Realizing the Smart Grid Imperative:

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Realizing the Smart Grid Imperative:


A Framework for Enhancing Collaboration Between

Energy Utilities and Broadband Service Providers
Charles M. Davidson
New York Law School
Michael J. Santorelli
New York Law School
www.twcresearchprogram.com
REPORT SERI ES
SUMMER 2011
For more information:

Fernando Laguarda
901 F Street, NW
Suite 800
Washington, DC 20004
Phone: (202) 370-4245
www.twcresearchprogram.com
twitter.com
/TWC_RP
Foreword
..................................................................................................................................................
3
By Fernando R. Laguarda, Time Warner Cable
I. Introduction and Overview
.........................................................................................................
4
II.
The Smart Grid Imperative: Using Broadband to Modernize the Electric Grid
.
..........
7
A. The Evolution of the Smart Grid Imperative at the Federal and State Levels
.......................
7
B. The Key Role of Broadband in Smart Grid Deployment
..........................................................
9
1. Why Broadband Matters to the Smart Grid
........................................................................
10
2. Assessing the Impacts of a Broadband-Enabled Smart Grid
...........................................
11
C. Conclusions
...................................................................................................................................
13
III. Understanding the Divides Separating Energy Utilities and Broadband
Service
Providers
.
..............................................................................................................................................
14
A. Regulatory and Incentives Divide
...............................................................................................
14
B. Network Divide
.............................................................................................................................
17
C. Consumer Divide
..........................................................................................................................
19
D. Conclusions
...................................................................................................................................
22
IV. Bridging the Divides to Realize the Imperative: A Legal and Policy
Framework
for the 21st Century Broadband-Enabled Smart Grid
...............................................................
23
A. Bridging the Regulatory and Incentives Divide
........................................................................
23
B. Bridging the Network Divide
......................................................................................................
26
C. Bridging the Consumer Divide
...................................................................................................
27
V.
Conclusion

........................................................................................................................................
29
Endnotes
...............................................................................................................................................
30
About the Authors
..............................................................................................................................
48
Table of Contents
1
Realizing the Smart Grid Imperative
1
Whether your principal concern is national security, environmental stew
-
ardship, or economic welfare, no one doubts the need to modernize the
nation’s energy sector. This report,
Revitalizing the Smart Grid Imperative:
A Framework for Enhancing Collaboration Between Energy Utilities and
Broadband Service Providers,
by Charles M. Davidson and Michael J.
Santorelli, addresses the role that the “Smart Grid” can play in achieving
important national objectives. Despite the numerous steps being taken by
industry and government to work together in this area, progress toward this
goal seems agonizingly slow to many observers. This report explains the
policy impediments that need to be overcome to move that process forward.
According to the National Institute of Standards and Technology, the Smart Grid “utilizes
advanced information and communications technologies to replace the one-way flow of elec
-
tricity and information in the current grid with a two-way flow of electricity and information.”
As Davidson and Santorelli make clear, bringing together information and energy in two-way
networks that are truly intelligent, automated, and widely distributed is a complex undertaking for
a number of reasons that divide energy utilities and broadband service providers in the ecosystem.
Those reasons come down to conflicting regulatory incentives, divergent views about information
networks, and different relationships with consumers. This report explains these “core divides”
and offers a legal and policy framework for tackling them in order to jump-start innovation in the
area of the Smart Grid.
This report contributes to the policy debate about the Smart Grid by emphasizing the importance
of collaboration and dialogue among stakeholders as a key component of innovation. For historic
and jurisdictional reasons, policy discussions on this topic have tended to focus on specific indus
-
tries. Occasionally, an issue like the Smart Grid arises at the intersection of two industries (energy
and broadband).
Davidson and Santorelli address the need for innovation on the basis of greater understanding and
collaboration between and among participants in the ecosystem. This is a challenging and fruitful
exercise because it breaks free of the more traditional approach to policy, which tends to focus on
what one sector and its stakeholders can do “with” “to” or “for” each other. As a nation, we depend
on reliable and affordable access to energy. For broadband networks to play a constructive role in
meeting this critical need, the recommendations in this report are essential reading.
When we launched the Time Warner Cable Research Program on Digital Communications, we
hoped for reports like this one, to stimulate debate and encourage more thoughtful policy. We
look forward to your comments and feedback.
Foreword
By Fernando R. Laguarda, Time Warner Cable
Realizing the Smart Grid Imperative
3
Modernizing the provision of energy services in the United States has long been a priority of state
and federal policymakers. Over the last several decades, legislators and regulators have imple
-
mented a number of incremental changes to the traditional energy regulatory paradigm in an
attempt to spur grid modernization and innovation. These efforts have included several federal
legislative actions aimed at, among others, adjusting how rates are structured
1
and realigning
incentives to support investments in certain types of demand management tools.
2
Federal guid
-
ance on these issues has met varying levels of state resistance,
3
but many see these laws as the
starting point for a more fundamental recalibration of how utilities make investments and earn
returns on those investments.
4

Notwithstanding efforts to date, the transmission, distribution, and consumption of energy in the
U.S. remain inefficient
5
and antiquated in many respects.
6
The underlying physical energy infra
-
structure — the nation’s electric grid — has emerged as the primary focus for reform. A number
of wide-scale outages
7
and reported cyber attacks
8
have underscored the vulnerability of a national
infrastructure that supplies electricity to every resident and business in the United States. These
events prompted former President George W. Bush
9
and President Barack Obama
10
to refocus
energy policymaking on bolstering the nation’s electric grid and positioning it as an ecosystem for
innovation and a hub for economic growth.
Recent energy policymaking efforts have been animated by a desire to inject intelligence into the
U.S. electric grid. Using an array of advanced digital communications technologies to create a
“smart” grid, utilities and other innovators are poised to enhance efficiency and empower consum
-
ers with more control over their energy consumption.
11
New devices like smart meters, wireless
sensors, and synchrophasors are poised to leverage robust communications networks to generate,
aggregate, transmit, and analyze a flood of new data, allowing utilities to streamline their opera
-
tions and spur innovation.
12
Broadband networks in particular are poised to play a key role in
realizing the many goals for the smart grid by undergirding the physical infrastructure of the next-
generation grid and supporting the torrent of data traffic expected to be generated by a new class
of technologies aimed at curtailing energy consumption.
13
In addition, the ubiquity and increasing
utilization of commercial broadband connections will hasten the extension of these benefits into
homes and buildings, enabling an array of innovations targeted at reducing carbon footprints and
costs for customers.
14
Together, these innovations are expected to yield an interdependent smart
energy ecosystem, one where smart energy services thrive along the grid, in the home, and at
every other node through which energy passes.
15
These initiatives and developments in the energy and high-tech sectors, coupled with the wide
availability of broadband networks throughout the country,
16
place the United States on what
should be an inexorable path toward creating an environment within which a smart energy
I. Introduction and Overview
The views expressed are those of the author(s) and not necessarily those of Time Warner Cable, the Time Warner Cable Research Program
on Digital Communications, or New York Law School.
Realizing the Smart Grid Imperative
4
ecosystem, supported by a modern, more intelligent electric grid, will flourish. But, for numerous
reasons discussed herein,
stakeholders in the energy and broadband sectors — seemingly natural
partners in the smart grid context — remain more divided than united over many issues related to
the smart grid. This paper examines the issues dividing these stakeholders and proposes a new policy
framework for ensuring the rapid deployment of 21st century electric architecture.
Section II
provides an overview of the prevailing vision for using new technologies to create a
smarter energy grid in the United States. Federal policymakers have spent much of the past decade
focused on modernizing the grid. In addition, policymakers at the state and federal levels have
debated new regulatory frameworks to encourage more innovation and experimentation in the
21
st
century energy sector. Taken together, these various efforts have laid a considerable amount of
groundwork necessary for smart grid deployment. Yet many key issues remain unresolved.
17
How
policymakers address these technological and regulatory issues will directly impact whether the
divides between stakeholders in this space can be closed.
18
Section III
identifies and assesses three core issues dividing utilities and broadband service
providers in the smart grid space. The
first divide
is twofold. Disparate regulatory frameworks gov
-
erning each sector create divergent incentives to invest and innovate.
19
Indeed, the current energy
regulatory framework, which treats most utilities as local monopolies, has resulted in a sector
that is largely – and justifiably – risk-averse and conservative in its approach to innovation.
20
This
paradigm does not reward utilities for implementing technologies that result in decreased energy
consumption.
21
In contrast, a deregulatory approach to broadband has fostered a vibrantly com
-
petitive environment, which has in turn spurred the development of an interdependent ecosystem
of innovation that is largely driven by consumer demand.
22
Broadband service providers have a
clear incentive to enter into new lines of business that pair high-speed Internet connections with
new consumer-oriented services, like those expected to be developed in the smart grid space.
23

