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2. Background

2.1 Department of Treasury and Finance Review of the AMI Program

This report forms part of a broader review of the AMI Program being conducted by the DTF, including a public consultation process currently underway. The DTF published an Issues Paper on 31 May 2011 (Review of the advanced metering infrastructure program-Issues paper for public consultation), which sought stakeholder comments on a number of issues discussed in this report. In forming the advice in this report, Deloitte has reviewed submissions to the DTF Issues Paper.

In addition, during the review Deloitte consulted with the key stakeholders outlined in Table 2.1, to obtain their views on a broad range of issues related to the AMI Program. This consultation was extremely useful in testing our assumptions and seeking input on the outcomes of the AMI Program to date and possible AMI Program scenarios for 2012 and beyond.

Table 2.1: Stakeholders consulted during our review
Distributors CitiPower Pty (CitiPower) and Powercor Australia Limited
Jemena Electricity Network (JEN)
United Energy Distribution (UED)
SP AusNet Pty Ltd (SP AusNet)
Retailers AGL Energy Limited
Origin Energy
TRUenergy Pty Limited
Simply Energy
Lumo Energy
Customer advocacy groups Consumer Utilities Advocacy Centre
Consumer Action Law Centre
Alternative Technology Association
Brotherhood of St Lawrence
Government agencies Department of Primary Industries
Australian Energy Regulator

2.2 History of AMI in Victoria and other jurisdictions

This section outlines the development of the Victorian Government's decision to replace the existing accumulation metering stock in Victoria with smart meters. Victoria was the first jurisdiction in Australia to consider a state-wide rollout of smart meters, preceding the National Smart Meter Project (NSMP).

Box 1 provides a description of the general meter types referred to in this report.

Box 1: Definitions of accumulation meters, interval meters and smart meters

2.2.1 ESC 2004 decision on mandatory rollout of interval meters

In 2004, the Victorian Essential Services Commission (ESC) mandated the rollout of manually read interval meters throughout Victoria, termed the 'Interval Meter Rollout' (IMRO) program. The Commission's decision to mandate a rollout of interval meters was predicated on the following assessments:

  • Market forces alone would fail to deliver a timely interval meter rollout on a scale sufficient to provide economies in meter manufacture, installation and reading
  • Regulatory intervention would be required to achieve the economic benefits that would result from a more timely and larger scale rollout
  • Based on the Commission's cost-benefit analysis, a net economic benefit would arise from a timely, mandatory rollout of interval meters
  • The existing differential between the cost of accumulation and interval meters was expected to fall over time.8

2.2.2 Victorian Cabinet 2006 approval of the new AMI mandate

In view of developments in metering technology and the possibility that the IMRO decision could be expanded to deliver greater benefits to customers, the then Department of Infrastructure (DOI), together with the electricity distributors and retailers, commissioned a cost-benefit study in 2005 to examine the net societal benefits of adding advanced functionality to the IMRO mandate. The study consultants, CRA International and Impaq Consulting, established a societal business case for adding two-way communications and core advanced functionality 9 - remote meter reading and remote connection and disconnection - to the IMRO mandate, and conducting the rollout according to an accelerated four year schedule. The original communications technology recommended was distribution line carrier (DLC).

According to CRA / Impaq, at best, the revised metering plan would produce benefits of $432 million and costs of $353 million, while at worst, benefits would remain at $432 million and costs could increase to $954 million (NPV at 2005). 10

Cabinet approved the new Advanced Metering Infrastructure (AMI) mandate (also known as AIMRO) in early 2006. An amendment to the Electricity Industry Act 2000 was passed in August 2006 providing the Government with legislative heads of power to make Orders-in-Council (OIC) establishing requirements for the AMI deployment.

As a consequence of the Victorian Cabinet decision, AMI was to be installed in all residential and small business premises over four years, commencing in 2009. Enabling legislation was established, and a specific AMI cost recovery framework established (following several amendments over 2007-09). Technology trials were also conducted to determine the functionality and performance level specifications to be mandated for Victoria.

