This will come as no shock to anyone familiar with the Federal Trade Commission’s policy and advocacy function: FTC staff has a long history of advocating for effective competition and consumer protection in electricity markets. Recently, in a move to benefit electricity consumers as well as the overall power system, FTC staff submitted a comment to the District of Columbia Public Service Commission (DC PSC), the agency that regulates electric utilities in D.C. Currently, most residential customers of Potomac Electric Power Company (Pepco) pay a flat rate for electricity at any time of the day. The DC PSC is considering Pepco’s proposal to authorize “dynamic pricing” – which means that residential customers would pay different prices for electricity at different times of the day. Specifically, Pepco’s proposal would offer a lower rate to customers who reduce their electricity use during “peak” times when electricity demand is greatest – for example, during a sweltering summer afternoon. A price break for peak-time reductions in electricity use should give consumers an incentive to cut back during peak periods – say, by running their dishwashers and clothes dryers at “off-peak” times (perhaps just before going to bed that night).
To make dynamic pricing a reality, consumers need access to real-time data about their electricity use. Pepco plans to enable this by means of the “smart meters” that it has installed in customers’ homes, which can measure and report the customer’s real-time electricity use to the customer and to Pepco (or to an alternative electricity marketing company). Armed with this information, the customer could choose to reduce electricity consumption during peak periods when the cost of producing electricity – and therefore its wholesale price – is much greater than at off-peak times.
Individual consumers will certainly welcome lower electricity bills. But there’s another benefit from smoothing out demand for electricity over the course of a day: the grid will operate more efficiently and under less stress, with less likelihood of blackouts or brownouts. Also, the environmental benefits of dynamic pricing programs like the one proposed by Pepco can be substantial. When an electricity system faces less dramatic demand peaks, it becomes easier to integrate renewable energy sources into the system, and utilities can better avoid the use of older, higher-cost, more-polluting generators during peak demand periods. And as the FTC staff has pointed out in several recent comments to state electricity regulators, dynamic pricing will increase electricity customers’ incentives to find ways to improve their energy efficiency, which might include investing in automated devices that assist with shifting consumption to cheaper, off-peak periods.
In short, dynamic pricing is a powerful policy choice: consumers save money, the grid is more efficient and reliable, and it helps reduce the overall environmental impact of producing electricity.
Especially when dynamic pricing is in use, electricity consumers need access to clear, accurate information to help guide their choices. For this reason, recent FTC staff comments (such as this one) have also addressed consumer protection issues in electricity markets. FTC staff has encouraged regulators to design disclosures that not only give consumers the pertinent facts, but do so in ways they can easily understand. The most recent FTC staff comment urged the DC PSC to ensure neutrality when consumer education programs present information about dynamic pricing and alternatives offered by various electricity marketers, so that consumers can make informed choices between the incumbent utility (Pepco) and alternative marketers. Alternative marketers also need access to the data generated by Pepco’s smart meters, so they can compete effectively by making their own dynamic pricing offers. An earlier FTC staff comment also recommended that utility regulators consider employing experts in consumer education and communications, and using rigorous consumer testing in developing the disclosures.
We hope this blog post has sparked greater interest in FTC staff’s electricity advocacy work. FTC staff will continue to seek opportunities to promote competition and protect consumers in critical energy markets.