Harmonizing these two vastly different frameworks for the purposes of the smart grid would help
to ensure that an ecosystem of innovation is able to develop and evolve in a timelier manner.
A
second divide
stems from divergent views among utilities and broadband service providers over
the efficacy of using existing broadband networks to support various components of the smart
grid. Concerns generally center on the robustness and reliability of existing commercial broadband
networks. Many utilities have focused on deploying their own private communications networks
for smart grid purposes. However, as discussed throughout the paper, several experimental part
-
nerships have been forged between utilities and broadband service providers to determine whether
and how existing commercial networks can support actual smart grid deployment.
Differing approaches to consumers and consumer demand represent the
third divide
between
stakeholders in the smart grid context. Since utilities tend to have an arms-length relationship with
consumers, one in which interactions between the two are often mediated by a regulatory body,
energy service providers craft their business models in a much different way from broadband
service providers. How service providers regard and engage with consumers directly impacts the
ways in which issues like consumer privacy are addressed. These issues take on additional salience
in light of the emerging importance of smart grid data access, privacy and security generally.
Combined, these three divides present a sizeable gap separating two key stakeholder groups in the
emerging smart grid space.
Section IV
offers a legal and regulatory framework for bridging these divides and igniting inno
-
vation in the U.S. energy sector. This framework does not intend to pick winners and losers or
Realizing the Smart Grid Imperative
5
endorse a particular approach to deploying the smart grid in the United States. Rather, the frame
-
work proposes several updates to a regulatory paradigm that is as antiquated as the electric grid it
applies to. A unifying theme among these proposals is the importance of ongoing collaboration,
coordination, and discussion among stakeholders and policymakers in the energy and broadband
sectors. Such a comprehensive and inclusive approach is needed to achieve the many goals for the
smart grid.
Realizing the Smart Grid Imperative
6
In 2007, Congress passed the Energy Independence and Security Act (EISA), a comprehensive
reform package aimed at moving the United States “toward greater energy independence and
security…increas[ing] the production of clean renewable fuels [and]…increas[ing] the efficiency
of products, buildings, and vehicles.”
24
Title XIII of the Act set forth, for the first time, a national
policy for modernizing the nation’s electric grid by ensuring that sufficient levels of intelligence
were built into the transmission and distribution infrastructure.
25
The Act identified 10 goals and
several benchmarks for devising a national smart grid policy to guide modernization efforts.
26

At
the core of these goals is the notion of using an array of advanced digital communications and infor
-
mation technologies to “improve reliability, security, and efficiency of the electric grid.”
27

Passage of EISA marked the culmination of several decades of inquiries into grid modernization.
28

Initially, discussion and analysis at the federal level focused primarily on bolstering the existing
electric infrastructure to guard against wide-scale outages.
29
In the early 2000s, the ability of emerg
-
ing communications technologies like broadband to transform the energy sector remained largely
speculative.
30
Since then, the view that a truly “smart” grid is possible has emerged in tandem with
the rapid maturation of the nation’s broadband sector.
31
EISA, and the subsequent policy inquiries
called for by the Act, thus signaled the beginning of an official turn toward focusing modernization
efforts on leveraging new digital technologies to build intelligence into the electric grid.
32

Subsection A briefly traces how recent grid modernization discussions have evolved at the state
and federal levels, and then provides a comprehensive assessment of the smart grid impera
-
tive announced in EISA and furthered in subsequent inquiries. At the heart of many ongoing
discussions by federal and state policymakers is an examination of how best to use new digital
technologies and high-speed data networks like broadband to support the smart grid and the
development of a pervasive smart energy ecosystem. Subsection B highlights the critical role that
broadband is poised to play in helping to modernize the electric grid and examines the array of
smart grid components and smart energy tools that it enables.
A. The Evolution of the Smart Grid Imperative at the Federal and State
Levels
A massive power outage in August 2003 caused extended blackouts throughout much of the
Northeast and parts of Canada, underscoring the extreme vulnerability of the U.S. energy grid.
The blackout impacted some 50 million people across eight states, resulting in several deaths
and billions of dollars in lost economic activity.
33
In a report by a task force convened to study
the causes of the blackout, members compared and contrasted the scale and impact of the outage
with previous major grid failures. One common feature of each outage was “an inability of system
operators or coordinators to visualize events on the entire system.”
34
Indeed, the amount and type
of data available to operators were extremely limited and not real-time in nature.
35
As a result, the
local consequences of an overgrown tree touching a high-voltage power line in Ohio cascaded
across a significant portion of the U.S. in a matter of two hours.
36
The August 2003 blackout was
largely an information failure, one that denied local operators the ability to see what was occurring
in other parts of the grid.
II.
The Smart Grid Imperative: Using Broadband
to Modernize the Electric Grid
.
Realizing the Smart Grid Imperative
7
Utilities have long used information technology to monitor the provision of electricity in their
immediate service territory. For example, utilities began deploying Supervisory Control and Data
Acquisition (SCADA) systems in the 1980s and 1990s to monitor local infrastructure.
37
A SCADA
system “gathers information (such as where a leak on a pipeline has occurred), transfers the infor
-
mation back to a central site, then alerts the home station that a leak has occurred, carrying out
necessary analysis and control, such as determining if the leak is critical.”
38
Many of these systems
transmit information via telephone networks, often at the speed of a dial-up Internet connection.
39

In more remote areas, wireless signals are used to relay information.
40
Similarly, many utilities have
used information and communications technologies to enable Automatic Meter Reading (AMR)
systems, which transfer customer consumption data to the utility for billing purposes.
41
Metering
advances like AMR were chiefly deployed to eliminate costly and time-consuming manual meter
-
ing readings by technicians.
42
Despite the value of these services to individual service providers,
the raw information generated by these tools is typically only useful to the utility collecting the
data.
43
After many years of meeting increased demand for energy services, the balkanized nature
of these systems became evident in the August 2003 blackout.
44
EISA sought to address many of
these problems with its smart grid provisions.
EISA itself, however, was just a first step. The Act launched a series of inquiries, studies, and
working groups, all of which were aimed at defining the contours of a national smart grid policy.
One of the first major reports to emerge after EISA was a 2008 study by the federal government’s
Electricity Advisory Committee, which identified the barriers facing smart grid deployment.
45
Key
impediments identified in the report included cost concerns, regulatory challenges, and the lack of
a coordinated strategy for deploying a smart grid on a national scale.
46
Interestingly, the assump
-
tion at that time was that utilities would be able to leverage existing proprietary communications
infrastructure — e.g., those developed and deployed for SCADA and advanced metering initia
-
tives (e.g., AMR) — to support emerging smart grid devices.
47

Formal recognition of the fact that
high-speed data networks could be used to support the smart grid did not occur until passage of the
American Recovery and Reinvestment Act (ARRA) in early 2009.
ARRA directed the Federal Communications Commission (FCC) to prepare a
National Broadband
Plan
that, among other things, examined how “broadband infrastructure and services” could be
used in “advancing…energy independence and efficiency.”
48
Implicit in this directive was a call to
examine how existing commercial broadband networks could be used to facilitate rapid deploy
-
ment of a national smart grid. ARRA also included specific monetary allocations to support not
only broadband expansion,
49
but also smart grid pilot programs.
50

