evolving utilities, cost recovery, and pricing… · customers’ “utility of the future,”...
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EVOLVING UTILITIES, COST RECOVERY, AND PRICING:
A CONSUMER VIEW
Bob Nelson
Montana Consumer Counsel [email protected]
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“I used to be open minded, but my brains kept spilling out.”
Steven Wright
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What’s going on?
What the utility sees:
- DSM/EE growth
- DR programs
- DG, Commercial/Residential
- Automation leverage______
= reduced load growth
= lower revenue growth
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What the consumer sees:
Commercial/Large:
- Cost of wind and solar are competitive with/lower
than embedded resources
- Constituents favor “green”
Residential:
- PV is green
- PV is cheaper than retail rate in many settings
- Net metering appears to generate savings, esp. through 3rd parties
_______________________________________________________________
=Desire for customer options
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But what do most customers want?
1) Reliable and safe service
2) At lowest reasonable cost
3) Convenience
4) Environmental stewardship
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What is the “Utility of the Future” for customers?
- For most residential and small business it will be the “utility of the past” - The utility is the light switch and outlet
- Customers generally don’t think about technical aspects of the grid, generation, load growth, RTO’s, etc.
- Electricity is a commodity – not valued for itself, but for applications it enables
- True, some electricity consumers are installing generation. Q: Why? Would they do it if it cost more?
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Customers’ “Utility of the Future,” cont.
- The Bill
- This may represent the biggest change in how customers see their
utility.
- Energy consumerism is on the rise
- Utilities should focus more on customers, less on commissions/regulatory mechanisms
- Customers focus not on energy, but its use:
- Generally like options that increase control without complicating their lives
- Don’t like price increases
- Those things will encourage increased interest in “breaking free” and at some point regulatory fixes won’t be enough
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Example: REV Assumptions and Questions
- “Historical regulatory approach” is not well adapted to meeting objectives such as empowering customer management of energy
- Why not?
- “Building to meet demand” vs. “How to incorporate DER” - Are these exclusive?
- Public Utility always has role of meeting demand
- Customer centered approach that harnesses technology and markets - Isn’t current regulation customer centered?
- Use DER as a primary planning tool - Can’t IRP process do that?
- Utility will have opportunity to earn market based revenues - What market?
- If true market, should it be regulated?
- Early actions: DR tariffs, demonstration projects, non-wires alternatives - Can’t these be done now?
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REV, cont.
- Opportunity presented by proliferation of new utility business models to align earnings opportunity with customer value
- Yet to be developed
- Isn’t using “value” as a benchmark for earnings inconsistent with the basis for regulation?
Estimate of cost savings?
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Cost Recovery Through Rate Design
• Volumetric, with Customer Charge
• SFV/Fixed Charges
• Demand Rates
• TOU
• Minimum Bills
• Net Metering
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Bonbright’s Principles
• Acceptance, understandability, feasibility of application: convenience and simplicity
• Reasonable opportunity to recover allowed cost of service
• Rate continuity: stability and predictability of rates themselves
• Economically efficient use of facilities and resources
• Fairness and avoidance of undue discrimination
Bonbright, Principles of Public Utility Rates, 1988
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What is objective here?
- Reducing utility risks?
- Collecting costs through fixed charges?
- Raising customer charges is unpopular
- Demand charges have same effect if not practically avoidable
- Other more direct methods available
- Achieve better efficiency through demand pricing?
- Must be based on coincident peak
- Must ask, “is there a better way to do this?”
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SFV/Fixed (Customer) Charges
- Wisconsin evolution
- Pro: - Large portion of utility costs are fixed
- Revenue stability
- Revenue recovery
- Con: - Unpopular – customer resistance
- Shifts general economic risks to consumers
- Negative impact on energy efficiency incentives
- Hits low usage/low income
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Residential Demand Rates
- Pro:
- Theoretical match between pricing mechanism and cost incurrence
- Revenue stability
- Revenue recovery
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Residential Demand Rates
Legitimate concerns: – Difficult to understand
• Difference between general concept and actual understanding of demand rates
• Determining which are fixed costs is controversial
– High frictional costs • Imposes high level of inconvenience
• Limited (or no) ability to change some usage – Some things must run (AC, refrig., med.)
