Tom Adams and Allen Stanbury
Prepared with the Financial Assistance of Industry Canada
April 12, 2002

Executive Summary

In Canada, the United States and many other jurisdictions around the world electricity markets are changing. Liberalization, including commodity price deregulation and customer choice, already exists in one Canadian jurisdiction, is imminent in another and under active consideration in several more.

As Canadian jurisdictions move toward customer choice, de-regulating the price of commodity electricity, and unbundling of their electricity supply, ordinary consumers must chose between being billed on new electronic interval meters or their existing electromechanical meters.

The meter is the cash register of the power system. The type of meter chosen will affect the electricity bill paid by the consumer. Using older electromechanical meters means the actual consumption in each hour must be inferred from an reference profile assumed to be correct for all customers without interval meters. In Ontario, the reference profile is called the net system load shape (NSLS).

With interval metering, the customer is billed on actual consumption in each hour. The consumer’s bill will accurately reflect the actual consumption pattern even if consumption varies from the NSLS, perhaps because the consumer works a night shift that results in unusual usage patterns, takes a vacation that happens to coincide with an electricity price spike, or has installed special load control equipment.

This paper reviews the potential benefits of interval meters as they might be used by ordinary consumers in the future. This report identifies qualitatively the benefits and costs of interval metering.

The natural market for interval meters appears to be larger customers, customers with a naturally favourable load shapes, and customers with manageable loads. As customers who can benefit from interval meters leave the pool that forms the NSLS, the pool will become more unfavourable over time, driving the exit of more customers.

Federal and provincial regulatory rules will have a significant influence over the rate of introduction of interval meters.

Interval meters will not be cost-effective for all customers. For example, a small customer with a standard contract with an energy retailer would get no value from metering improvements.

---

Introduction

This qualitative discussion of metering issues focuses on the changes underway in Ontario’s electricity market. This study does not deal with sub-metering of bulk metered, multi-occupant buildings.

Electricity cannot be stored efficiently or economically. To maintain reliable service, power production must be continuously adjusted to exactly match consumption. Historically, most modern electricity systems imposed few administrative controls on consumption. The common exception was that in many utility jurisdictions a few large industrial customers, willing and able to reduce and/or eliminate their consumption when required by the system dispatcher, were induced to make this flexibility available to the system through offers of price discounts. Reliability of service was maintained predominantly by actions on the supply side of the equation. Centralized planning aimed to construct and operate facilities sufficient to meet peak demand. These measures were generally undertaken by vertically integrated monopolies encompassing generation, transmission and distribution functions. North America’s experience has been that this system provided reasonably reliable service. By relying primarily on the supply side of the equation, the cost to society for reliability was higher than it might have been with a more balanced reliance on greater demand-side flexibility. Building sufficient generation capacity to meet seasonal peak electricity demands has meant that much of the available generating capacity sits idle during off-peak times.

More and more jurisdictions are moving to liberalized markets for commodity electricity, where efficient prices reflecting the degree of scarcity of electricity provides signals for more rational demand responses, power system operation decisions, and, hopefully, more rational investments in generation and transmission capacity. These jurisdictions should eventually have the lowest societal costs for electricity. Two of the many challenges facing those seeking to liberalizing once monopolized electricity markets are price volatility and the tendency for small customers to see higher commodity prices even if aggregate prices are not changed or decline as a result of competition. Monopolized electricity markets can conceal great changes in the fundamental scarcity of electricity, with the impacts of changes in scarcity being apparent to the consumer only in exceptional cases. The proper functioning of liberalized markets requires accurate, scarcity-reflective prices. While the tendency of market forces is to level out volatility over time, at the outset competitive electricity markets are prone to “ill-behaved” volatile prices. California and Alberta in the winter of 2000/2001 were both examples. A fundamental cause of the price volatility in both instances was the lack of demand elasticity. Customers with more accurate price signals in both markets demonstrated significant price elasticity, a factor that mitigated the scarcity.