Around the same time, several smart grid pilot projects were being launched in cities across the
country.
51
These followed on a previous move toward deploying advanced metering infrastructures
(AMI) by utilities. AMI encompasses a range of technologies and services, such as “home net
-
work systems, including communicating thermostats and other in-home controls, smart meters,
communication networks from the meters to local data concentrators, back-haul communications
networks to corporate data centers, meter data management systems, and, finally, data integration
into existing and new software application platforms.”
52
These systems are considered a necessary
precursor to supporting the development of a smart energy ecosystem and increasing acceptance
of advanced energy maintenance tools by consumers.
53
Even though the federal government had identified AMI and the smart grid as keys to grid modern
-
ization efforts, the vast majority of these initiatives are vetted, approved, and monitored by regulators
at state public utility commissions (PUCs).
Over the past few years, a growing number of states have
opened inquiries and rulemaking proceedings focused on speeding along AMI and establishing
Realizing the Smart Grid Imperative
8
regulatory frameworks for the smart grid.
54
The New York Public Service Commission, for
example, opened an inquiry in October 2007 to develop guidelines for use in the development of AMI
plans by utilities.
55
California was one of the first states to open a formal smart grid rulemaking
proceeding in December 2008.
56
PUCs in Colorado
57
and Ohio,
58
among other states, have also
opened dockets related to the smart grid. State-level smart grid efforts have focused on complying
with various regulatory obligations set forth in EISA and on adapting the federal mandate for grid
modernization to suit local market conditions.
59
However, some states, like California, are begin
-
ning to adopt new rules to address specific issues like privacy.
60

The potential for policy conflict and overlap at the state level is a significant concern.
61
Some
argue that the development of a patchwork regulatory approach to the smart grid could slow its
deployment and potentially raise costs for device manufacturers and utilities operating in multiple
jurisdictions.
62
These concerns stem primarily from the regulatory frameworks within which state
PUCs typically operate, many of which treat utilities as local monopolies.
63
In addition to laws and
regulations that vary by state, these frameworks have generally created a narrow set of invest
-
ment incentives for utilities, which has fostered a justifiably risk-averse and conservative approach
to innovation in the energy space.
64
Many of these paradigms are grounded in state and federal
statutes and PUC precedent, all of which have developed over the last century in a market charac
-
terized by incremental technological change.
65
As a result, there appears to be an inevitable tension
between how various stakeholders, including those in the energy sector, want the smart grid to
develop and the existing regulatory structure that will ultimately guide its deployment.
66

Identifying broadband as a viable means of supporting a wide variety of smart grid technologies
and functionalities has generated additional regulatory and policy questions.
67
These are addressed
in section III.A. Before analyzing those issues, section II.B examines the specific impacts that these
tools will have on the smart grid and provides context for better understanding the many issues
over which stakeholders in the smart grid space remain divided.
B. The Key Role of Broadband
68
in Smart Grid Deployment
Bolstering the ability to generate, aggregate, transfer, and analyze information across various
points in the electric grid has been the primary animating feature of smart grid policy efforts in
recent years. Utilities have experimented with a number of information and communications tech
-
nologies over the last few decades, often installing equipment like SCADA and AMR to automate
certain processes. Such tools operate mostly in a unidirectional manner, where information is
simply generated at a node (e.g., a meter) and sent back to the utility for analysis.
69
Newer technol
-
ogies like AMI, which rely in large part on the installation of smart meters,
70
are being deployed in
greater numbers due to generous federal stimulus allocations. Indeed, it was estimated that only 14
percent of homes in the United States had smart meters installed in 2009; that number is expected
to increase to 43 percent by 2014.
71
These more advanced technologies facilitate two-way commu
-
nications between the utility and various nodes across the grid. Additional data can be generated
and sent upstream to the utility, but these technologies also allow data to be sent downstream to
customers, either directly from the meter, the utility, or through a third-party service provider.
72

The shift from closed unidirectional communication to more open, two-way communication
distinguishes recent grid modernization efforts from previous attempts to bolster the nation’s
electricity infrastructure.
73

The amount of data that could theoretically be generated and transmitted by the current genera
-
tion of smart grid technologies is enormous.
74
Some have estimated that “the amount of annual
data utilities must process will increase tenfold…when the [s]mart [g]rid is fully operational.”
75

Realizing the Smart Grid Imperative
9
Although different technologies will be required to generate and send varying amounts of data at
any given time to an array of locations, many observers have concluded that utilities will require
an increasing amount of bandwidth through which this information can be reliably delivered.
76

High-speed and high-bandwidth data networks will thus be a critical component of the communi
-
cations infrastructure underlying smart grid deployments across the nation.
1. Why Broadband Matters to the Smart Grid
Broadband is emerging as an essential part of the smart grid for two primary reasons.
First, broadband has the ability to seamlessly connect a variety of information nodes and transfer
large amounts of data across a network using universally accepted protocols and standards.
Utilities
have typically relied on an array of communications technologies to be the backbone for advanced
metering efforts and other attempts to increase the amount and type of information being
collected. These have included dial-up modems, local area networks, and a range of wireless tech
-
nologies (e.g., radio frequency identification).
77
Although adequate for accomplishing the tasks for
which they were originally designed, many of these communications systems will likely be over
-
whelmed with the information produced by newer, more advanced components of a smarter grid.
Moreover, these proprietary systems are typically incompatible across jurisdictions, precluding the
type of information sharing and visibility envisioned by federal policymakers.
78
The data generated by the smart grid will vary in amount and in the intervals at which it is
collected, depending on where it originates and the task it is meant to support. For example, a resi
-
dential smart meter can collect data in a near-real-time manner
79
— i.e., in one-minute intervals
80

— requiring upward of 100 kilobytes per second (kbps) of bandwidth.
81
Currently, more than half
of utilities use proprietary communications networks — wired and wireless — to support data
generated by AMI.
82
Individual customer data sets are typically collected at an aggregation point
and sent to the utility. The backhaul bandwidth needed to support these transfers could reach
upwards of 500 kbps.
83
Whether and how bandwidth needs impact communications networks
depends on how those networks are designed and which technologies are used to transport the
data.
84
Similarly, the bandwidth requirements and latency tolerance of demand response tools,
85

which leverage smart meters and other smart grid tools to enhance grid and load management,
vary widely depending on their core function and whether they are deemed “mission critical.”
86

Older technologies like SCADA require significantly less bandwidth, but are much less tolerant of
latency given their key role in monitoring critical infrastructure.
87
Despite the best efforts of a number of entities to estimate the bandwidth and latency needs of
current-generation smart grid tools, the U.S. Department of Energy (DOE) admits that “future
communications needs may be difficult to quantify due to the pace of evolution in grid tech
-
nologies. Smart Grid technologies continue to evolve, and future applications of Smart Grid
technologies may lead to both an increase and a qualitative change in communications require
-
ments.”
88
Moreover, the FCC has observed that “the amount of data moving across Smart Grid
networks is modest today but is expected to grow significantly because the number of devices,
frequency of communications and complexity of data transferred are all expected to increase.”
89

Without a sufficiently modular
90
communications infrastructure capable of supporting both
near term and long term uses of smart grid technologies, deployment efforts could be delayed or
thwarted.
91

Second, and related, broadband is emerging as an essential component of the smart grid because
it helps to solve the problem of long term bandwidth planning.
Broadband is a relatively flexible
communications technology adept at handling fluctuations in network traffic.
92
To this end,
Realizing the Smart Grid Imperative
10
next-generation commercial broadband networks continue to be deployed in order to ensure
that consumers have sufficient bandwidth to support more advanced — and bandwidth-intensive
— applications and services.
93
In this context, commercial broadband service providers have
demonstrated the modularity of the underlying network infrastructure by ensuring that time- and
latency-sensitive applications are delivered without interruption.
94

