springing up of grassroots movement such as “Pack Up Pepco.”

• “For a distribution company that no longer runs generation, their most basic mission and obligation is to deliver power on a reliable basis. It is the sine qua non of their job. If a utility demonstrates that it is incapable of providing reliable power, it calls into serious question the very basis for its franchise.”

• “Pepco’s monopoly franchise requires it to provide the very best reliability, more important now given the extent of our dependence on sensitive communication and computer technologies and our County’s desire to be attractive to high tech companies who expect and demand a highly reliable grid.”

• “But while our focus is initially and properly on reliability, reliability is not simply burying power lines. Reliability issues are themselves a serious symptom of a far broader set of issues, issues that in their totality underscore the utter failure of our current utility model.”

• “We need a new utility model. We need a utility that our constituents can trust to implement it. We need ‘Utility 2.0.’”

• “We desperately need a fresh dose of entrepreneurialism, a system that Steve Jobs would be proud of.”

• “If we are poised to spend upwards of a billion dollars on our utility infrastructure, let’s not put Humpty Dumpty back together again. Let’s build a new dynamic system that reflects our values and the requirements of the 21st Century.”

The full text of Council President Berliner’s presentation follows:

Let me begin by commending the Governor for requesting this critically important inquiry into what our residents should expect from our state’s regulated providers of electricity.

The grant of a monopoly franchise is an extraordinary privilege. Utilities are insulated from the kinds of competitive pressures faced by almost every other business, and are guaranteed the opportunity to earn a fair rate of return. In exchange for those unique privileges, utilities are expected to provide reliable services. Regrettably, in Montgomery County, that essential aspect of the regulatory compact has not been honored.

For a distribution company that no longer runs generation, their most basic mission and obligation is to deliver power on a reliable basis. It is the sine qua non of their job. If a utility demonstrates that it is incapable of providing reliable power, it calls into serious question the very basis for its franchise.

The cost to our citizens and our state—financially and beyond—of an unreliable distribution system is simply not acceptable. What we know in Montgomery County is that Pepco’s substations are still vulnerable; their transformers too old; and the wires susceptible to weather events. The net result has been that our County has had some of the least reliable power in the country since 2006. It is, quite frankly, an outrage. Today, I represent a population of people who have totally lost trust in their local utility company. And the evidence is everywhere, from YouTube songs to the springing up of grassroots movements such as “Pack up Pepco.”

Imagine having to look at the weather everyday, seeing forecasts for thunderstorms, and wondering whether it may be too great a risk to spend your hard-earned money on groceries because a forecasted thunderstorm may also forecast a power outage. Or, looking at the forecast and seeing that it is going to be a sunny day and still have to worry if you will lose power.

The cumulative effect of so many outages over so many years has led to this moment where people are yelling from the rooftops “we can’t take it anymore.” And they should not have to. We should never have been in this situation. Pepco knew its system was falling apart but made the decision not to invest in it and did not even spend what was authorized for its reliability budget. At the same time, as the Chairman has forthrightly acknowledged, the Commission itself did not appreciate the full measure of Pepco’s unreliability until five years into their lowest quartile performance. It is no wonder that Pepco was voted the “most hated company in America” and that our people question our state’s willingness to hold Pepco and their shareholders accountable.

While Pepco’s performance and credibility remains very much at issue, I personally believe the Commission has begun taking steps to staunch the erosion of public confidence in its capacity to regulate Pepco. Its latest decisions—one to reject all but the legally required rate increase sought by Pepco and reduce its return on equity, and the other to reassess whether Pepco can recover 24 hours worth of lost revenue during extended outages—demonstrate to me that the Commission understands the magnitude of the situation and the urgency in taking meaningful steps to address it. I commend them for their recent actions.

Moreover, we are poised to begin making progress on reliability. As a result of the reliability legislation sponsored by Delegate Feldman, supported by the Governor and passed by the legislature, as the Commission’s representative has summarized, the Commission has put in place reliability standards that for the first time hold our utilities accountable for meeting key metrics for reliability. By 2015, assuming compliance, a big assumption, Pepco should at least be providing power as reliably as its neighboring utilities.

But the remedies implemented to date only take us part of the way there. It remains an open question as to what level of reliability the citizens of Montgomery County should expect and the State should be mandating for Pepco. I am told that in Germany, whose economy is among the world’s strongest, they measure outages for the entire year in minutes. They had a bad year last year. There were nine minutes of outages during the year. Nine minutes. Not hours. Not days. Not weeks. Outages aren’t even on their citizens’ radar—a stark contrast with Montgomery County, where power outages have become the number one threat to our quality of life. Germany’s density of trees is the same as Montgomery County’s and yet its utilities lead the world in reliability.

Pepco’s monopoly franchise requires them to provide the very best reliability, more important now given the extent of our dependence on sensitive communication and computer technologies and our County’s desire to be attractive to high tech companies who expect and demand a highly reliable grid. What arguably may have been an acceptable level of reliability decades ago is not acceptable today—not that we are even achieving those lower standards today. Our previous expectations were not met, and now our expectations and our need for reliable electricity have only increased. In my view, we should strive towards the highest levels of reliability that other countries already possess.

It has been argued that highly reliable electric service will increase rates. Yes, but what is equally clear is that unreliable service is more costly—costing our economy literally billions of dollars and threatening our health, welfare, competitiveness, and peace of mind. And given the general state of the economy, there has never been a better time to make an investment in our infrastructure. Further, energy prices are low as a result of generous supplies of natural gas and interest rates are affordable for the foreseeable future.

