NYTimes, July 17, 2000 Utilities Trying New Approaches to Pricing Energy By MATTHEW L. WALD [W]ASHINGTON, July 16 -- As air-conditioners hum this summer, and experts issue dire warnings about electricity running short, a growing number of utilities are varying the price of power based on supply and demand to make sure there is enough to go around. The approach is a decidedly novel one for electric utilities, which have mostly set prices for power without regard to fluctuations in energy use. And it is inducing companies and individual consumers to change how they use power and think harder about what electricity is worth to them at different times. Wisconsin Electric Power is one of the utilities with a new approach to pricing power. The company usually has no trouble meeting demand when temperatures rise in the summer. But during the second week of May, usually the slack season for power use, between the winter and summer peaks, the utility had closed many generating stations for maintenance. So when the temperature in Milwaukee hit an unseasonable 90 degrees, Wisconsin Electric saw a power shortage looming. One possibility was buying electricity from another company on the open market, but because other utilities were also caught short, that would have cost 10 to 20 times the usual price. Instead, the utility called one of its biggest customers, the Cleveland Cliffs iron ore mine, in Michigan's Upper Peninsula. How would the mine feel, dispatchers asked, about taking the afternoon off -- and being paid for it? At first the answer was no. But then plant managers looked at the pile of crushed ore coming out of the milling machines, and realized that if the machines shut down for the rest of the day, no shipments would be delayed. After some quick negotiations, a deal was struck: Wisconsin Electric would pay the mine $82,000 to shut down its ore crushers. "That was a heck of a good deal," said Richard A. Abdoo, the chairman, president and chief executive of Wisconsin Electric. His company would be paying Cleveland Cliffs about 30 cents a kilowatt-hour not to use electricity, or about six times what Wisconsin Electric charges industrial customers for a kilowatt hour. But it was cheaper than buying power on the open market. Wisconsin has gotten more sophisticated since May, gathering the beeper and fax numbers of 80 of its biggest customers. On hot afternoons, it can alert them to log on to its Web page, where it offers them cash -- the amount varies, much like the price of a restaurant's lobster special -- to reduce consumption at certain hours. There are no statistics on the number of utilities using new methods to manage energy demand, but more and more companies seem to be doing it. In Connecticut, Northeast Utilities is installing Internet-controlled thermostats in 50 houses, which it can use to bump air-conditioner settings up by 4 degrees when it needs the power, in exchange for a $200 payment to each homeowner for the summer. And around the country, utilities are installing radio-controlled switches on central air-conditioners and swimming pool pumps to turn them off at peak hours. For years, electricity has been sold under a system that is worthy of the old Soviet Union: a kilowatt-hour has a fixed price, and you can have as much as you want until it runs out; then there isn't any for anybody. Allan Schurr, vice president of Silicon Energy, which writes software for the Internet-controlled thermostats, compared the traditional system to an airline that keeps a flock of planes by the gate in case a crowd suddenly wants to fly somewhere. "We don't have a reservation system," he said. Not troubling customers with the fluctuations of price worked fairly well under the old regulated system. A kilowatt-hour, which the utility typically sold for 8 to 10 cents, often cost 2 cents but hardly ever more than 12. Now, electricity is often bought and sold wholesale, with no regulation, and the cost can temporarily soar to $6 a kilowatt-hour. No utility can buy much at that price, resell it at 5 or 10 cents, and still make a profit. Some utilities can pass those costs through and spread them among their customers, but everyone's costs would be much lower if customers had a choice to cut consumption when prices became exorbitant. The new pricing structure, with rates varying by the hour, will take some getting used to. "A lot of people are going to say, I don't want to face this," said Eric Hirst, a consultant on electric industry reorganization. "But others are going to say, I can make money by cutting consumption here and increasing consumption there." Pricing by the hour has no impact on energy efficiency -- the amount of work done per kilowatt-hour -- but it does improve reliability, he said, because it will minimize power failures. Some utilities are reluctant to