2. Assessing the Impacts of a Broadband-Enabled Smart Grid
Stakeholders widely agree that broadband will serve as the primary foundation for innovation in
the smart grid and smart energy spaces in both the near term and long term. The emerging class
of broadband-enabled innovations will profoundly impact consumers, utilities, third-party service
providers, and many other stakeholders across the energy sector. Taken together, the consequences
will fundamentally alter the energy delivery and consumption paradigm in the United States.
Many of these benefits will accrue over time as utilities begin to adapt established business models
to meet evolving consumer demand. In the near term, utilities and other stakeholders will begin to
integrate high-speed data networks into the existing model of energy distribution and consump
-
tion.
95
To this end, broadband will initially serve as the communications backbone connecting
the millions of smart meters expected to be deployed across the country over the next few years
and as the conduit for connecting consumers to the services that will interpret and present the
data generated by these tools.
Ultimately, the near term development of a robust advanced metering
infrastructure, undergirded by broadband, will be critical to the long term viability of the smart grid
for several reasons.
First, such an AMI will demonstrate the actual, rather than the hypothetical, value of broadband
to smart grid deployment. To date, much of the research and analysis surrounding the broadband-
enabled smart grid has been speculative. The specific communications and data needs of the smart
electric grid envisioned by the federal government remain unclear.
96
Moreover, many were skepti
-
cal of the role that advanced communications infrastructure like broadband might play in smart
grid deployment.
97
In the near term, however, increased AMI deployment will assist in further
refining these estimates and obviate the need for more robust broadband connectivity. Successes
and failures stemming from major pilot programs in Boulder, Colorado
98
and Austin, Texas,
99

along with those supported by ARRA funding, will inform these estimates and subsequent policies
developed by state PUCs, FERC, and other regulatory entities.
Second, a successfully deployed broadband-enabled AMI will likely spur consumer demand for
smart energy services in the home.
100
Multiple components of an AMI are consumer-facing and
are meant to enhance the “fundamental link between the consumer and the grid.”
101
Thus far,
however, demand for the smart grid, including the various services enabled by smart meters,
remains low. A survey conducted by General Electric in early 2010 found that only four percent
of U.S. consumers had heard of the smart grid or understood what it could do for them.
102
In
addition, concerns about the accuracy,
103
data security, and health impacts
104
of smart meters has
fostered skepticism among a significant number of consumers, even though independent reports
commissioned by state PUCs have found smart meter measurements to be extremely precise.
105

Fortunately, surveys have found that consumers are usually very eager to learn about and use these
tools once they become aware of them.
106
More widespread deployment of broadband-enabled
AMI, coupled with public outreach and education by stakeholders, could bolster consumer aware
-
ness of and demand for smart grid tools and services, thus helping to overcome a potentially
significant near term barrier to adoption of advanced energy efficiency tools and to the develop
-
ment of a smart energy ecosystem.
107
Realizing the Smart Grid Imperative
11
Third, broadband will also be used in the near term to drive smart energy innovation within
homes. High-speed Internet connections are beginning to form the core of home area networks
(HANs), which “connect the smart meter, smart appliances, electric vehicles, and on-site electric
-
ity generation or storage, both for in-home displaces, controls, and data uploads, and to allow for
automated modulation of energy loads during peak demand periods.”
108
Several HAN components
already exist, including smart appliances and machine-to-machine (M2M) technologies that
allow appliances and other in-home devices to communicate energy consumption data and other
such metrics. Many of these communications occur via wireless networks (e.g., Wi-Fi or ZigBee),
although communications via wired connections (e.g., over existing electric wiring in homes) are
possible with tools like HomePlug.
109
The ultimate goal for HANs is to serve as the locus of inno
-
vation for the smart home and to enable the development of “various consumer applications, such
as remote monitoring and control of a home’s thermostat or appliances via smart phone.”
110
Given
the increasing prevalence and cost-effectiveness of these components, along with a rapidly grow
-
ing M2M sector, there are numerous economic incentives for both consumers and third-party
innovators to continue adopting and developing HAN services.
111
In addition to consumer-facing innovations, broadband will drive several key grid-level innova
-
tions in the long term. For example, utilities will begin to deploy advanced sensor technologies
to more precisely monitor the flow of electricity through systems. Foremost among new sensor
technologies will be synchrophasors, which will provide the foundation for wide area situational
awareness systems that enable utilities to “improve the monitoring of the power system across
large geographic areas[,] effectively providing grid operators with a broad and dynamic picture of
the functioning of the grid.”
112
These advanced systems require significant amounts of bandwidth
since they tolerate less latency than other smart grid components do.
113
A more comprehensive and accurate view of the electricity flowing through the grid will enable
utilities to recalibrate their fuel supply strategy, their pricing structure, and their distribution
model. Three key innovations are likely. First, a more granular view of grid dynamics will facili
-
tate the “bi-directional flow of energy,” which will, in theory, allow customers to potentially sell
back unused energy to utilities during peak times.
114
Second, additional data about energy flows
will enable dynamic or real time pricing, which will facilitate more accurate pricing of energy
consumption and foster more cost-efficient use. To date, demand response programs have not
been deployed at scale and, as a result, have largely failed to generate more than nominal cost sav
-
ings.
115
Third, the ability to generate and analyze load data in real time could eventually facilitate
the incorporation of additional fuel sources into a utility’s supply. In particular, the smart grid is
expected to enable the integration of renewable fuel sources (e.g., wind and solar) into the national
fuel supply.
116
In the longer term, the smart grid will undergird a larger hub for smart energy innovation. One
of the core long-term goals is to use the smart grid as a way to encourage the development and
purchase of plug-in hybrid vehicles. President Obama has set a national goal of having one million
“advanced technology vehicles” on the road by 2015.
117
The smart grid will play an essential role in
ensuring that these vehicles’ energy needs are met without straining the grid.
118

In sum, these and other approaches to enhancing energy efficiency in the United States via a
national, broadband-enabled smart grid are expected to result in enormous cost savings,
119
carbon
emission reductions,
120
and many other consumer welfare gains.
Realizing the Smart Grid Imperative
12
C. Conclusions
The smart grid imperative in the United States is clear. Modernizing the electric grid by injecting
intelligence into it will spur job creation, economic development, consumer welfare gains, and
cutting-edge innovation focused on enhancing energy efficiency in every facet of transmission,
distribution, and consumption. High-speed data networks will serve as the primary vehicle for
enabling these gains and for encouraging innovation along nearly every node of the grid.
That broadband is positioned as the
sine qua non
of the smart grid envisioned by the President,
Congress, the FCC, and state PUCs is largely undisputed. After several years of uncertainty and
debate, there is now widespread agreement that the future of the nation’s energy sector will depend
in large part on the ability of high-speed data networks and the nearly infinite universe of energy
efficiency applications and devices that they enable.
What is in dispute, however, is the best way to
realize the smart grid imperative. In a sector where annual retail revenues exceeded $310 billion in
2010, the economics of the smart grid are inviting a number of new stakeholders to the table.
121
As
a result, the path forward is muddled with the competing interests and fundamental disagreements
between an array of companies and interest groups.

Realizing the Smart Grid Imperative
13
The emergence of broadband as a viable platform upon which to build the smart grid has intro
-
duced a new set of stakeholders into the debate regarding grid modernization and 21
st
century
energy policy: commercial broadband service providers. As owners of communications networks
that are available to over 95 percent of households in the United States,
122
broadband service
providers have significant economic incentives to become partners in national smart grid deploy
-
ment efforts.
123
However, the more than 5,000 utilities and power producers in the United States
also have significant incentives to build proprietary data networks to support the smart grid and
to only partner with broadband service providers in limited instances.
124

These two sets of stakeholders have become immersed in major policy discussions regarding
use of commercial broadband networks for smart grid deployment.
125
In addition to competing
economic interests, numerous other divides have precluded them from forming more partner
-
ships that could accelerate the deployment of this critical infrastructure at scale.
126
In many cases,
these differences appear to be intractable because they stem from divergent regulatory paradigms
that have fostered fundamentally different approaches to issues of elementary importance to grid
modernization. These different approaches are not inherently good or bad. But they are different
and, as such, render policy reform that much more challenging. This section analyzes three broad
sets of issues that have divided otherwise natural partners in updating the nation’s electric grid and
fostering the development of a smart energy ecosystem.
A. Regulatory and Incentives Divide
Whether and how a particular sector is regulated depends on multiple factors, foremost among
which are the nature of the goods or services offered to consumers, the underlying econom
-
ics of producing the good or providing the service, the number and type of firms competing in
the market, and how these various dynamics contribute to overall consumer welfare. Ultimately,
regulatory frameworks are developed by policymakers to ensure specific outcomes of value, either
to the public at large or to consumers in a particular market.
127
Regulations often have the practi
-
cal effect of creating a variety of incentives and disincentives for firms to invest, to innovate, or to
alter business models. The scale and scope of these incentives tend to vary from sector to sector,
depending on the resulting regulatory rubric and how those regulations are implemented and
enforced by policymakers.
The regulatory paradigms currently governing the energy and broadband sectors are almost dia
-
metrically opposed. Utilities are subject to a very exacting sort of regulation that largely insulates
local energy providers from many aspects of competition, thus decreasing market-based incen
-
tives to innovate.
128
Conversely, the broadband sector has been lightly regulated since high-speed
Internet access first emerged as a commercially viable service more than a decade ago.
129
This
regulatory paradigm has fostered the development of intermodal competition among a variety of
broadband platforms (e.g., cable modem and wireless), which in turn has created consumer-focused
economic incentives to invest in networks and support the emergence of a wider ecosystem of inno
-
vation. In sum, these divergent regulatory systems have resulted in the development of distinct sets
III. Understanding the Divides Separating
Energy Utilities and Broadband
Service
Providers
.
Realizing the Smart Grid Imperative
14
of norms for utilities and broadband service providers regarding innovation and investment in new
services and lines of business.
In the energy sector, the provision of electricity services to households in a given geographic area
is typically considered a natural monopoly. A firm possesses a natural monopoly if it is “able to
provide a good or service to a market at a lower average cost than two or more firms because of
economies of scale or other network economies.”
130
In exchange for granting a local energy firm a
monopoly, regulators impose a rigid regulatory framework to ensure universal access to services
at a reasonable price. In general, U.S. public policy has long considered the provision of basic ser
-
vices like electricity as “clothed with a public interest” and the providers of these services as public
utilities subject to rigorous economic regulation.
131