2.2.3 MCE sponsored 2008 national smart metering analysis

In April 2007, the Council of Australian Governments committed to a national roll-out of electricity smart meters to areas where benefits could be demonstrated to outweigh costs. A national AMI cost-benefit report prepared by NERA, released in mid-2008, informed this national decision. On the basis of the NERA analysis, a distributor-led rollout of AMI in Victoria was estimated to offer net benefits in the range from negative $101 million to positive $690 million (NPV at 2007). 11

The National Smart Metering Program (NSMP) established a leadership body (the National Stakeholder Steering Committee) to facilitate consistent technical and operational development of smart meter rollouts. Jurisdictional ministers in each state were tasked with determining whether to implement smart meter rollouts under the NSMP framework. The Australian Energy Market Commission (AEMC) has recently provided advice to the MCE on the cost recovery arrangements for future smart meter rollouts (which would not affect the Victorian AMI rollout). The AEMC advised that the current National Electricity Rules framework could adequately accommodate the recovery of efficient costs for mandated smart metering infrastructure (including rollouts or pilots and trials), subject to some incremental amendments to the National Electricity Rules being made. 12

To date, no states have determined to mandate the rollout of smart meters under the NSMP (although some distributors in other states are conducting large smart meter and smart grid trials, partly funded by government, as discussed in section 2.4). While the Victorian AMI rollout moved ahead of the NSMP, there is considerable Victorian involvement in the NSMP. NSMP plans are being developed to ensure the Victorian AMI Program is consistent with the national framework, where appropriate.

2.2.4 Victorian Auditor-General's criticism of AMI decision making process

The cost-benefit analysis that supported the Victorian decision to mandate the rollout of AMI (commissioned in 2005 by DoI), was subject to criticism by the Victorian Auditor-General's Office (VAGO) in 2009. VAGO's conclusions and main findings included the following:

The AMI project has not used the checks and balances that would ordinarily apply to a major investment directly funded by the state. This highlights a gap in the project's accountability framework.

There have been significant inadequacies in the advice and recommendations provided to government on the roll-out of the AMI project. The advice and supporting analysis lacked depth and presented an incomplete picture of the AMI project in relation to economic merits, consumer impact and project risks.

The cost-benefit study behind the AMI decision was flawed and failed to offer a comprehensive view of the economic case for the project. There are significant unexplained discrepancies between the industry's economic estimates and the studies done in Victoria and at the national level. These discrepancies suggest a high degree of uncertainty about the economic case for the project. 13

2.2.5 DPI sponsored 2009 - 2010 review of AMI costs and benefits

In response to the VAGO criticism, DPI commissioned further analysis of the benefits and costs of the AMI Program in 2009 and 2010. This involved separate analysis of benefits (conducted by Futura) and costs (conducted by EMCa).

The review culminated in the release of a report by Oakley Greenwood that concluded the AMI rollout would deliver low case benefits of $2.577 billion against expected costs of $1.813 billion ($2008). 14

The Oakley Greenwood report has, itself, been subject to a review sponsored by DPI and conducted by Deloitte. In late 2010, Deloitte was engaged to review whether the Oakley Greenwood work aligned to Victorian Government guidance material on best practice. The Deloitte review found that although the Oakley Greenwood work effectively articulated the cost and benefits of the project, the work could have been enhanced by more closely following the Victorian Government guidelines in relation to clearly defining the base case and incorporating analysis around the impacts on different types of stakeholders

2.3 Victorian AMI rollout - Legislative and regulatory framework

In mandating the rollout of AMI, the former Victorian Government determined minimum functionality and service level specifications to which the distributors' AMI solutions had to conform. Four key services were specified for the rollout period (noting that additional services may be provided post rollout):

  • Recording of energy imported or exported from a metering point by half hour trading interval
  • Remote reading of the AMI meters
  • Remote de-energisation
  • Remote energisation.15

Minimum functionality and performance levels for the AMI systems were determined according to the following elements:

  • Meter configurations
  • Remote and local reading of meters
  • Supply disconnect and reconnect
  • Time clock synchronisation
  • Load control
  • Meter loss of supply detection and outage detection
  • Quality of supply and other event recording
  • Supply capacity control
  • Interface to the home area network (HAN).16

The Victorian distributors commenced rolling out AMI meters and communications and IT infrastructure in late 2009. While there are differences among the distributors in the progress of their individual rollouts, approximately 650 000 AMI meters had been installed at the end of May 2011, along with a significant portion of the communications equipment necessary to enable the meters to transmit data. The majority of the IT capex required to support the large volumes of AMI data, organise and manage the rollout has also been incurred.

Figure 2.1 illustrates the rollout schedule stipulated within the AMI Order in Council (OIC), which the Victorian distributors are required to meet (and which is a condition of their distribution licences). Each percentage target represents the proportion of meters that must be installed and capable of being remotely read.