---

In Ontario, the evidence suggests that the benefits of competition, relative to energy costs in a non-competitive environment, may not be distributed evenly. Load data from the local electricity distribution utility in Milton, Ontario shows customers using over 100 KW of demand, as a group demonstrate an electricity usage pattern, prior to the introduction of market pricing, that is much less weather sensitive than customers under 100 KW. If we assume that future market price changes are correlated positively with demand and that the total societal cost of commodity electricity remains unchanged at the beginning of market pricing, it is likely that residential and smaller commercial/industrial customers will pay more for electricity after the introduction of competition unless the usage pattern for small customers improves.

Market Power Mitigation Agreement (MPMA) rebates will be allocated to customers on the basis of their volume of consumption, not their exposure to peak prices.¹ In the event of significant and sustained price volatility where the average annual price is high, some extraordinarily flexible customers are likely to receive significant rebate amounts although their average cost of power may be low.

Incremental power consumed during periods of peak demand is likely to come from fossil units with poorer fuel efficiencies and worse emissions profile than plants used for intermediate and baseload operations. In Ontario, the coal-fired Lakeview station is one of the commonly used peaking stations but it has one of the worst emission profiles and local air impingements of any fossil-fired station in Ontario.

What is an Interval Meter?

An interval meter is an electronic device that records electricity consumption in each hour, or more frequently, such as in 5 or 15 minute intervals. Each reading is date and time stamped and can be collected through a variety of technologies. Itron’s MV 90 software suite is the leader in providing dial-up access to interval meters and is used in almost all wholesale electricity markets.

Other technologies such as power line carrier, wireless and satellite data collection are usually grouped together under the term automated meter reading (AMR). Many AMR technologies exist and their deployment in the industry is growing, but to date no single AMR technology that will address all of the data collection needs of distributors has become standard. Most distributors using AMR rely on a more than one AMR technology for data collection.

Interval meters are always electronic. In addition to facilitating daily and monthly data

---

¹ The rules surrounding the Ontario electricity market require that Ontario Power Generation refund to consumers a portion of its revenues in the event that the weighted average spot market price exceeds 3.8 cents/kWh.

---

collection, they offer important features for consumers. In Italy, where demand per household is capped, electronic interval meters are used to manage the demand in a residence within the cap by load shifting from one appliance to another. The clothes drier may by held back while the refrigerator is allowed to run. This is accomplished by a self forming local area network. Each appliance is retrofitted with a device that communicates over the 240V mains to the meter. The meter knows the capped maximum demand and is programmed to shift load from one appliance to the other so that inconvenience is minimized.

Electronic meters capable of 2-way communications may eventually also supply market price information to the consumer. In the future, either the meter or other energy management technology might be able to read the spot price over an Internet connection and might be able to manage residential usage during high price periods, giving the market enhanced elasticity to help stabilize energy prices.

Some high-end meters already have Internet protocol addresses and can be read with a browser. Many electronic meters provide additional information of value to the customer such as the frequency and duration of interruptions and voltage surges/sags/swells.

What is an Electromechanical Meter?

Most residences in Ontario are metered with an electromechanical meter. The Ferraris disk meter was invented in 1890 and is both stable and reliable but it must be read manually and provides no information other than the total energy consumed between readings, typically at approximately 30-60 day intervals. This is adequate in a market where prices changes only once a year but in most de-regulated jurisdictions, Ontario in particular, the price at the delivery level will change hourly depending only on supply and demand in that hour.²

How then would a customer with an electromechanical meter be billed in such a market? The energy distributor reads the meter and allocates the total energy consumed to each hour based on an arbitrary consumption pattern. In Ontario, the NSLS is calculated each day by the distribution company and applied by the distributor for billing purposes at the end of the month.

The NSLS is computed in each hour based on the difference between the sum of the wholesale meters (which are interval meters) on the distribution company boundary and the sum of all interval meters installed within the distribution company. This includes a mix of industrial, commercial and residential customers so the NSLS may not match the actual consumption profile of any single consumer it purports to describe.

---

² Prices in the IMO market can change every 5 minutes but are aggregated into hourly prices in bills to consumers issued by distribution utilities.