The immediate result of this regulatory
quid pro quo
is the establishment of a baseline economic
framework that remunerates a firm for providing consumers with a minimum level of service.
In the absence of such strictures, monopolists have an incentive to decrease supply and increase
prices.
132
Artificial price constraints are thus meant to “yield the mix of price, output, and profits
approximating that which would be produced in a competitive market.”
133
In the energy sec
-
tor, regulators have formalized this dynamic by creating a complex system of cost-of-service or
rate-of-return regulation that seeks to assure utilities an adequate return on investment while also
providing consumers with affordable rates.
134

State PUCs are tasked with reviewing and approving an energy company’s proposed rate structure
and many other aspects of its business before new rates are implemented. Rates are based on a
number of factors, including investment in new and existing infrastructure and the cost of inputs
(e.g., fuel sources). The value of many of these factors (e.g., property and infrastructure) consti
-
tutes the “rate base,” which is a benchmark that regulators use to determine a reasonable rate of
return for a particular company.
135

This approach to regulating utilities creates a very narrow set of incentives — and opportunities
— for investing in new services and otherwise pursuing new lines of business. Indeed, in many
instances, PUCs set strict per-kilowatt-hour rates for utilities, which “encourages larger sales by
utilities and equivalently discourages their energy efficiency efforts.”
136
Moreover, utilities will
typically invest in new services and infrastructure only if they are able to recoup a significant share
of their costs upfront via an approved rate-of-return schedule. The result is a highly risk-averse
utility sector that lacks market-based economic incentives to innovate and change how it delivers
basic electricity.
137
Moreover, this regulatory approach creates a perverse set of incentives to tacitly
encourage more energy consumption and a larger rate base to support increased demand.
138
As the
U.S. Department of Energy has astutely observed, “expanded peak demand has driven the need for
additional capital projects, which increase the rate base. As energy sales grow, revenues increase.
Both factors run counter to encouraging smart grid investments.”
139
Another aspect of the energy regulatory framework that complicates more robust smart grid
deployment is its state-centric nature. Indeed, the vast majority of utilities are regulated by state
PUCs. According to the U.S. Department of Energy, “state [PUCs] have jurisdiction primarily over
the large, vertically integrated, investor-owned electric utilities that own more than 38 percent of
the Nation’s generating capacity and serve about 71 percent of ultimate consumers.”
140
As a result
of this patchwork system of regulation, the pace of grid modernization at the national level will be
significantly impacted by individual state PUCs. Progress is likely to be fragmented and sporadic
given the different sets of laws, precedents, and regulatory review processes implemented by indi
-
vidual state regulatory entities. For example, even though ARRA allocated billions of dollars for
Realizing the Smart Grid Imperative
15
smart grid pilot programs in numerous states, these initiatives must still be reviewed and approved
by the appropriate state PUC before being deployed.
141

The immediate result of this regulatory paradigm and the economic incentives it creates for utili
-
ties has been a rather insular approach to smart grid deployment. While utilities have partnered
with communications companies in the past to assist in deploying systems like SCADA, some
utilities remain hesitant to leverage commercial broadband networks for smart grid purposes.
142

Although the vast majority of utilities cite security and reliability concerns as the primary rea
-
sons for not partnering with broadband service providers, the current regulatory framework also
provides economic incentives for utilities to build their own networks regardless of likely cost inef
-
ficiencies and rate increases.
143
These dynamics run counter to the regulatory framework and incentives for investment and inno
-
vation currently evident in the broadband sector. For much of the past two decades, the United
States has implemented a deregulatory approach to broadband Internet access services. This stems
directly from Congress’s intent, articulated in 1996, to “preserve the vibrant and competitive free
market that presently exists for the Internet and other interactive computer services, unfettered by
Federal or State regulation.”
144
Congress delegated oversight authority to the FCC, empowering the
agency to ensure that advanced communications services are available to all Americans.
145

Over the past decade, the FCC has mostly succeeded in preserving the deregulatory approach to
broadband and has recognized that limited regulation of the sector is essential to encouraging
additional investment in next-generation networks and innovation throughout the broadband eco
-
system.
146
In response, broadband service providers have invested hundreds of billions of dollars
to upgrade existing commercial networks and deploy next-generation services to nearly every part
of the country.
147
Much of this investment has been driven by a nearly insatiable demand among
consumers for additional bandwidth to accommodate more advanced uses (e.g., online video).
As a result, an ecosystem of innovation has flourished around the broadband network, driving
the rapid development and deployment of advanced devices to access high-speed networks and
the cutting-edge content that they deliver. This ecosystem has proven to be resilient in the face
of increasing consumer demand and has begun to target innovations at specific user groups.
148

Unlike in the utility sector, the deregulatory approach to broadband has created incentives for
network owners and others in the ecosystem to experiment with new business models.
149

