American Electric Power (NYSE:AEP) says it will work with General Electric (NYSE:GE) to develop and install "smart meters" to help the company better manage the transmission of electricity -- and give customers more direct control over how much they use, thus saving them money. The plan calls for an initial rollout of 200,000 smart meters to AEP's customers in 2008, with the ultimate goal being to deliver five million by 2015.

The plan, announced last week, is an aggressive one, but AEP has plenty of motivation to meet the goal. Under normal circumstances, the best way to meet growing demand is to simply increase power production. The problem is that it's not cheap or easy to build a power plant or construct a nuclear facility. This delay can sometimes create a classic supply-demand disconnect.

One way of addressing such shortages is rolling blackouts, which are widely unpopular. A far better approach is to increase the price of electricity during periods of peak demand and allow customers to voluntarily choose to control their consumption. For this market-driven approach to work, however, it's essential that consumers have the technology to monitor the price and amount of electricity they are using in real time. This is where the smart meters come into play.

Further, the smart-meter initiative gives AEP a cost-effective, alternative route for dealing with short-run consumption spikes, as opposed to firing up inefficient plants or ramping up capital spending. By taking this step now, the company likely will save both itself and its customers a lot of money and a lot of hassles over the years.

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