Americans are proud of their "First World" status, including reliable utility service that's envied throughout the globe. Flip the switch, the lights come on. Turn the faucet, the water flows. Underlying our blessed way of life is the principle that utilities have the "obligation to serve" their customers at any time, anywhere, no matter how many billions of dollars it costs. We don't expect to feel beads of sweat on hot summer days. We have little fear of what it will cost to blast the air conditioning in our home and workplaces. On those rare occasions when the lights do go out?like in Los Angeles this week?it's front-page news. Yet in other nations, it's routine. Ubiquitous and reliable utility service remains a daily struggle in much of the world. Even in bustling China, factories schedule production on alternate days because of a lack of power, a situation that would be simply unacceptable to California businesses and consumers. That's why discussions of real-time pricing for electricity gnaw at the nerves. They raise the specter of price rationing, discomfort, and lower profit margins. Americans seem to think price rationing is okay for developing nations, but not for the Sunset Strip. Yet building the ever-greater number of power plants and transmission lines needed to serve spiraling peak demand is raising the cost of electricity for all, which has California businesses and lawmakers squawking. It also increases emissions on the smoggiest days of the year in a state already overburdened with pollution. Don't like it, lump it, say many economists. Expect the cost of electricity to continue to rise as long as the current disconnect continues between its real cost at any given moment and what retail customers actually pay. Meanwhile, why sweat? Current retail electricity prices provide little incentive for customers to conserve when it's most needed, say real-time pricing advocates. Consequently, peak demand continues to rise, costing about $4,000 for each kilowatt of generating capacity added to the state's electrical system, according to Clark Gellings, Electric Power Research Institute vice-president of innovation. If running 20 percent of the time, the capital cost of the power it produces is around 8 cents\/kWh. Fuel costs come on top of that. Despite the cost, peak demand is projected to grow among the state's three investor-owned utilities from 45,422 MW in 2003 to 56,970 MW by 2016-an increase of 11,548 MW, or 25 percent, according to the California Energy Commission. Do the math. If we continue to just build peak power plants alone to meet that rising demand, it could entail untold billions in capital costs to keep pace over the next ten years. Demand-response strategies-including real-time pricing-cost just $100 to $500\/kW, Gellings noted. No wonder real-time pricing advocates say that it would be inefficient to just keep building power plants, particularly when they are used as little as a few days a year. Instead, they argue, real-time pricing should be used to stop the dramatic growth in peak demand. "It lowers the overall cost of producing power because you don't have to build all these power plants," said Severin Borenstein, University of California Energy Institute director. It also will make the system more resilient, he said, by balancing supply and demand. Right now, the onus for resilience is largely on the supply side. Demand-response programs are not living up to their goals, according to the Energy Commission, falling almost 25 percent short (<i>Circuit<\/i>, July 29, 2005). At least one power plant executive believes that's because state regulators themselves are half-hearted about demand response. That may have something to do with why the California Public Utilities Commission punted on implementing a watered-down version of real-time pricing-known as critical peak pricing-this summer. Under that proposal, utilities would charge their largest customers higher rates during the few peak hours of summer but maintain existing time-of-use tariffs at other times. The CPUC put the proposal on hold after groups such as the California Manufacturers and Technology Association, the Los Angeles Unified School District, hospitals, and BOMA Cal?an association of building owners and managers?complained. "It would just penalize them," said Joe Lyons, CMTA energy policy director. "Some industrial customers can't shift loads. We have very flat loads, 24\/7." The same goes for shopping centers, schools, and hospitals. It's the people in houses, no doubt. Not so fast, says Borenstein, who last month released a paper, Wealth Transfer from Implementing Real Time Retail Electricity Pricing. "We all subsidize them," he said, speaking of large electricity users. That is why more than half of the large electricity users he analyzed in Southern California would lose under real-time pricing. On the basis of data from 2002-04, Borenstein said that had the electricity market become highly volatile, the wholesale price of the last megawatt-hour of power could have cost as much as $16,146.41 under a real-time pricing scenario. The actual peak wholesale price during the period was $262.39\/MWh. The peak bid price of electricity during the energy crisis was $9,999\/MWh. The big difference reflects what he called the scarcity value needed to clear the market, but that would be for just one hour out of the three years he examined had the market become extremely volatile. The good news is that just under half of large users actually would have saved money under real-time pricing and the others easily could have hedged their risk by buying power on the forward market. "Fuel price hedging is the reason Southwest Airlines is not going broke today," said Borenstein, making an analogy to how large power consumers could cut their financial risk when it comes to electricity. Recognizing that real-time pricing will never advance unless "wealth transfers" are addressed, Borenstein advocates implementing real-time pricing on a limited basis. Under his plan, big customers would buy a baseline amount of power under today's time-of-use tariff and pay the real-time price for usage above that baseline. To avoid real-time peak prices, companies could either hedge their risk by purchasing power in the forward market or shift use from peak to nonpeak periods. Big customers are the place to begin because they already have the needed meters, and administrative costs will not overwhelm the benefits of real-time pricing, said James Sweeney, Hoover Institution senior fellow. The cost of metering and billing may be too high to implement dynamic pricing with small customers, he said. "The big-picture bottom line is to have more of a correspondence between the price consumers pay and the wholesale cost and the cost of the system to be more able to meet changing conditions," he said. Sweeney also advocated that the CPUC allow a pass-through for fuel costs. "The perfect power system of the future absolutely should increase demand response," Gellings said. A move toward real-time pricing would be a good start.