Equally as important, service providers have the latitude and economic incentive to experiment
with new lines of business as the broadband adoption rate reaches a saturation point.
150
To this
end, broadband service providers are already investigating the viability of additional revenue
streams to supplement revenues derived from consumer subscriptions, which are expected to
flatten over the next few years.
151
These new partnerships and business models, however, are not
intended to be zero-sum arrangements. In other words, broadband service providers are not
attempting to become
de facto
healthcare and energy providers by delivering telemedicine and
smart grid services via existing broadband connections. On the contrary, broadband service
providers are seeking to diversify the number and type of services available to consumers and oth
-
erwise bolster the existing ecosystem in order to create additional revenue opportunities. Congress
echoed these goals in its directive to the FCC to articulate a strategy for using this technology to
realize an array of national purposes.
152
As a result of prevailing regulatory dynamics and the myriad economic incentives they support,
broadband service providers view the smart grid as an opportunity to monetize existing core
competencies and expertise to facilitate the growth of an emerging service.
153
Broadband service
Realizing the Smart Grid Imperative
16
providers view partnerships with utilities as an obvious convergence that would bring together
essential components for the smart grid in an efficient and cost-effective manner.
154
By seeking to
partner with utilities to establish a new class of specialized energy services for consumers, broad
-
band service providers are attempting to further differentiate themselves in an already competitive
marketplace.
155
To do so is a natural reaction to the economic signals emanating from the cur
-
rent regulatory framework. Moreover, these arrangements would be beneficial to all stakeholders:
broadband service providers would be able to offer customers a new suite of services; where
appropriate, utilities would gain access to modular, next-generation networks and proven network
management expertise; consumers would have a number of choices for smart grid-enabled ser
-
vices; and the nation would more swiftly realize the many goals for the smart grid articulated by
the President, Congress, the U.S. Department of Energy, and the FCC.
However, contrasting regulatory frameworks hinder rather than encourage the forging of partner
-
ships. More precisely, the economic incentives created and fostered by these disparate regulatory
regimes have divided two sets of potential partners in the smart grid space. Several state and
federal entities have offered proposals for bridging these divides, but little progress has been made
toward aligning the incentives of both sectors to facilitate the rapid deployment of a national smart
electric grid.
156
Until these misaligned incentives are addressed, utilities and broadband service
providers will likely be unable to collaborate fully in furthering the smart grid.
Moreover, the resolution of this fundamental divide could foster additional collaboration on other
vital aspects of smart grid deployment, including the viability of commercial broadband networks
for smart grid purposes and the need to develop consumer-focused smart energy strategies and
services.
B. Network Divide
Utilities and broadband service providers often have divergent views regarding the ability of com
-
mercial broadband networks to accommodate grid modernization efforts.
Given the essential nature of electricity and the proven fragility of the grid, the infrastructure
maintained by utilities is rightfully held to very high standards of reliability and security. Indeed,
electricity providers are required to adhere to multiple reporting requirements, all of which are
meant to prevent disruptive blackouts. At the state level, the vast majority of PUCs require utilities
to report “event information” regarding the duration and frequency of both momentary and sus
-
tained service interruptions.
157
The U.S. Department of Energy and the North American Electric
Reliability Corporation (NERC) also “require reporting of major electricity system incidents and
disturbance events. Reporting to these national bodies is…mandatory, required in near-real time,
and includes incidents that sometimes result in no loss of electric service to customers.”
158
Utilities
must also comply with numerous state and federal reliability standards, which seek to protect
against outages and mitigate damages resulting from service interruptions.
159
FERC coordinates
with NERC on reliability investigations and enforcement as they relate to bulk power.
160
Failure to
comply with these standards could result in a penalty.
161
The rapid emergence and integration of numerous new smart grid components has introduced
uncertainty regarding the impact of new communications technologies on traditional notions of
reliability.
162
These concerns have trickled down to individual utilities, creating somewhat wide
-
spread agreement that relying on non-proprietary communications networks to deploy the smart
grid will be inadequate to meet stringent reliability standards. During its investigation into the
communications requirements of the smart grid, the U.S. Department of Energy found that one
Realizing the Smart Grid Imperative
17
of the primary concerns of utilities vis-à-vis smart grid deployments was that they not pursue an
approach or suite of tools that “could potentially compromise reliability.”
163
Collectively, these con
-
cerns form the basis for an industry-wide skepticism regarding the ability of existing commercial
broadband networks to support core elements of the smart grid.
During the DOE inquiry, “the most-discussed issues [with regard to the reliability of commercial
broadband networks] were backup power for communications services, priority of service in the
event of either an outage or congestion, and overall communications network design and manage
-
ment.”
164
Backup power refers to the amount of emergency power utilities have on hand in case of
an outage. Many utilities have enough backup power for at least 72 hours.
165
A number of broad
-
band providers require similar amounts of backup power across their networks, but the DOE
has observed that “there is generally a gap between utilities’ and commercial service providers’
relative assessments of the sufficiency of the backup power capabilities in commercial networks.”
166

Harmonizing these assessments is essential given the importance of real-time data and other func
-
tions to the value of the smart grid.
167
Utilities also expressed concern about the ability of broadband service providers to guarantee
priority service during an emergency and during times of network congestion, both of which
could compromise the delivery of mission-critical, time-sensitive energy data.
168
A range of con
-
tractual agreements and government programs already exist that would allow utilities to arrange
for priority service with network owners. These include Service Level Agreements, which assure
a minimum quality of broadband service for utilities,
169
and several federal initiatives like the
Telecommunications Service Priority, which “enables certain telecommunications users to receive
priority treatment” for specific services.
170
The DOE has observed that utilities have yet to fully
avail themselves of these options.
171
Moreover, as broadband service providers continue to develop
specialized service agreements to deliver time-sensitive data for services like telemedicine, their
ability to guarantee priority of service for emerging smart energy applications will be tested and
honed. Ultimately, broadband service providers have a significant economic incentive to perfect
these agreements lest they foreclose a potentially lucrative new line of business.
172
Despite the advances being made by broadband service providers with regard to assuaging reli
-
ability concerns, most utilities prefer deploying proprietary wired and wireless networks for
the smart grid.
173
As a result, many utilities are foregoing the opportunity to explore whether a
particular broadband provider could effectively apply its expertise in building and maintaining
communications networks that support an array of mission-critical objectives.
174
Indeed, concerns
about “creating additional interdependencies between different parts of the nation’s critical infra
-
structure” are mostly specious because proprietary networks built for smart grid purposes would
be no less critical than extant broadband network infrastructure.
175
Since whichever broadband
network is used for the smart grid will be considered of overriding national importance, the abil
-
ity to manage and maintain it becomes especially crucial. Thus, the proven ability of broadband
service providers to manage, maintain, and secure critical infrastructure, like aspects of the U.S.
Department of Defense’s communications system, should not be discounted.
176

In general, the drive by some utilities to build proprietary communications networks for the smart
grid raises a number of issues. First and foremost are the underlying economic motivations. As
previously discussed, the prevailing regulatory structure for the energy sector has created a direct
correlation between investment and rates: increases in the former typically lead to increases in the
latter in order to ensure a guaranteed rate of return. By building proprietary networks, utilities would
not only be assured recoupment of their investments; they would also be guaranteed rate increases to
offset likely decreases in energy consumption. Conversely, collaborating with commercial broadband
Realizing the Smart Grid Imperative
18
service providers for these purposes would likely be more cost-efficient in many instances, but would
not, under the prevailing paradigm, lead to the rate increases necessary to offset revenue decreases
resulting from more efficient energy consumption.
177

Second, the deployment of proprietary communications networks underscores the importance of
network interoperability between networks used for smart grid purposes and the larger broad
-
band ecosystem. Efforts to devise interoperability standards are currently underway at the federal
level, under the leadership of FERC in close coordination with the National Institute of Standards
and Technology (NIST).
178
However, the proliferation of multiple proprietary networks designed
solely for the smart grid could impede interoperability with commercial broadband networks and
decrease potential consumer welfare gains.
179
Indeed, the continued development of an “Internet of
things”
180
and a smart energy ecosystem could be thwarted if smart grid networks fail to seam
-
lessly interoperate with the broadband ecosystem.
Third, the potential for technological obsolescence impacts the long term efficacy of proprietary
communications networks. As many stakeholders have observed, the communications needs of
the smart grid are still in flux and will continue to change rapidly in the coming years.
181
Under
the current regulatory framework, utilities typically lack the ability and incentive to update their
networks regularly. Indeed, the formal processes for reviewing investment and rate increase pro
-
posals by state PUCs — so-called rate cases — are time-intensive investigations that can last for
many months, a process that neither embraces nor facilitates the rapid pace of broadband-enabled
innovation.
182
As a result, many utilities still use first-generation systems like SCADA and AMR,
which, in many cases, remain tethered to basic communications infrastructure (e.g., the copper-
based, public switched telephone network).
Many of these network concerns are amplified by each sector’s business practices and technology
standards, which derive directly from prevailing regulatory paradigms and the economic incentives
that these frameworks generate. As a result, formidable barriers exist to more robust collaboration
between utilities and broadband service providers. Commercial broadband networks may not be the
solution in every instance, but such a determination is impossible to make without a fuller under
-
standing of their many positive attributes and the ecosystem of innovation they have spawned.
183

C. Consumer Divide
Regulation in both the energy and broadband sectors is guided by a similar social policy. In each
case, regulators have a mandate to develop policies to ensure that the public is able to receive
electricity and access advanced communications services. However, the nature of the service being
delivered alters the scope of this standard. For example, since electricity is “clothed with a public
interest,” local monopolies are obligated to deliver, and regulators are empowered to assure deliv
-
ery of, this basic service to consumers at reasonable rates. As previously discussed, this dynamic
has necessitated an exacting regulatory scheme that has all but erased any incentive for the
monopoly utility to innovate or offer consumers anything more than basic service.
184

In the broadband context, however, the interplay between oversight agencies like the FCC and
service providers is fundamentally different. With regard to broadband service, the FCC is only
empowered to ensure that it is made available to all Americans in a reasonable and timely manner.
185

Additional policymaking efforts influence the deployment decisions of broadband service provid
-
ers, but the FCC’s core mission vis-à-vis broadband is only to ensure that it is widely available.
186

