On September 20, the PJM regional grid filed its second informational report with the FERC on Price-Responsive Demand (PRD). That’s the idea that, someday soon, electricity will be sold like other consumer products. Just like gasoline, for example, electricity prices would rise and fall in tune with supply and demand, forcing retail utility customers to think about how much electricity they really need – or even go without – should prices climb too high.

Welcome to the dark side of the smart grid – where America’s consumers could well come face to face with the mother of all rate shocks.

In fact, we’ve already seen a bit of this dark side in California, where the state Public Utilities Commission reported how Pacific Gas & Electric encountered a ratepayer backlash over higher electricity prices after installation of smart meters in the the state’s San Jaoquin Valley. They’re calling this backlash the “Bakersfield Effect.”

Meanwhile, green energy visionaries continue to tout the “Smart Grid” as a win-win for consumers and national energy policy. Advanced metering infrastructure (AMI) teams with smart thermostats and appliances – all interconnected through the Internet – to usher in a cleaner, greener, more energy-efficient future. Jobs up. Oil imports down. Even Google is buying in.

But the smart grid also implies dynamic retail pricing – electricity rates that reflect hour-to-hour or even minute-to-minute variations both in power plant costs and imbalances between supply and demand. In this vision, consumers reschedule some of their day-to-day chores – cooking, ironing, clothes washing, or perhaps even perhaps even charging up the family’s hydrid electric car – all to take advantage of electricity price swings.

But can regulators really envision a price-elastic retail electricity market? Can anyone truly imagine forcing ordinary Americans to spend their summer days calculating whether electricity will be cheap enough during the next hour to run the AC?  Many utility regulators have trouble with that. One such regulator, apparently, FERC Jon Wellinghoff, who made is feelings known recently when he clashed with fellow commissioner Philip Moeller on whether to fashion FERC policy for wholesale power markets on the assumption that state regulators will soon be approving utility tariffs that feature dynamic retail prices. Wellinghoff fears that given various political realities – the threat of a ratepayer backlash being one – it will be a long before we see dynamic pricing and a truly customer-empowered smart grid at the level of local, retail electricity rate making.

And the problem goes beyond politics and consumer backlash. It even affects resource planning and electric system reliability.

Consider, for example, the simple idea of demand forecasting. Utilities, regulators, and grid system operators regularly engage in forecasting to calculate basic utility industry parameters, such as load requirement and installed capacity margin. The reason is simple. When ratepayers display price elasticity, consuming less power when prices rise, the “need” for load and capacity becomes similarly elastic.

Ohio Public Utilities Commissioner Paul Centolella and PJM’s Andrew Ott said as much in a white paper they released in 2009 on price-responsive demand, The Integration of Price Responsive Demand into PJM Wholesale Power Markets and System Operations. In that paper, they noted that static load forecasts are inefficient if they take no account of ratepayer reaction to high prices:

Such forecasts would continue to produce resource and planning reserve requirements which would force LSEs with price-responsive demand to carry resources and reserves for demand that would not be present at higher spot prices.

Led by Centolella’s vision, the Ohio PUC repeated this argument in comments it filed on PJM’s proposed scarcity pricing regime now pending before FERC. In short, the Ohio PUC argued that definitions of “scarcity” should float freely as ratepayers react to prices, so that PJM should not be so quick to invoke its proposed scarcity price ceiling of $2700/MWh:

When primary reserves become short, a small increase in energy prices … may be sufficient, given PRD, to reduce energy demand and allow PJM to maintain its reserve requirement.

Does dynamic retail pricing mean the end of traditional industry concepts such as load and capacity requirements? Not quite. They become fuzzy, but still capable of modeling, as PJM points out in its recent progress report on price-responsive demand: “PRD demand curves submitted to PJM by LSEs will be an added input into the dispatch algorithm in the same way as generation offer curves.”

As far back as a year ago, in fact, PJM’s Capacity Market Evolution Committee (CMEC) reportedly had laid out possible revisions to PJM’s capacity planning tools to take account of customer price elasticity in assuming a reduced future reliability requirement for the May 2010 Base Residual Capacity Auction, to solicit electric capacity offers for the 2013-14 planning year. However, as PJM explained in its recent information filing, the stakeholders eventually elected to defer a vote on the proposal, and so any decision on implementing PRD was delayed until a vote taken August 18, 2010. That’s when the Market Implementation Committee (MIC) found itself unable to reach a simple majority on PRD, and chose to reconsider the matter at its upcoming November meeting, when stakeholders hopefully would come together on a plan.

As was explained in the September 20 progress report on PRD, a November approval would allow PJM presumably to implement price-responsive demand in time for its May 2011 Base Residual Auction, to solicit electric capacity for the 2014-15 delivery year. However, given the failure of stakeholders to agree back in August, PJM now reports that it “remains uncertain” whether stakeholders will be able to reach the two-thirds majority consensus required to implement a proposal on price-responsive demand.

 Will PJM take sides in the debate at FERC between Chairman Wellinghoff and Commissioner Moeller? So far, it appears that PJM is taking a neutral stance.

In fact, when this reporter talked privately with experts from the audience after the conclusion of FERC’s September 13 conference on incentive compensation for demand response, at least one observer expressed disappointment the Andy Ott had not argued more forcefully for a retai-focused smart grid policy, as Moeller had recommended. Wellinghoff, of course, would prefer to look to the wholesale market to promote the smart grid, through generous incentives paid to demand response suppliers, rather than to rely on scarcity pricing and/or dynamic retail pricing to boost energy efficiency and drive smart grid policy.

And that diplomacy was evident again in the Sept. 20 progress report on price-responsive demand, where PJM recommended moving forward on both fronts – wholesale (supply) and retail (demand):

It will be critically important to avoid creating [wholesale] incentives … through one option over the other simply because, for example, the supply side option offers a more favorable revenue stream than the saving stream offered by the PRD option.

Nevertheless, PJM is not blind to the political opposition that so far has discouraged any move toward dynamic retail pricing and price-responsive demand. (Note however, that the Michigan Public Service Commission on Sept. 14 announced approval of a new, experimental dynamic peak pricing tariff for Detroit Edison. A look at the PSC order in fact reveals a proposed energy charge of $1.00 per kWh for all electric consumption during “critical peak hours.)

In particular, PJM recognizes the “Bakersfield Effect” and the apprehension it gives to regulators. In its progress report, it acknowledges that political realities could well push price-responsive demand and the smart grid to the back burner:

These developments,” PJM notes, “may portend a somewhat longer timeframe for deploying AMI and implementing the dynamic retail rates that will enable price-responsive demand.”