– Lack of information • Smart meters may not read kW
– Reduces efficiency incentives
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Legitimate concerns: - Bill instability
- Higher chance for unpredictable and surprising bills
- Price signals that diverge from purpose - Residential users have more diversity than Industrial/Commercial - Monthly peak demands likely diverge from annual peaks - Annual demand is not known until end of the peak season - Beyond anyone’s control
- Higher bills for low use customers - Low use customers may correlate more highly with low income
- Requires expensive metering equipment, use of that equipment, and other technology/appliance investment
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Legitimate concerns:
- Low customer acceptance
- In one study of the utilities that offer voluntary residential demand rates:
- “In general, this rate option has very low subscription levels, with the exception of APS, which has approximately 10 percent of their customers who opt in to the demand-based offering.”
McLaren, Davidson, Miller, Bird, Electricity Journal (10/15)
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2014 Monthly kWh Usage vs System Peak (MW)
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August Billing Cycle: Daily kWh usage vs Daily System Peak (MW)
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August 7, 2014 kWh usage (15 minute increments) vs Hourly System Load (MW)
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kWh MW MW Load at Top of Hour
kWh usage in 15 minute increment
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Bill Impacts: Standard Rates vs Demand Rates
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Feb Mar Apr May Jun Jul Aug Sept Oct Nov Dec Jan Feb
Standard Rates
Stability Rates
Demand Rates
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Predictable Result
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Westar Proposed Rate Design
kWh Kw Standard Stability Demand
2014 Feb 582 6 $84.53 $83.46 $83.33
Mar 513 8 $76.29 $79.49 $83.37
Apr 533 8 $78.68 $80.64 $85.10
May 483 8 $72.71 $77.76 $80.77
Jun 785 10 $108.79 $109.59 $182.89
Jul 1134 10 $152.24 $147.85 $213.07
Aug 1100 10 $147.92 $143.51 $210.13
Sept 1203 10 $161.00 $156.64 $219.04
Oct 640 8 $91.46 $89.92 $94.35
Nov 553 8 $81.07 $81.79 $86.83
Dec 557 8 $81.55 $82.02 $87.17
2015 Jan 726 8 $101.74 $101.59 $101.79
Feb 504 8 $75.21 $78.97 $82.59
Bill impact of Demand Rates
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Achieving Objectives? - 77,675 Residential accounts w/ consumption and peak demand info -Rate design options: ($13.25 CC)
Annual Demand
Billing (Monthly demand) Volumetric Split (40% fixed, 60% energy) Seasonal TOU
- Correlation of demand costs to customer contribution to system peak?
Source: Rubin, Electricity Journal (11/15)
Option Intercept Slope R-squared Significance
All kWh 169.200 0.526 0.419 p˂0.001
Billing Demand 178.876 0.499 0.426 p˂0.001
Split 43.695 0.878 0.419 p˂0.001
Seasonal 125.856 0.648 0.550 p˂0.001 24
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TOU Rates
• Wisconsin experience
• Pros:
– Stronger price signal
– Easier to understand than demand rates
• Cons:
– Higher frictional costs
– Real time pricing difficult or impossible to respond to
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Minimum Bills
• Pros:
– Theoretically recognizes fixed cost recovery in fixed rates
– Appears to have less impact on non-net metering customer bills than demand rates
(McLaren, et al., Electricity Journal 10/15)
• Cons:
– Low customer acceptance
– Treats base level of consumption as “free”
– Dampens conservation incentive
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Volumetric Rates
• Pros: – Simple, straightforward – Consistent with most other pricing practices – Customers do understand kWh’s – Smart meters read kWh’s – Can set discrete pricing times to send stronger price signals – Can give same education as demand rates to achieve similar
goals – Consistent with competitive model in assigning business risks – Encourages conservation
• Cons: – Utility revenue recovery and stability may be impacted – High volume users may support lower volume users
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DG Customer Rates
• Utility concern: Cost recovery
• Ratepayer concern: Cost shifting
• Options: – Net metering
– Wholesale energy rates
– AC rates – modified
• Why important? – Residential PV customers offset on average 60-95% of annual load
– Residential PV customers meet roughly 65% of demand from the electric grid
• Conclusion: Standard rate design may be less suited to these customers
• Solution: ?
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“Experience is something you don’t get until just after you need it.”
Steven Wright
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