Energy consultant Craig Miller, who spends much of his time working to make the smart grid a reality, got a jolt when he mentioned his work to a new acquaintance. The man, who happened to be a lineman at a Pennsylvania utility, responded earnestly: "Smart meters are a plot by Obama to spy on us."

The encounter was a disheartening sign of the challenge ahead for proponents of the smart grid, who say that the technology can help the industry meet power demand, fix problems faster, and help consumers lower their electricity bills. Advocates of such a 21st-century grid are learning that they need to take privacy concerns seriously. Though smart meters are not, in fact, a domestic espionage scheme, they do raise questions: In a world where households start talking with the power grid, what exactly will be revealed? And who will be listening? (See related quiz: "What You Don't Know About Electricity.")

The term "smart grid" encompasses an array of technologies that can be implemented at various points along the line of transmission from power plant to electricity user, but for many consumers, it is symbolized by one thing: the smart meter. A majority of U.S. states have begun deploying the wireless meters, which can send electricity usage information from a household back to the utility remotely at frequent intervals. According to the U.S. Energy Information Administration, more than 36 million smart meters were installed across the nation as of August 2012, covering about a quarter of all electrical customers. In the European Union, only 10 percent of households have smart meters but they are being deployed rapidly to meet an EU mandate that the technology reach 80 percent of households by 2020.

Because smart meters can provide real-time readings of household energy use instead of the familiar monthly figures most customers now see in their electric bills, the devices offer a new opportunity for consumers to learn more about their own power use and save money. But the ability to track a household's energy use multiple times a day also presents some unsettling possibilities. In theory, the information collected by smart meters could reveal how many people live in a home, their daily routines, changes in those routines, what types of electronic equipment are in the home, and other details. "It's not hard to imagine a divorce lawyer subpoenaing this information, an insurance company interpreting the data in a way that allows it to penalize customers, or criminals intercepting the information to plan a burglary," the private nonprofit Electronic Frontier Foundation noted in a blog post about smart meters. (Related: "Pictures: The Energy Drain of Recreational Drugs")

The European Union's data protection watchdog warned earlier this year that smart meters, while bringing significant potential benefits, also could be used track whether families "are away on holiday or at work, if someone uses a specific medical device or a baby-monitor, how they like to spend their free time and so on." The European Data Protection Supervisor urged that member states provide the public with more information on how the data is being handled. (Related: "The 21st Century Grid")

A State-by-State Effort

As with many of the rules governing utility operations, regulations to address privacy concerns in the United States are currently embedded in a patchwork of state laws and public utility commission policy. Most experts point to California as a leader: Last year, the California Public Utilities Commission (CPUC) adopted rules governing access to, and usage of, customer data. The state has also passed legislation that requires utilities to obtain the customer's consent for release of their information to any third party. The CPUC was involved in producing a comprehensive report on privacy with the National Institute of Standards and Technology (NIST) that summarizes, often in chilling detail, the many ways in which privacy breaches could occur on the smart grid, and recommends best practices for preventing those breaches. "As Smart Grid implementations collect more granular, detailed, and potentially personal information, this information may reveal business activities, manufacturing procedures, and personal activities in a given location," the NIST report said.

George Arnold, national coordinator for smart grid interoperability at NIST, points out that many of these privacy and security issues have been dealt with in the health care and telecommunications sectors, for example. "Protecting the privacy of the information [on the smart grid] has been taken very seriously. . . . I think it's a good news story that policymakers recognize the importance, and both policy and technical tools are well in hand to deal with this," Arnold said. (See related photos: "World's Worst Power Outages.")

But no existing federal or state laws can be counted on to protect consumers' utility data as smart meters are rolled out across the country. At least one utility in California argued early on that it was subject to a number of existing laws that would address privacy concerns, according to Jim Dempsey of the Center for Democracy and Technology, which worked with the CPUC on its privacy framework. However, Dempsey's group found that no single law provided a clear answer regarding utility data, and that a new set of rules was necessary. "Almost every state has some kind of [privacy] law already," Dempsey said. "But the point is, those laws predate the smart grid, and they do not really account for the complexity of the smart-grid ecosystem."

With other states—including Colorado, Maine, and Texas—now formulating policy on smart meters, a consensus is emerging. Jules Polonetsky of the Future of Privacy Forum, which advocates for responsible handling of consumer data, says there is general agreement that utilities should have rules that govern how they can use smart meter data, and that a customer should be able to know and have access to the data being collected. Still, Polonetsky points out that as energy-saving applications and devices (such as the Nest wireless thermostat) proliferate, state privacy frameworks may have limited power. Utility sharing of data is restricted, but "some device that I buy and I activate may not be subject to utility regulations," Polonetsky said. His organization has introduced a privacy seal for companies that handle smart-grid data, with the goal of highlighting companies that are being proactive about privacy.