let customers know they do not have enough power on hand to handle every contingency, preferring to sell as much power as possible and pass along occasionally extraordinary prices. "Frankly, there are not a lot of production operations that keep a lot of inventory around these days," said William T. McCormick Jr., chairman and chief executive of CMS Energy, the parent of Consumers Power, of Michigan. And customers can be reluctant. "We don't like to take a plant up and down if we don't have to," said David L. Gardner, a spokesman for Cleveland Cliffs. But on that day in May, it worked out that a shutdown entailed little waste of manpower. "It was a win-win situation," he said. Cleveland Cliffs is one of many Wisconsin Electric customers on an "interruptible" contract, which allows the utility to pull the plug in an emergency. But this was not an emergency, just a time when the economics favored rewarding the mine to shut down. The utility has signed up 81 major customers this spring, with a total demand of 40 megawatts (enough to power 1,000 homes), who are prepared to bid for power interruptions. It hopes to sign up customers using an added 30 megawatts, though it is not yet sure how much of that will be volunteered when it needs relief. But the amount could be a significant fraction of demand on a bad day. Last year, the maximum amount of power required simultaneously by all its customers reached 5,975 megawatts. In a blunt, low-tech way, utilities have tried for years to cut peaks in demand for power, which they call peak load. Potomac Electric Power, which serves the District of Columbia and some Maryland suburbs, has persuaded about a third of its 600,000 residential customers to join a "kilowatchers club." In exchange for a monthly credit of $9 on their bill, the utility has installed a second electric meter for their air-conditioners. It can shut off the air-conditioners by radio control for 13 minutes every half-hour. Some customers, in exchange for a $22 monthly payment, have meters that can shut off their air-conditioners altogether. Last year, demand for Potomac Electric's power peaked at 5,927 megawatts, but the kilowatchers can shave 271 megawatts if necessary. Potomac Electric typically uses the radio control 5 to 10 days a year. Northeast Utilities, in Connecticut, also reduces demand for its electricity for air-conditioning, but in a more sophisticated way. At the end of June, David and Elizabeth Yu, of Unionville, Conn., accepted a $50 payment from their utility, Northeast Utilities, to let Northeast replace the thermostat that runs their air-conditioner. Central air-conditioners in houses like the Yus' -- a 16-year-old, four-bedroom Cape -- draw about 3 kilowatts; raising the thermostat 4 degrees cuts the number of minutes they run each hour by about 30 percent, said Michael W. Townsley, a Northeast manager who oversees conservation. If the family had the thermostat set at 74, for example, the utility could reset it to 78. Most of the year, the power saved costs only a few cents an hour. But now that Northeast buys its electricity on the open market at peak hours, the price can change fast. Hence the value of fiddling with the Yus' thermostat from a central office. "When supply and demand are very tight, you're going to see tremendous swings," Mr. Townsley said. "In the morning the price might be down around 2 cents, later, $1 a kilowatt-hour. What that says is, there are some potential economic opportunities there." Many companies are marketing radio-controlled switches that will turn off an air-conditioner or a pool pump. But the thermostat, developed with the Carrier Corporation, has a more subtle impact on the household. The Yus' new thermostat calls in four times a day for instructions. If the family lets the utility control the temperature, Northeast will pay them another $150 on Oct. 1. But if Mrs. Yu finds the house uncomfortably warm, she can override the setting. Each time she does so, though, Northeast will deduct $15 from that bounty. "The financial incentive is not that much," Mr. Yu said. "It'll just get absorbed into the budget." But, being a gadget-lover, he is attracted by the device itself. Mr. Yu is at work during the hours that Northeast is most likely to adjust their thermostat. But Mrs. Yu, who is at home with the couple's three children, said, "It'll be interesting to see how it changes our lives during the peak hours." Like all utilities, Northeast already has precise historical data on how much power customers will demand at any given level of temperature and humidity; now it wants to know what that demand curve looks like when price is a factor. "Our interest is primarily reliability, when supply and demand tend to be outside of equilibrium," Mr. Townsley said. "But that's also at the time when the economics come in."