Jim Lazar, RAP senior advisor, describes how the costs of smart grid should be reflected in utility cost allocation studies and in rate design. Smart meters enable many capacity and energy saving measures, and should not be classified as 100% customer-related, as has been the practice with traditional meters. Similarly, distribution automation investments are typically used to reduce line losses, which are energy-related savings, and should not be classified as 100% demand-related, as is the general practice with substation investment. The bottom line is that cost-effective smart grid investments should enable reduction of customer demand, and energy costs on a system, and the investment should be apportioned on the basis of costs-follows-benefits. In this presentation to the California Municipal Rates Group, Mr. Lazar suggests an innovative, bi-directional rate design that charges all customers for the services they use.