Figure 2.1: Regulatory targets for AMI rollout

Figure 2.1: Regulatory targets for AMI rollout

As Figure 2.1 demonstrates, the rollout of AMI meters is expected to significantly accelerate from the second half of 2011, with over 75% (approximately 2 million) meters to be installed and commissioned (able to be remotely read) in the next 30 months.

The AMI OIC sets out the regulatory and cost recovery framework for the interim rollout period over 2009-15. Cost recovery is split into two budget periods, over calendar years 2009-11 and 2012-15. From 2016, metering will again become part of the distributors' Regulatory Asset Bases (RAB), and will fall under the National Electricity Rules.

The cost recovery framework within the AMI OIC is best described as a cost pass through arrangement, which differs significantly from the incentive regime under the National Electricity Rules to which other distribution assets are subjected. Approximately 10 months prior to the commencement of each Budget Period, distributors were required to submit applications outlining their forecast AMI budgets and associated customer charges to the AER. The OIC states that proposed budgeted costs must be approved, unless the AER can establish that they do not meet a series of tests, as set out in Figure 2.2.

Figure 2.2: AMI Order in Council - Budget tests


Source: AER, Final determination- Victorian advanced metering infrastructure review - 2009-11 AMI budget and charges applications, October 2009, p. 3.

For the 'Scope test', the AMI OIC requires that activities associated with the proposed costs must be those that are required to deliver metering (AMI and accumulation metering) services. Broad lists of specific 'in scope' activities associated with the distributors' obligation to roll out AMI are contained in the AMI OIC.

For the'Prudent test', the relevant tests that the AER must apply are dependent upon whether the cost is associated with a signed contract that has been competitively tendered. Where this is the case, the cost is automatically approved. Where costs are 'non-contract', they are also automatically approved unless the AER can establish that either the cost is more likely than not to not be incurred, or that the expenditure will be incurred but that incurring it involves a substantial departure from the commercial standard that a reasonable business would exercise in the circumstances.

The AER Approved Budgets are converted into separate charges for metering via a 'building block' methodology. It is worth noting the following key points:

  • All Victorian small customers commenced paying for their AMI meters as at 1 January 2010
  • Only actual incurred costs are paid by customers. There is an annual process whereby the AER adjusts the charges set in its 2009-11 or 2012-15 AMI Budget Decision to ensure only actual costs are passed through to customers. Distributors must provide independent auditor statements that detail actual costs, and where actuals differ from the Approved Budget, can seek to recover up to 120% of the Approved Budget costs in 2009-11, and 110% of the Approved Budget costs for 2012-15 without triggering a review by the AER
  • The AMI OIC provides that distributors may elect to under-recover their costs over 2010-15. All distributors have elected to under-recover over 2009-11, and JEN has also elected to under-recover its AMI costs over 2012-15
  • Recovery of costs for the distributors' accumulation meter asset bases is accelerated as part of AMI charges over 2010 to 2015.

2.4 Smart meter trials and pilots in other states

While the NSMP continues to develop plans for mandated smart meter rollouts, pilots and trials, some distributors have moved ahead to trial new metering infrastructure.

2.4.1 ETSA Utilities

Following extensive research and trials of technologies to reduce peak demand, South Australian distributor ETSA Utilities is now trialling up to 1,000 Peakbreaker+ devices throughout the Adelaide metropolitan area and a regional area.

The Peakbreaker+ program is a refinement of earlier direct load control schemes. A communications module is fitted alongside the customer's conventional electricity meter and is capable of controlling air conditioning compressors on a rotational basis. It has two way radio communications, which offers a range of additional features to its load switching capability. 17

2.4.2 Ausgrid Smart Grid Smart City

In mid-2010 a consortium led by NSW distributor Ausgrid (formerly EnergyAustralia) won the tender for the Australian Government's $100 million 'Smart Grid Smart City' project.18

The three-year project runs across five sites in Sydney and the Hunter Valley (Newcastle, Scone, Sydney CBD, Ku-ring-gai and Newington). It will represent Australia's first commercial-scale smart grid, and is one of the largest and most integrated smart grid projects anywhere in the world.