---

Some consumers will have valid concerns about the accuracy of their bills under the NSLS approach. Some consumers may have actually purchased most of their power in low price hours but may be required to pay for some of this usage as if it was purchased in high priced hours.

Electricity Pricing in Ontario’s Future Electricity Market

Once the new electricity market is operating in Ontario, customers without a contract with an electricity retailer and without an interval meter will buy commodity electricity from their local distribution utilities under Standard Supply Service (SSS).

Distribution companies have three options for offering customers SSS. They can use a reference price set by the Ontario Energy Board, arrange for a third party to supply SSS, or seek Ontario Energy Board approval to pass through the spot market price. It appears likely that few if any utilities will adopt third party SSS. From the customer’s perspective, there is little difference between the reference price SSS and the spot pass-through SSS.

With the reference price, bills for consumers will be calculated on the basis of a forecast price with regular true-ups to invoice or credit the customer with accumulated differences between the forecasted price and the market price. With the spot pass-through, the utility knows the market price for the arrears periods covered by each customer’s bill and charges you that amount. In either case, the mapping of market prices onto customer bills is done using the concept of a NSLS.

One implication of the net system load shape approach is that consumers who tend to use power in low price periods will cross-subsidize customers who tend to use power in high price periods. Consumer benefits of interval metering have been demonstrated on a site-specific basis in the UK for small industrial and institutional customers.³

The movement of customers toward interval meters is likely to develop a momentum of its own over time. Non-interval metered customers who are cross-subsidizing other consumers have an incentive to improve their meters. As customers with naturally favourable load profiles leave the pool of non-interval metered customers, the remaining customers collectively face higher exposure to peak electricity prices.

---

³ Consumer Advantages from Half-Hourly Metering and Load Profiles in the UK Competitive Electricity Market, P. Stephenson and M. Paun, Kingston University, Faculty of Technology, London SW15 3DW UK, Stephenson P & Paun M, DRPT2000 Int. Conf. on Elc. Utility Deregulation and Restructuringand Power Technologies, Proc., London, UK, 4-7 April, 2000; 35-40.

---

Categories of Benefits

The benefits of interval metering are a function of price volatility. If the price for electricity was always the same, there would be no need for interval meters because the incentive to consume or conserve would not be related to timing. While some insight can be gained into expected price behaviour by studying data from various competitive jurisdictions, actual behaviour is unpredictable and fluid.

Increasing the penetration of interval metering will provide customers more direct means to manage their electricity costs, however, the benefits of switching to interval meters will not be evenly spread. Small business consumers, due to higher volumes of usage, are more likely to benefit from advanced meters than households. Customers with a naturally favourable load shapes, that is customers tending to use power at times when it is cheapest, and customers with manageable loads are also more likely to benefit from interval meters.

Customers with interval meters and sufficient communication to have reasonably accurate knowledge of the market price will have a greater incentive to align their consumption behaviour with the level of scarcity that exists in the market. Cost-effective implementation of interval metering on a widespread basis can be expected to help reduce the amplitude of price spikes relative to the amplitude we would anticipate with existing crude metering. Enhancing demand elasticity is recognized as a mean of mitigating market power. “Increases in the price elasticity of demand at peak times have a profound impact on the ability of generator to abuse market power. If demand is more elastic, then generators will lose a larger proportion of their output for a given change in price because total demand will fall.”⁴

The benefits are not limited to participating (those installing interval meters ) customers. Non-participating customers could also be expected to benefit from the peak demand reductions resulting from real-time price signals on customers with new interval meters. Customers in commercially connected utility regions may also benefit from the impact of these strategic demand reductions.

In addition, as more interval meters are deployed, distribution utilities will have much better data than they have today to assess power quality, manage distribution assets, and make better use of the transformer capacity. Rather than specifying equipment on the basis or assumptions about coincident peak demands of consumers, actual load data can be used to reduce costs. Knowing the duration and magnitude of excess loads can allow loading above name plate rating without loss of life making even more capacity available from existing transformers.

---

⁴ Options for Market Power Mitigation in the Alberta Power Pool, Final Report, Prepared for the Alberta Department of Energy by London Economics, Inc. Cambridge, Massachusetts, January, 1998 www.energy.gov.ab.ca/index.asp

.