This light regulatory touch, along with the intermodal nature of broadband platforms, has fostered
the development of an interdependent ecosystem of innovation.
Realizing the Smart Grid Imperative
19
These divergent frameworks have also resulted in predictably different approaches toward
consumers, the ultimate beneficiaries of energy and broadband services. Consumer-facing innova
-
tions offer one measure of how utilities and broadband service providers respond to consumer
demand.
As regulated monopolies, utilities’ interactions with consumers are mostly determined by regula
-
tory forces, not market forces. The prevailing energy regulatory paradigm has “disenfranchised”
the consumer from most aspects of product development.
187
Utilities ultimately have little incen
-
tive to seek rate increases for unproven or experimental services that might enhance consumer
welfare.
188
Thus, the consumer end of the electricity delivery and consumption model has
remained largely unchanged for decades.
189
The vast majority of innovation has occurred on the
back end of the transmission and distribution model (e.g., the deployment of AMR). These sys
-
tems have become somewhat more efficient and technologically complex, but consumers continue
to receive the same set of basic services. One of the primary consumer-facing changes has been
a rise in rates as utilities target investments at maintaining existing infrastructure, streamlin
-
ing back-office operations, accommodating additional capacity, and absorbing the costs of more
expensive fuel supplies.
190
Consumer demand, however, has slowed considerably over the last few
years and is expected to flatten over the coming decades.
191

Consumer-facing technological innovation in the energy sector has largely centered on leverag
-
ing the Internet to make additional information and services available to customers. These range
widely in scope and complexity. For example, most utilities offer customers the ability to access
accounts and pay bills online. Some have also begun to use social media (e.g., blogs, Facebook,
and Twitter) to engage customers in initiatives and to raise awareness of particular issues.
192
In
addition, several mid-size and large utility companies in the United States are beginning to deploy
energy efficiency tools (e.g., online energy calculators) and forge partnerships with third-party
applications developers in an effort to provide customers with additional energy consumption
tools. Eleven U.S. utilities, for example, partnered with Google to test PowerMeter, an applica
-
tion launched in 2009 that allowed consumers to monitor their energy use online regardless of
location.
193
This service let customers track the costs of their energy consumption and provided a
range of tools to set and adhere to a budget.
194
These efforts, though generally increasing as more
utilities experiment with online features, remain limited and have yet to have a disruptive impact
on the way most customers consume energy. Indeed, in June 2011 Google announced that it was
ending its PowerMeter initiative due to an inability to scale the program out.
195
An illustrative example of the wariness with which utilities typically approach new technolo
-
gies and innovative business methods can be seen in the debate over customer data privacy. Data
generated by smart meters and other components of the smart grid represent the primary input
that will drive innovation in the smart energy ecosystem over the long term. Generating, transmit
-
ting, and analyzing customer consumption data will help utilities and innovators enhance energy
efficiency and provide consumers with more control over their energy use.
196
However, the genera
-
tion and aggregation of large amounts of customer data has raised a host of privacy and security
concerns.
Whereas in the past utilities only released usage data to customers once per month — “after
the energy use occurs” and without any knowledge of “the price of electricity, the source of the
power or the amount of power need to run each of their appliances”
197
— a new class of smart
energy tools that operate in real time can produce an enormous amount of granular consump
-
tion data that, if skillfully manipulated, could reveal a “detailed picture of residential life.”
198
This
information, however, is essential to enabling many of the smart energy innovations envisioned
Realizing the Smart Grid Imperative
20
by policymakers.
199
Providing third-party innovators with access to this data, for example, would
likely ignite innovation in customer-facing smart home tools.
200
Empowering customers with
ownership rights to this data would also likely drive demand for energy management tools and
other smart home innovations.
201
But the nature and granularity of this data raise a host of novel
questions, in particular whether and how existing privacy laws apply to the smart grid.
202
These concerns — and the potential for legal liability if data are compromised — underscore the
importance of determining who owns the data generated at the meter and which entities can
access it.
203
Some argue that data generated by smart meters installed by utilities are likely owned,
in the first instance, by the utility.
204
The extent to which customers and third-party innovators
have any access rights or ownership stakes in this data remains unclear.
205
An inquiry by DOE in
2010 found that a significant number of utilities agreed that they should share access and owner
-
ship rights to this data with consumers.
206
However, one survey of large utilities in 2009 found that
“of the almost 17 million [smart] meters being planned or deployed by [survey] respondents, there
were clear plans to provide customer access to the data only 35 [percent] of the time. Furthermore,
less than 1 [percent] of the respondent’s customers have real-time access to their energy data
today.”
207
In addition, uncertainty remains among utilities regarding the type of data to which cus
-
tomers and third parties should have access.
208
Further muddling these disagreements is the fact
that different states require different levels of data granularity and customer access.
209
Ultimately,
utilities have a strong financial incentive to control customer usage data generated at the meter
and monetize third-party access to it.
210
Doing so would allow utilities to moderate and control the
pace of innovation in consumer-facing smart grid tools.
211
In lieu of widely accepted standards for
data ownership, access, and privacy, the fragmented nature of energy regulation could “straight
-
jacket[] innovation” at the edge of the smart grid.
212
The highly segmented nature of the energy sector — where utilities continue to play a significant
gatekeeper role vis-à-vis customer-facing smart grid innovation — is in sharp contrast to the
interdependent, consumer-driven ecosystem that has emerged in the broadband space. Broadband
is a platform that encourages innovation and experimentation. It serves as the basis upon which
innovators build new tools and services for use by consumers. An illustrative example of this
dynamic — and a potential template for the smart energy ecosystem — is the emergence of a
robust marketplace for wireless applications that are available for installation on an array of mobile
handsets.
Over the last several years, wireless network owners have invested tens of billions of dollars to
deploy next-generation mobile broadband infrastructure.
213
Service providers have made these
investments mostly in an effort to keep up with insatiable consumer demand for more mobile
broadband capacity, which is being used to access the Internet and the growing universe of loca
-
tion-based services that it enables.
214
Mobile handset makers have responded to these investments
and consumer demand by developing a new class of advanced smartphones, which are capable of
leveraging the full power of next-generation wireless broadband networks.
215
These developments
have also spurred content makers to produce specially designed wireless applications that run on
smartphones and that are enabled by broadband. The market for these types of applications has
grown exponentially since first emerging in 2007. The global apps market is expected to grow to
a $25 billion per year industry by 2015,
216
up from just $1 billion in 2009 and essentially zero in
2007.
217
This type of interplay and consumer focus is simply lacking in the energy sector.
Since regulators tightly control investment and pricing in the energy sector, and since utilities are
guaranteed a predetermined rate of return on investments, policy does not encourage utilities to
respond to consumer demand for more innovative services. As a result, the delivery and consumption
Realizing the Smart Grid Imperative
21
of electricity has remained essentially unchanged for decades. Moreover, without ready access to
innovations, consumers will not develop a knowledge of or demand for cutting-edge smart grid
tools.
218
In the absence of consumer demand for smart grid services, and in light of the prevailing
paradigm of utility-consumer interactions, utilities lack an incentive to stir demand for services
that will likely cut electricity consumption.
D. Conclusions
The regulatory frameworks governing utilities and broadband service providers have resulted in
substantial divides between two natural partners in the development and deployment of a nation
-
wide smart energy grid. Stakeholders in each sector respond to unique economic incentives and
regulatory requirements when making investment decisions and responding to consumer demand.
Utilities remain skeptical of using commercial broadband networks to support the smart grid
and have concerns regarding the reliability, security, and overall robustness of existing broadband
infrastructure. Broadband service providers, on the other hand, view the smart grid as a compel
-
ling business opportunity that would provide them with another means of generating revenue
and providing end-users with access to new services. Regardless of how compelling partnership
between utilities and broadband firms may appear, the divides discussed in this section are real
and impede the swift realization of state and federal grid modernization imperatives.
Realizing the Smart Grid Imperative
22
Realizing the smart grid imperative is a goal shared by policymakers at every level of government
and by stakeholders across the energy and broadband sectors. Billions of dollars have already been
invested in pilot programs, worker retraining efforts, and standard-setting processes in an effort
to more rapidly modernize the grid and develop an ecosystem of innovation for energy services.
However, fundamental questions remain unanswered, and potential partners in this space remain
divided over fundamental issues related to the smart grid. Broadband is not a panacea for the
many energy problems facing the nation, but it is widely agreed that it “will be an important part
of the solution.”
219
Going forward, a critical component of realizing the smart grid imperative is
bringing utilities and broadband service providers together and creating an environment more
supportive of collaboration between these two groups of stakeholders.
This section articulates a framework for bridging these divides and facilitating more meaningful
interactions among natural partners in smart grid deployment. The single most important part
of this framework is rationally reforming the energy regulatory paradigm to leverage and adapt
the innovative spirit and consumer-driven responsiveness that characterize the broadband space.
Revising this paradigm will also help to align the economic incentives of stakeholders in both sec
-
tors. With properly aligned incentives, collaboration could quickly flourish and assuage concerns
among utilities regarding the robustness and reliability of existing commercial broadband net
-
works. Finally, realigning incentives and modernizing regulatory frameworks could also enhance
the way in which utilities interact with consumers and could, in turn, help to drive demand for
innovative smart energy services.
A. Bridging the Regulatory and Incentives Divide
Even though individual states and their PUCs have long championed the development of new
approaches to electricity delivery and consumption, realizing the smart grid imperative is decid
-
edly a national goal.
220
Both President Bush and President Obama have trumpeted it; a significant
amount of funding was earmarked for the smart grid in the 2009 federal stimulus package; and,
more recently, federal entities including the DOE, FCC, FERC, NERC, and NIST have addressed
it from a variety of vantages. The states have participated in many of these deliberations and
processes, but their role is mostly consultative in nature.
221
And yet, the prevailing regulatory
framework for the delivery of electricity to residential customers has positioned state PUCs as
the primary conduit through which smart grid innovations will be vetted and implemented. This
dynamic raises the possibility of disruptive jurisdictional clashes in the deployment of the smart
grid and the creation of a wider smart energy ecosystem.
To date, there has been a flurry of activity at the state level regarding smart grid deployment. Many
state PUCs have already opened smart grid dockets to examine the regulatory issues implicated by
this new system, and state legislatures are also increasingly addressing these issues.
222
Indeed, as of
June 2011, 25 states had adopted legislation regarding aspects of the smart grid.
223
However, there
have already been glimpses of tension between the national imperative for smart grid deployment
and existing regulatory structures at the state level.
IV. Bridging the Divides to Realize the
Imperative: A Legal and Policy
Framework for
the 21st
Century Broadband-Enabled Smart Grid
Realizing the Smart Grid Imperative
23
For example, an ambitious smart metering proposal put forward by a large utility in Maryland in
2010 was initially rejected by the state’s PUC. The original proposal for the initiative, which was
to be funded, in part, by a federal stimulus grant, sought to place the vast majority of the finan
-
cial burden on ratepayers by implementing a customer surcharge.
224
In denying the proposal,
the PUC expressed doubt about whether the benefits of the smart grid, as detailed by the utility,
exceeded the costs, which were projected to reach $1 billion. In particular, the PUC stated that the
original proposal asked “ratepayers to take significant financial and technological risks and adapt
to categorical changes in rate design, all in exchange for savings that are largely indirect, highly
contingent and a long way off.”
225
The PUC did, however, allow the utility to submit a revised pro
-
posal, which it eventually approved.
226
Under the revised plan, the utility would “shoulder the early
costs to install smart meters in homes and businesses and wouldn’t be able to seek reimbursement
through rate increases until 2014 at the earliest.”
227
Ultimately, the PUC forced the utility to con
-
form its business plan to the prevailing regulatory standard in order to “match[] customer costs
and benefits more closely.”
228
Even though this disagreement was eventually settled, it highlights
the likelihood for fragmented—and fractious—development of a national smart grid as state regu
-
lators channel smart grid innovation through the strictures of prevailing regulatory models.
In setting out a smart grid policy for the United States in 2007, EISA did not alter the “jurisdic
-
tional boundaries between federal and state regulation over the rates, terms, and conditions of
transmission service and sales of electricity.”
229
This determination did little to change the current
model of cooperative federalism between federal and state regulatory entities in the energy sec
-
tor.
230
The immediate result has been the application of existing regulations and assumptions when
reviewing smart grid proposals. And even though a growing number of state PUCs are beginning
to examine the impact of smart grid deployments on these regulatory structures, progress in the
short term will likely be governed by existing frameworks. However, EISA did empower FERC
to adopt interoperability standards for the smart grid.
231
FERC understands this Congressional
mandate to mean that it “has the authority to adopt a standard that will be applicable to all electric
power facilities and devices with smart grid features, including those at the local distribution
level and those used directly by retail customers.”
232
In addition, the Obama administration has
argued that the development and adoption of such “open” standards for smart grid interoperability
would “catalyze innovation” by “demonstrat[ing] to entrepreneurs that a significant market will
exist for their work.”
233
Thus, given the interstate nature of the smart grid envisioned by federal
policymakers, there appears to be an inherent tension in deferring to state PUCs for smart grid
implementation and realization of the U.S. smart grid imperative.
234