The consortium has committed to rolling out up to 50,000 smart meters to homes across the trial sites. The technology will allow residents to see real-time analysis of electricity usage for their households, as well as for individual appliances. The smart grid demonstration will also test real-time, complex data on grid performance in order to the efficiency and control of network operations for energy transmission and distribution companies. Smart Village and Smart Home trial

Ausgrid has also undertaken to build Australia's first Smart Village and Smart Home as part of a two-year trial, aimed at helping 1,000 households in Newington and Silverwater (NSW) reduce their utility bills and carbon impact. This trial is partly funded by the NSW Government's Climate Change Fund. 19

Homes in the trial are being connected to a smart grid featuring greater information and control of energy consumption. These households will be able to obtain real time data on their energy and water use, turn their appliances on and off remotely using iPhones and websites, and compare energy use through neighbourhood competitions. A Smart Home is also being fitted out in Newington to test the latest energy and water efficient appliances and how renewable energy interacts with the grid. Smart meter trials

Independent of the two Government funded trials, Ausgrid has also been rolling out smart meters and time of use pricing to a subset of its customers as part of its move towards a smart grid.

More than 4,000 smart meters with communications have been installed to date, and about 200,000 customers have been involved in time of use tariff trials. 20

2.4.3 Essential Energy

NSW distributor Essential Energy (formerly Country Energy) has been involved in smart grid and smart meter trials since 2004. Essential Energy conducted Australia's first demand management trial including smart meters, in-home displays, and critical peak pricing tariffs. 21

The trial involved around 150 customers in and around Queanbeyan, NSW. The trial confirmed the importance of real time consumption data in driving energy efficiency. Customers involved in the trial achieved an overall reduction in energy consumption and up to 30 per cent reduction in their peak demand. Essential Energy has noted that education was key to the success of the trial, helping customers maximise the benefits of the technology to save on their costs and cut greenhouse gas emissions.

2.4.4 Western Power

Western Australian distributor Western Power has been trialling smart meters across its network as part of a number of projects.

As part of its Green Town Project, which aims to trial multiple energy efficiency initiatives, Western Power has installed more than 1500 smart meters. 22

In addition, the Perth Solar City project involves trialling smart meters for 8700 residents in the East Metropolitan area. At the end of this project, Western Power has indicated that it will evaluate the trial results and make decisions on the roll out of smart meters to the remainder of its network.

2.5 International smart meter rollouts

There are many examples of smart metering programs around the world, however the technical features of the smart metering devices installed vary greatly between rollouts.

Italian distributor Enel has carried out the world's largest rollout of smart meters, with 27 million meters deployed. Unlike the Victorian AMI meters, Enel's smart meters do not have Home Area Network capability.

In Texas, several utilities are deploying smart meters concurrently, however, unlike in Victoria, their meters do not have the ability to remotely connect and disconnect customers.

In California three major utilities will complete deployments of more than 10 million smart meters by mid-2012.

The following tables provide selected examples of international smart meter rollouts which share some characteristics with the Victorian AMI Program.

Table 2.2. HydroOne - Ontario, Canada
Location details Electricity distributor HydroOne in Ontario Canada serves 1.2 million customers that inhabit 2 million square kilometres of Ontario. The network area includes some small cities, towns and all of the rural areas in Ontario. HydroOne is also responsible for all of the transmission network construction and maintenance for Ontario.
Number of meters
As of June 2011, 1.2 million smart meters are installed and communicating remotely.
Timeframe for rollout Meter testing was carried out from 2004 to early 2006. A first scale test of deployment was completed in late 2006, and the full deployment of smart meters started in early 2007. The Ontario Government mandated that meters were to be installed before the communications network, and as such the first 700,000 meters were deployed ahead of the network. In 2010 the vast majority of the smart meter and communications network deployment were completed. HydroOne is currently carrying out network tuning and the final 3% of the meter installation. This is expected to be completed in early 2012.
Technology adopted Initial smart meter testing involved a older mobile phone technology called GSM from the communication vendor Smart Sync, of which 25,000 meters were deployed. Once this meter testing was complete, HydroOne decided to use Trilliant's communications network (mesh radio) for 95% of customers and Aclara's power-line carrier for the final 5%. The Aclara system has had very limited rollout in practice accounting for less than 1% of the customers instead of the planned 5%.Initial smart meter testing involved a older mobile phone technology called GSM from the communication vendor Smart Sync, of which 25,000 meters were deployed. Once this meter testing was complete, HydroOne decided to use Trilliant's communications network (mesh radio) for 95% of customers and Aclara's power-line carrier for the final 5%. The Aclara system has had very limited rollout in practice accounting for less than 1% of the customers instead of the planned 5%.
Customer engagement

HydroOne started an extensive customer engagement program in the summer of 2004, setting up booths at community agriculture fairs and other community events, including information on bills and sending customers letters in business envelopes. HydroOne carried out extensive questioning on incoming calls to its call centres and offered its executives for radio and television interviews. The smart meter program was branded with logos which were added to HydroOne employee shirts and trucks including the phrase "Ask Me About it?".