---

The introduction of interval meters to small customers will impact consumption behaviour and therefore price. Since the price outlook is one of the inputs in determining the benefits from interval meters, prospective assessment of the benefits of metering improvements is necessarily uncertain.

Categories of Costs

Purchasing, installing, monitoring and verifying an interval meter is inherently more costly than it is for the common analogue meter now in use. Cost per unit tends to decrease as the number put in use increases. Functional replacements for electromechanical meters are presently in the range $70 to $150 per meter and will fall with increased sales volume.

Meters capable of interval data and automated data collection range from $250 to $800 per meter. Again this price will fall dramatically with increased sales volume, as it did in the U.K. where the introduction of the electricity market created long production runs with the result that meter prices for equivalent capability are often 20% of the functional equivalent in Canada.

Communication costs for electronic data collection can be significant. For residential meters the cost depends on the data collection technology and the ownership of the communications medium. Two types of technology are used in Canada dial up and automated data collection (AMR).

If the telephone line used for dial up is used exclusively, the meter data collection costs can be $125 to $400 per meter per year. On the other hand, many municipal utilities are able gain access to an existing customer telephone line at no cost since the meter is called once per day for about one minute between midnight and 3:00 am. Since there is no long distance charge, the cost of dial-up can be as low as $25 to $50 per year.

Dial-up is not suited to collect data for more than about 5000 thousand meters per day. On the other hand AMR systems are designed to collect data in volume. Many AMR technologies exist. Each uses a mixture of wireless, satellite, power line carrier and wide area network technologies. The cost per meter reading has been declining for over a decade but still remains higher than manual meter reading.

Technological uncertainties exist with changing meters. Some of these uncertainties include the choice of one-way vs. two-way communication, the future role of the Internet, and how meters might in future integrate with energy management technologies. Experience with time-or-use meters, which several Ontario distribution utilities invested in during the 1990s, but which became obsolete because of the recent market reforms, provides a cautionary lesson.

Cost issues for meter verification are discussed in the next section.

---

Some consumers, particularly those using a small amount of electricity, may not see sufficient payback to justify acquiring an interval meter. As meter and communication costs decline, the market for meters will expand.

Regulatory Issues

Two regulatory agencies currently control the metering options available to Canadian electricity customers: Measurement Canada, the federal agencies that administers weights and measures, and the Ontario Energy Board, the provincial agency that regulates electricity distributors.

Federal Regulations

Electricity meters in Canada are regulated under the national Electricity & Gas Inspection Act. National regulations are a significant factor in the lifecycle cost of an electricity meter since Measurement Canada requires that the meter population be sampled periodically to ensure that each group of meters in the population is accurate.

Measurement Canada is currently in the process of modernizing its practices with regard to electronic metering. Under the existing Measurement Canada policy, electronic meters are subject to much more stringent and costly meter verification than analogue meters and the approval of new metering technology is a slow process. Under the auspicious of the Canadian Electrical Association, the metering industry is pushing for new rules that will permit the metering industry to modernize.

The glass enclosed Ferraris disk meter with the rotating disk seen is seen on nearly every household today. These meters are inexpensive, reasonably accurate, rarely influenced by voltage surges and have service lives exceeding 40 years. The purchase price is low – about $35 each. The cost of meter reading in urban utilities where meters are located outside is often in the range of 25-40 cents/reading.⁵

Each electromechanical meter group must be sampled every 12 years. Depending on the size of the group, 1.5 to 3% of the meters in the group are replaced and taken back to the meter shop to be reverified. The cost of shop testing, the labour to install replacement and collect the meter ranges from $100 to $250 per meter, depending on the location in Canada. Added to this is the cost of maintaining a pool of replacement meters.

The volume of electronic meters in Canada has been low, due in some measure to

---

⁵ “Comparative Review of Meter Reading Costs:” by Thomas Adams, 1996 April 1, Pre-filed Testimony on Behalf of Energy Probe, Presented to the Ontario Energy Board Regarding E.B.R.O. 492.