So long as each state PUC has the unfettered ability to review and approve smart grid deployment
plans by local utilities, an overhaul of the prevailing energy regulatory framework and the eco
-
nomic incentives it creates will be extremely difficult.
As such, Congress should update the smart
grid policy outlined in EISA to include a national regulatory framework to guide deployment efforts.

Doing so could reduce the likelihood of a patchwork system of smart grid policies from devel
-
oping and would accelerate policy reforms that support new economic incentives for utilities to
embrace innovation.
235

A similar approach was taken in the early 1990s to accommodate the rapid growth of the wireless
marketplace. Prior to the implementation of a national regulatory framework, wireless services
were largely regulated at the state level under existing telecommunications laws.
236
The national
regulatory framework implemented by Congress explicitly acknowledged that the interstate nature
of wireless required a more streamlined approach to unburden the market of many inconsistent
state-level regulations.
237
The new framework did carve out limited regulatory authority for the
states by winnowing jurisdiction to “other terms and conditions” of service; ratemaking authority
Realizing the Smart Grid Imperative
24
was explicitly preempted.
238
The result of this policy reformulation was accelerated deployment
of wireless networks that were national in scope. Competition among different carriers emerged,
which drove down prices and spurred the development of new network technologies and services
(e.g., the emergence of mobile data).
239
The efficacy of implementing a similar model to govern the
emerging smart grid space should be investigated by Congress.
This type of regulatory realignment, however, need not be construed or structured as federal preemp
-
tion of state smart grid efforts. Indeed, a restructuring could be positioned as an update to the current
model of cooperative federalism
. To this end, Congress could defer to the appropriate federal agency
(likely FERC) to develop regulatory and legal standards to guide the development and deployment
of the smart grid. These standards, which would identify the outer limits of appropriate state-level
action on the smart grid, would be considered both a “floor” and a “ceiling” for the purposes of
guiding state PUCs during implementation of various components of the smart grid.
240
Federal
standards could encompass a range of issues, including: standards of review for smart grid project
applications; revising rate formulas for smart grid projects (e.g., by encouraging, among other
things, rate decoupling);
241
creating economic incentives to spur customer-facing innovation; and
encouraging consideration of non-traditional methods of investment recovery by utilities.
In the alternative, federal entities like FERC and DOE, in close consultation with Congress, could
develop a program to encourage specific regulatory and legal reforms at the state level
. In particular,
federal energy officials could adapt the “Race to the Top” model that proved effective in facilitating
policy change in the education sector at the state level. The Race to the Top program “rewarded
schools and states that modeled reforms on predetermined federal criteria.”
242
Even though only
a small number of states ultimately received federal funding through this program, the mere
possibility of receiving a federal grant spurred nearly every state in the country to adopt a range
of reforms that many stakeholders consider essential to modernizing the country’s education
paradigm.
243
By adapting this approach for smart grid purposes, leading states like California,
Colorado, and New York could become models for forward-looking regulatory reforms in the
smart grid space. Furthermore, the prospect of securing additional federal funding for state smart
grid projects could encourage policy and legal reforms that conform to model standards devel
-
oped by DOE, FERC, and counterparts at the state level.
244
Implementing a national regulatory framework would further clarify smart grid goals and outline
an actionable process for realizing them. Revising the prevailing regulatory framework would also
realign economic incentives for utilities wishing to pursue smart grid deployments.
Such realign
-
ment should include incentives for partnering with commercial broadband service providers
. For
example, national standards could encompass a set of incentives for reforming ratemaking at the