Resistance to smart meters in some areas, though confined to a small fraction of utility customers, has been vociferous enough that a handful of communities have declared moratoriums on installations. The city of Ojai, California, for example, declared such a moratorium in May, though it is effectively unenforceable. In Texas, one woman pulled a gun on a utility employee who was trying to install a smart meter. Beyond privacy issues, many smart-meter opponents cite fear of exposure to radio frequency waves, even though radio frequency exposure from smart meters falls "substantially below the protective limits set by the Federal Communications Commission (FCC) for the general public," according to a study from the Electric Power Research Institute, the nonprofit research organization funded by the electric power industry. (Related: "Putting a (Smiley) Face on Energy Savings")

Some states, including California and Maine, which has the highest penetration rate in the country for advanced meters, have allowed residents to opt out of smart-meter installation. So far, few customers have done so: In California, according to Chris Villarreal of the CPUC, the opt-out rate was less than half of one percent. The Texas Public Utility Commission is currently weighing whether or not to allow customers to opt out.

Miller, the energy consultant, has been working on a $68 million effort partially funded by the U.S. Department of Energy to implement smart-grid technology with rural electric cooperatives. He said many of the concerns about smart meter privacy run counter to how utilities actually operate. "The utilities go through all kinds of effort to reduce the amount of information they get," he said. "They see no advantage [in] collecting data with no operational value. If the data did not allow you [as a utility] to make a better decision about the operation of your grid, then there's no reason for a utility to collect it, and they won't."

High Ambitions, Low Public Awareness

Protecting homeowner data from interested outsiders will be crucial for the electric industry as it seeks customer buy-in on the smart grid, but the real challenge may lie in boosting the interest of homeowners themselves. "Our research shows that consumers generally overwhelmingly are unaware of the smart grid [and smart meters] and don't even know what those terms mean," said Patty Durand, executive director of the Smart Grid Consumer Collaborative (SGCC), a nonprofit dedicated to consumer education about the smart grid.

In most cases, the utility notifies the customer that the smart meter is coming, swaps in the new meter, and recovers the cost of deployment through a slight rate adjustment, so a homeowner may have little involvement in the installation process. That decreases the likelihood that a homeowner will understand what the smart meter does or how it is beneficial. (Related: "Smart Meters Take Bite Out of Electricity Theft")

"For the longest time, the relationship between the utility and the customer has been, 'Here's the power and you can pay for it'," said Villarreal of the CPUC. "Now with smart grid and smart meters, we're asking the customers to get more involved and providing them with a lot more information, and now they're starting to ask questions."

Villarreal said that not all utilities have been quick to embrace a world that demands more of a dialogue with customers. In response to the notion of posting a privacy policy, one utility representative from another part of the country told him, " 'We don't want to do that, because we don't want customers calling us and asking us questions about it.' That's not a very proactive response to working with your customers. You're probably just raising the ire of customers more than solving the problem," he said.

California's public utilities have learned to employ robust communication strategies for smart-meter rollouts. San Diego Gas and Electric (SDG&E) sent out at least five notifications to customers leading up to installations. "I think that really helped, because it wasn't like it was somebody knocking on the door," said Caroline Winn, SDG&E's vice president of customer services and chief customer privacy officer. "People weren't surprised to get the smart meter when we installed them."

While a combination of proactive communication and opt-out policies can help prevent customer confusion and minimize backlash against smart-meter rollouts, utilities have the long-term task of making sure that they add value for both customers and themselves. Some benefits involve little or no customer engagement: Smart meters can tell utilities, for example, when outages occur and help generate outage maps for customers (in the analog days, the utility didn't know about an outage unless a customer called).

Other aspects of smart meters involve more attention from a household. Pacific Gas & Electric (PG&E), which has installed 9.1 million smart meters across northern and central California at a total cost of $2.2 billion, has experimented with a variety of methods for getting customers more interested in their data. "We deploy reporting with your bill that shows you your usage compared to your neighbor's, and that's highly motivating for some people," said PG&E Chief Information Officer Karen Austin.

PG&E's other programs include rate incentives for energy conservation during peak times, text messages that alert customers when their electricity usage crosses into a new pricing tier, and participation in the Green Button Initiative, which allows people to download their energy-usage information in a standardized format. The goal is to create a level of engagement with energy-usage data among consumers that has barely existed before. Ultimately, the hope is that when consumers see how much energy they use, they can try to use less.

"The utilities have been challenged with not properly educating consumers and not understanding who their consumers are, because they've never had to," said Durand of the SGCC. "In the past, it's been a one-way relationship . . . but those days are over." (Related: "Can Hurricane Sandy Shed Light on Curbing Power Outages?")