---

regulatory policy. Current Measurement Canada policy requires that 100% all electronic meter be reverified every six years. Replacement and testing costs are the same as for electromechanical meters but the increase in sample size and recall frequency, means that the cost of reverification is up to 128 times that of electromechanical meters.⁶ With the life cycle cost so much higher in comparison to electromechanical meters, few Canadian utilities have adopted electronic meters in significant numbers.

Measurement Canada has recognized the need for change in policy and is actively considering the needs of consumers and industry in mapping out a strategy for change in regulatory policy. Results however may be some years off.

In the meantime, distributors that have deployed electronic meters have done so because they want to offer new rates, better information, or load control options to customers. This imperative will escalate with de-regulation.

Provincial Regulations

Retail metering rules in Ontario are established under the OEB’s Distribution System Code. Under those rules existing customers over 1 MW must have interval meters and new customers over 500 KW must have interval meters (Section 5.1.3 of the Code). Some Distribution companies have taken the initiative to bring Interval meters to a wider group of customers. Milton Hydro has fitted all customers over 100 KW with interval meters.

Experience in other jurisdictions suggests that a portion of the non-customer specific costs to utilities of interval metering should be shared with customers who do not themselves have interval meters. As discussed below, Florida Power & Light has demonstrated the use of interval metering to enhance reliability, monitor power quality, and improve the management of distribution systems for the benefit of all customers.

The wider benefits of interval metering are not recognized in the Distribution System Code. A customer that requests interval metering shall compensate a distributor for all sunk and incremental costs associated with that meter and the meter it replaces (section 5.1.5 of the Code). Under the Distribution System Code, the LDC determines the metering options customers have and the communication options that the meters must use.

Under Section 5.1.6 of the Code, a distributor is required to identify in its Conditions of Service the type of meters that are available to a customer, the process by which a customer may obtain such meters, and the types of charges that would be levied on a customer for each meter type.

---

⁶ Industry Initiative: Electricity Measurement Accuracy Program (E-MAP) Proposal, prepared by the CEA Task Group on Metering & Regulations, Canadian Electricity Association (CEA), July 2001, www.canelect.ca

.

---

Ontario’s current Performance Based Rate-making (PBR) formula creates a disincentive for distribution companies to expand the range and quality of services offered to consumers. Under PBR, the rates distributors can charged are capped, creating an incentive to distributors to cut costs within the scope of existing service offerings. If interval metering is to develop in Ontario, the Ontario Energy Board will have to declare clear rules that give distributors assurances that their reasonable costs can be recovered.

Considerations for Introducing Interval Meters for Small Consumers

There are several arguments favouring a regulatory system designed so that customers voluntarily identify themselves for upgrading to interval meters, and bearing a portion of the incremental cost. Interval meters will not provide any benefits for small customers who have already signed contracts with marketers. Customers with naturally favourable seasonal loads will receive fewer benefits. For example, some retired residential customers spend some portion of the summer months at cottages and the winter months in warm climate regions, resulting in their local electricity usage being concentrated in periods of low seasonal electricity demand with a higher probability of relatively low prices and relatively low price volatility. For customers using very small amounts of electricity, the increase in fixed costs associated with interval meters is more difficult to recover from savings on the commodity cost of power.

On the other hand, if meter replacement is handled centrally, economies of scale might be achieved. A strategy combining voluntary upgrading for small customers hoping to benefit with utility-managed upgrading of metering for customer classes where benefits across the class can be demonstrated, might prove beneficial.

Customer choice in meters was recommended by the Ontario Market Design Committee. Under the existing Distribution System Code customers can only install meters approved and supplied by their local utility. Meters of the future may have energy management features built in.

Energy retailers might want to play a role in metering. Energy retailers might be interested in promoting meters that are suited for or compatible with controlling electricity usage for particular appliances.

Government and regulatory leadership on metering improvements is necessary. With very few customers currently metered with equipment fully able to accommodate the new electricity market, metering improvements are necessary for the full realization of the benefits of Ontario’s electricity restructuring. The net benefits of metering improvement may be modest on an individual household level but may be significant on a province-wide basis.