Before TOU pricing commenced (which is mandatory in Ontario), another round of communication was sent to customers, such that in most cases each customer had 3 to 5 examples of various smart meter and then TOU pricing information from HydroOne. Smart meter specific 24 hour call centres were established, with specially trained staff to answer inquiries. Customer questions that could not be handled by the call centre staff were personally responded to by HydroOne executives, including the program director or the CEO.

Results As at June 2011, 1.2 million smart meters are installed and operating, and approximately 900,000 customers are on TOU transmission and distribution charges, while being free to choose a retailer for energy pricing. All HydroOne customers will be on TOU tariffs by the end of October 2011
HAN Similar to Victoria, a Zigbee home area network (HAN) was deployed within the meters. Approximately 2000 homes now have Zigbee thermostats and another 1,000 have in-home displays (IHDs). A specific HAN engagement program was carried out, including a lived in demonstration HAN-home. The demonstration home has had over 10,000 visitors to see over 50 Zigbee devices in action, including a remote pet feeder. The HAN engagement program has involved a major home building company that has agreed to build fully HAN equipped housing in Ontario.
Other features Similar to Victoria, HydroOne's smart meters communicate consumption data to market daily, however they do not have remote connection and disconnection capability. Prior to the rollout, HydroOne customers faced quarterly bills. Significant cost increases above budget included a 24 hour operations centre that was not initially anticipated.
Table 2.3. Southern California Edison (SCE), California
Location details Californian utility SCE covers the area outside of the City of Los Angeles, from just north of San Diego to north and west of LA. SCE has one of the fastest growing customer bases in the US, adding an average of 50,000 customers a year. SCE's network area includes what were rural areas in the late 1940s and early 1950s, while the older cities and towns each have their own municipal utilities. SCE also owns and operates a gas network that does not match its electricity network. Accordingly, SCE's network area is inconsistently covered by SCE, which has complicated its smart meter rollout.
Number of meters
At last report over 4 million smart meters were installed and communicating in SCE's network. The total deployment objective is 5 million meters.
Timeframe for rollout SCE commenced testing smart meters in 2004, and similar to Italian distributor Enel, decided to design its own meter. However, this was abandoned in late 2005 and SCE settled into a long testing period, involving almost every meter vendor in its field trials. In 2006 a decision was made to deploy Itron's OpenWay system and a customer pilot was undertaken in early 2007. During the pilot, Itron upgraded the meter and communications capability, creating OpenWay 2.0. This upgraded technology was supported by another electricity and gas distributor which borders SCE to the south, with some scale and scope efficiencies generated. Building on the lessons learned from HydroOne's rollout, SCE opened its operations centre early in the rollout and started operating the communications network almost immediately.
Technology adopted SCE adopted Itron's OpenWay communications system with a combination of G3 and Fibre Optic backhaul from the collectors in the field. The communications system is mesh radio based, and uses an unlicensed 900Mhz frequency, (which is identical to the Silver Springs mesh radio).
Customer engagement SCE followed Hydro One's example with extensive pre-rollout communications to its customers, and extensive follow up communications, including a personal phone call from the call centre to each customer where a meter was installed.
Results SCE has more than 4 million meters communicating data to market daily.
HAN The SCE deployment also includes a Zigbee based HAN. The HAN is not active in the meters today, aside from in a handful of SCE-employee homes. SCE expects to start enabling the HAN for customers who sign up in late 2011 or early 2012.
Other features Similar to Victoria, SCE's smart meters feature remote connection and disconnection capability, and a Zigbee HAN. SCE's network operations centre is staffed 24/7 with outage information being immediately routed to SCE's Outage Management System. SCE has a web portal where customers can see their own usage data, and has released an iPhone and Android app that allows customers to get their consumption data on their smart phones or iPads. Unlike Victoria, prior to the smart meter rollout, SCE manually read its customers' meters on a monthly or more frequent basis. Accordingly, the business case for the smart meter rollout was largely substantiated by the reduction in manual meter reading costs. It is noted that SCE's meter reading costs included significant costs associated with staff injuries, with California being the highest cost location in the world for settling industrial injuries. In some cases, a dog bite has cost SCE over US$1 million.