Imagine being able to automatically postpone some energy intensive functions, such as running the air conditioner, hot water heater, pool functions or a manufacturing line, until after the hours of peak demand, when the cost is lower. With gridSMART^SM customers will have control in their homes and in businesses that doesn't exist today, giving traditional energy efficiency and demand-side management programs a big technological boost.

gridSMART^SM is the cornerstone of AEP's energy delivery system of the future. Not every need or technological innovation that customers will demand in the future can be envisioned today, but gridSMART^SM is being designed to provide a much greater degree of flexibility than is now possible. gridSMART^SM provides three major benefits: it adds automation and capabilities to allow customers to better manage their energy use and improve reliability; it allows AEP to monitor and operate its system more efficiently and create fewer emissions; and it prepares the system for new technologies that could greatly affect how power is generated, distributed and consumed.

Smart meters would communicate with an AEP data center to indicate the price of power at a given time and how much energy is being used. Coupled with time-of-day or other innovative rates, home or business owners would be able to decide how much they are willing to spend to perform a particular task now, versus waiting until a lower rate is in effect.

During periods of peak demand, customers might choose to cycle their air conditioning in 20-minute periods, for example, rather than run them continuously, or to turn off the pool pump for a few hours. Commercial and industrial customers could postpone energy intensive manufacturing or business operations.

The same technology would also allow AEP to better manage its system. Smart meters and distribution system equipment would enable us to connect customers remotely, identify overload conditions more easily and reduce energy theft. The result would be more timely service for customers, fewer crews on the road, fuel savings and lower emissions. gridSMART^SM would enable us to identify outages more quickly rather than waiting for customers to report them, and this would help us deploy repair crews sooner.

gridSMART^SM also incorporates more traditional energy efficiency and DSM programs, which could be implemented independently of advanced technology. Because electric prices have been so low in our service area, these programs have had little appeal among customers and regulators alike. Low prices undermine incentives to reduce consumption.

Some of our stakeholders, including Natural Resources Defense Council, Ceres and the American Council for Energy Efficient Economies, continue to press us for programs and ideas that result in measurable reductions. At the same time, they recognize AEP's need for the cost of these programs to be recovered – while we recognize the value of continuing to work with these groups toward achievable solutions.

As rates increase because of higher fuel prices, environmental upgrades, new plant costs and related factors, AEP expects that the appeal of these programs will increase, and that gridSMART^SM will magnify their benefits for our customers. We will also continue to offer traditional programs such as home weatherization, lighting upgrades and high efficiency upgrades. Our goal is to offset 1,000 MW of demand by 2012 through these efforts.

gridSMART^SM will help us to operate more efficiently and save energy with programs that range from installing energy management systems in our company buildings to upgrading to new transformers that reduce energy losses. We project that making these improvements to our assets would yield 150 MW of our 1,000 MW goal in demand savings and provide 600 gigawatt hours a year in energy savings by 2012.

The gridSMART^SM initiative also involves technology development in the areas of fuel cells, large-scale batteries and other energy technologies. No one can say with certainty how these technologies will be adopted, the rate at which they will be deployed and what their final impact will be on traditional generation systems.

By providing real-time information about costs and usage to customers, gridSMART^SM will encourage energy conservation and better use of resources.

Among the technologies we are leaders in deploying, as discussed in last year's report, are sodium sulfur or NAS batteries, which can be deployed to support local circuits and take the strain off substations nearing capacity load. These batteries can support megawatt-sized loads for hours in the event of an outage. Their steady supply of power also helps offset power quality issues. They can delay the need for expensive substation upgrades for years, facilitating a better prioritization of capital. Once station upgrades have been completed, the batteries are easily moved to a new location.

AEP installed its first megawatt-scale NAS battery in 2006 and ordered three two-megawatt NAS batteries in 2007, which will be delivered and deployed this year. We expect to have 25 megawatts of NAS batteries in place by the end of 2010.

Another technology with significant potential to reshape the utility business is the plug-in hybrid electric vehicle, or PHEV. We are working with the major auto manufacturers to determine their likely rate of adoption. General Motors, Ford and Toyota have announced plans to introduce PHEVs, which will recharge from 110-volt circuits, before or in 2010.

Plug-in electrics have the potential to significantly alter utility load profiles. The utility industry goal is to encourage customers to recharge at night, when demand is lower and capacity is available.

More importantly, PHEVs can improve the nation's environmental profile. PHEVs eliminate automobile greenhouse gas emissions, which are a major contributor to greenhouse gas levels worldwide. Power plant emissions will increase, which will offset some of those gains. However, power plant emissions come from much fewer sources and are concentrated, which makes them easier to capture. As described earlier, AEP and others are developing technologies to capture carbon dioxide from coal plants.

All of these elements are part of gridSMART^SM. Deploying the technology will vary by state and is subject to regulatory approval and cost recovery. Each of our operating companies will develop plans to roll out these technologies and will work with their regulators on cost recovery.

To support the gridSMART^SM effort, AEP and the General Electric Co. agreed in 2007 to jointly develop and deploy equipment and technology programs. The agreement calls for two pilot programs to be conducted in two mid-sized cities to test the equipment and customer response. Those cities have not yet been identified. A small pilot program will be conducted in Indiana as part of a settlement agreement with regulators. AEP's goal is to have all 5 million smart meters in place by 2015, if regulators approve.