Smart city collaborations will be shaped or stymied by the formal and informal rules that govern multi-stakeholder partnerships. In the absence of a common vision for smart infrastructure, municipal and federal regulations can be at odds with proposed investment strategies. These mandates, when coupled with informal pressures such as electability and shareholder demands, can make it challenging for utilities, municipalities and private industry to realize their common goals. It is no wonder then that survey respondents in Black & Veatch’s Strategic Directions: Smart Utilities report ranked policy as the third biggest hurdle to overcome en route to managing systems in a more integrated way.
Frequently discussed are the privacy and data security challenges posed by the data that is collected, stored and analyzed for use in smart city initiatives. These technology projects in particular often fall under a variety of state and federal regulations. From a privacy perspective, regulations may define protected or sensitive data using disparate criteria. In terms of data security, high-profile breaches and infrastructure initiatives have prompted two executive orders in the last 20 months. At the state level, 17 states have adopted or have advanced metering infrastructure (AMI) requirements pending (Environmental Impact Assessment, 2011). Other states have made significant progress in codifying privacy restrictions.
Smart City Regulatory Requirements
California, for example, currently restricts electric corporations from “sharing, disclosing, or otherwise making accessible to any third-party a customer’s electrical consumption meter data without the consent of the customer.”
What this means for collaborators is that any smart city road map must reference and include strategies for meeting and addressing complex regulatory requirements. Another tactic might be proposing and enacting legislation that takes new technologies and the data economy into account.
For utilities, rate recovery also presents a policy hurdle. Public, regulated utilities have to apply for permission to invest recovered capital outlay via the ratepayer. While municipalities have more freedom to adjust rates because they are run by elected officials, that flexibility is hampered because their positions are determined by the ratepayer (i.e., the voter) which often has the effect of making them less likely to raise rates because of electoral issues.
One anecdote that illustrates some of the challenges utilities and municipalities face involves a five-yearlong pilot project, initiated by a utility whose aim was to establish the first smart city. Several different technologies were installed with the goal of improved service delivery. However, the pilot’s implementation resulted in cost overruns, which were then passed on to ratepayers.
This particular case is a cautionary example of how the energy portion of a smart city plan will need to have expectations and funding clearly set; especially if an investor-owned utility (IOU) is involved. In summary, the participating municipality believed that the utility overpromised and under delivered on its smart city pilot at the ratepayers’ expense and, as a result, disallowed the utility’s cost of the project during two ratemaking cycles. Further, the city voted to form its own municipal utility thereby terminating the other’s franchise. The ensuing legal battle is expected to last for years.
Thus, a conversation that began with disparate entities sharing the goal of increasing operational efficiencies becomes an exercise in figuring out which methods of data sharing can be done legally and with sensitivity to stakeholder concerns. It is an issue that many cities face.
How will utilities and other stakeholders move forward?
Addressing Conversion Challenges
Sharing Ownership: Embracing the concept of shared ownership will be a key area of improvement. Shared ownership includes creating road maps for smart city initiatives that codify the joint responsibilities public and privately held entities have from a regulatory and cost perspective. It is important to note that this exercise should be completed before initiating any project.
Getting Smart: Municipalities may need to retain outside council to help them understand regulatory, contracting and budgeting challenges associated with smart city initiatives. For utilities, creating compelling rate cases will require clear, data-supported, justification for planned initiatives.
Budgeting Wisely: Getting real and true estimates and building contingencies into budgets that account for expenditures related to compliance and rate recovery will require investing in experts that know how to provide realistic estimates. The project should be defined and then a budget established, not vice versa. Challenges to address might also include defining the rules that govern return on investment (ROI) for public-private partnerships.
Being Nimble: Collaborators should begin planning with the understanding that goals, timelines and participation may change depending on regulatory and market forces. A plan with built-in flexibility creates opportunities for interested parties to contribute and participate as the initiative evolves.
In terms of ROI, it is Black & Veatch’s experience that cities and utilities that are exploring or embarking on smart city initiatives are driven by potential gains in efficiency and resiliency. Proper planning and knowledge of the mandates governing rate recovery, privacy and data security, along with an understanding of nuanced issues such as shareholder return, will result in stronger initiatives with a greater potential for success.
Subject Matter Expert
Clint Robinson: RobinsonCO@bv.com