That said, we would be ill advised to ignore the cost. Pepco has estimated the cost of its reliability upgrades at upwards of $900 million. And that does not include significant undergrounding, which is now properly being seriously reconsidered. It is a cost comparable to the cost of other essential infrastructure improvements so critical to our state and our county such as the Purple Line, the Corridor Cities Transitway and a new Rapid Transit network. And like those other projects, we must meet the infrastructure needs of our citizens that we know are absolutely essential to our future.

There are creative options for how our reliability enhancements are funded. In the traditional utility model, the utility makes the investment and the investment then becomes part of its rate base upon which it earns a generous return. That may not be the least expensive or efficient way to bring about the improvements we seek. We should explore all financing options, including the potential to combine government’s access to less expensive capital with utility billing to recover those costs. And finally, in the case of Pepco, it should not be presumed that ratepayers will be on the hook for all of the costs of upgrading the system. The Commission has stated that Pepco’s shareholders should share in these costs to the extent that they are the result of Pepco’s past imprudence in allowing its system to fall into such disrepair.

But while our focus is initially and properly on reliability, reliability is not simply burying power lines. Reliability issues are themselves a serious symptom of a far broader set of issues, issues that in their totality underscore the utter failure of our current utility model.

That conclusion, as provocative as it may sound, is inescapable if you list the qualities our residents and businesses should expect when it comes to electricity service. Here’s a partial list of the qualities of service we should expect and receive from our provider of electricity:
• Reliable
• Efficient
• Green
• Distributed power
• At competitive rates
Looking at that list, I would argue that we have none of the essential qualities that we should receive from our state’s providers of electricity services. If you come to the same conclusion, then I submit that we really have to step back and ask how we might change the utility model to achieve the goals we collectively seek. What is encouraging is that we do not really need a lot of technological breakthroughs. We can have everything on this list. But our constituents have no trust in our current utility, and I have even less faith that our current utility model can get us there. We need a new utility model. We need a utility that our constituents can trust to implement it. We need Utility 2.0.

Our current system is not on target to achieving the reliability we should expect, and I would suggest that it is not using electricity efficiently either. Under the Governor’s leadership, we have made significant strides in reducing our peak demands. But we have not been able to make comparable strides in increasing energy efficiency, the most cost effective approach to reducing energy use, utility bills, and greenhouse gases. And there is scant evidence that even after the Commission took action to “decouple” Pepco’s financial fortunes from conservation efforts that Pepco has become a real partner in reducing energy consumption. Until we have a utility that is committed to energy efficiency financing programs, it will be difficult for our citizens to retrofit their homes and businesses to make the progress that we need.

In addition, our focus on substations, transformers, and overhead lines should not obscure a critically important and larger reliability issue—the centralized distribution grid itself. Producing coal power in a central place and transporting that power great distances through a grid that is vulnerable to storms seems to be an increasingly risky proposition in the face of greater storm intensity due to climate change. It is also vulnerable to other serious threats we have fortunately not experienced yet, such as potential cyber attacks.

In the past, the economies of scale strongly supported a centralized system. But today, with an aging grid we have to make a decision between rebuilding the old system or moving to a more distributed energy model. One that relies on combined heat and power, storage, micro-grids and renewables such as photovoltaic roof tops. Recent reports by leading global consulting firms such as McKinsey and others argue that rebuilding our current grid in the same form will lead to unsustainable rate increases of over the next twenty years.

Our friends in Germany, Denmark and Japan have shown that distributed energy is more reliable and the scale that they have created has led to significant cost reductions in solar and other technologies. This leads many of us to believe that significant market penetration is not just possible but affordable. Our state policies and regulations already mandate the deployment of these technologies by 2022, but implementing them within a comprehensive reliability plan will reduce the costs and accelerate deployment.

If we are poised to spend upwards of a billion dollars on our utility infrastructure, let’s not put Humpty Dumpty back together again. Let’s build a new dynamic system that reflects our values and the requirements of the 21st Century.

It has been said that utilities today are like the black rotary phones of old. That is certainly true of Pepco. We desperately need a fresh dose of entrepreneurialism, a system that Steve Jobs would be proud of. That isn’t a quality that utilities in general or Pepco specifically are known for. To get it, we are going to need to seriously explore “unbundling” the system so that entrepreneurs can bring their creativity and talents and services to the people of Montgomery County. We can not allow Pepco’s control over the wires limit our access to higher quality services.

In sum, I represent a county that—for good reason—has lost faith in our local utility company. That means our state will need to be both more proactive in creating Utility 2.0 and more forceful in holding Pepco accountable. And while this may be the sole responsibility of the Commission, I can assure you that all of us who serve the public are held accountable for Pepco’s unacceptable quality of service.

More broadly, we need to rethink both what we expect from our utilities and the institutional arrangements that will bring about what we want. Fortunately, there are a lot of good smart people within the region who have the expertise and share a commitment to help us craft a new more reliable utility future.

One such person is John Jimison, who serves as Managing Director for the Energy Future Coalition. The Energy Future Coalition is the leading organization in the country focused on these sets of issues. They recently hosted a discussion on this very topic, and I am confident that with their facilitation and a lot of hard work, our state and specifically Montgomery County could become a model for the nation. It is work of the utmost importance to the welfare of our citizens and needs the kind of forward thinking that our Governor has demonstrated time after time.

Thank you for giving me this opportunity to share these thoughts with you today.