PORTLAND, Ore. -- State regulators approved Portland General Electric Co.'s proposal to install 850,000 smart electricity meters over the next two years.

The meters provide two-way communication between PGE and customer homes. The Portland-based utility says the technology will save $18 million annually by reducing the cost of shutoffs, service activations and meter reading.

PGE plans to test 16,000 meters this summer, then roll them out systemwide next year, The Oregonian newspaper reported.

Besides trimming costs, the company says the meters will provide a platform for future programs to better manage electricity demand. The technology, for example, could let PGE send price signals to customers, letting them check energy use on the Internet and adjust their habits to reduce costs.

"This technology is a key part of the foundation we're laying to meet Oregon's future energy needs," Peggy Fowler, PGE's chief executive, said in a statement Wednesday.

But someone has to pay for the technology. The utility said it needed a rate increase of 1.2 percent for residential customers, 1.4 percent for small nonresidential customers, and a fraction of 1 percent for large customers.

The increases are effective in June for a period of 2 years.

Advocates for PGE customers were unhappy that regulators approved the plan, especially when PGE has recently asked for and received other rate increases.

The Citizens Utility Board, which represents residential ratepayer interests, noted that PGE installed 3,500 smart meters in 2001. Those will be replaced by new and improved smart meters.

The citizens board says PGE shareholders should pay for the residual value of those meters because the company made a poor investment decision. Instead, the Public Utility Commission will let PGE write off $30 million in value of all its existing meters.

"We have a commission that's not holding them accountable," said Bob Jenks, the board's executive director. "There's a real need for this commission to say 'PGE, you have to control your costs."'

Earlier this year, PGE asked for a 9 percent rate increase. Roughly a third of the request was to cover higher natural gas and coal costs. But the company is also looking to cover the cost of more than 100 new positions, and wants a higher return for shareholders.

PGE customers saw rates increase almost 7 percent last year because of higher power costs as well as spending on a new gas-fired power plant and a wind farm.