Future Electric U,lity Regulaon Series Report #5: Future ...€¢ Unique point-counterpoint approach highlights different views on the future of electric utility regulation and business

Future Electric Utility Regulation Advisory

Group Meeting

March27,2014

FutureElectricU,lityRegula,onSeriesReport#5:RecoveryofU4lityFixedCosts:U4lity,Consumer,

EnvironmentalandEconomistPerspec4vesJuly8,2016

LisaWood,Ins4tuteforElectricInnova4onandTheEdisonFounda4onRossHemphill,RCHemphillSolu4ons

JohnHowat,Na4onalConsumerLawCenterRalphCavanagh,NaturalResourcesDefenseCouncilSeverinBorenstein,UniversityofCalifornia,Berkeley

LisaSchwartz,BerkeleyLab,ProjectManager

Agenda

•  Abouttheseries•  Webinarhousekeepingitems•  Fourperspec,vesonfixedu,litycosts(15min.each)

–  U,lityperspec,ve–WoodandHemphill–  Consumerperspec,ve–Howat–  Environmentalperspec,ve–Cavanagh–  Economistperspec,ve–Borenstein

•  Q&A(25min.)

2EnergyAnalysisandEnvironmentalImpactsDivision

Future Electric Utility Regulation Series •  A new series of reports from Lawrence Berkeley National Laboratory taps

leading thinkers to grapple with complex regulatory issues for electricity •  Unique point-counterpoint approach highlights different views on the future of

electric utility regulation and business models and achieving a reliable, affordable and flexible power system

•  Primary funder: DOE Office of Electricity Delivery and Energy Reliability, National Electricity Delivery Division

•  Primary funder for report #5: DOE Office of Energy Policy & Systems Analysis •  Reports published or underway:

1. Distributed Energy Resources (DERs), Industry Structure and Regulatory Responses 2. Distribution Systems in a High DER Future: Planning, Market Design, Operation and

Oversight 3. Performance-Based Regulation in a High DER Future 4. Distribution System Pricing With DERs 5. Recovery of Utility Fixed Costs: Utility, Consumer, Environmental and Economist

Perspectives – Today’s topic 6. The Future of Electricity Resource Planning (draft under review)

•  Additional reports forthcoming: feur.lbl.gov•  Expert advisory group (next slide) provides

guidance and review EnergyAnalysisandEnvironmentalImpactsDivision 3

AdvisoryGroup

4

•  JaniceBeecher,Ins,tuteofPublicU,li,es,MichiganStateUniversity•  AshleyBrown,HarvardElectricityPolicyGroup•  PaulaCarmody,MarylandOfficeofPeople’sCounsel•  RalphCavanagh,NaturalResourcesDefenseCouncil•  CommissionerMichaelChampley,HawaiiPublicU,li,esCommission•  SteveCorneli,independentadviser•  CommissionerMikeFlorio,CaliforniaPublicU,li,esCommission•  PeterFox-Penner,BostonUniversityQuestromSchoolofBusiness•  Sco^Hempling,aôrney•  ValJensen,CommonwealthEdison•  SteveKihm,Seventhwave•  CommissionerNancyLange,MinnesotaPublicU,li,esCommission•  SergejMahnovski,ConsolidatedEdison•  KrisMayes,ArizonaStateUniversityCollegeofLaw/U,lityoftheFutureCenter•  JayMorrison,Na,onalRuralElectricCoopera,veAssocia,on•  AllenMosher,AmericanPublicPowerAssocia,on•  SonnyPopowsky,FormerconsumeradvocateofPennsylvania•  KarlRábago,PaceEnergy&ClimateCenter,PaceUniversitySchoolofLaw•  RichSedano,RegulatoryAssistanceProject•  ChairAudreyZibelman,NewYorkStatePublicServiceCommission•  PeterZschokke,Na,onalGrid

EnergyAnalysisandEnvironmentalImpactsDivision

Webinar Housekeeping Items


•  We’re recording the webinar and will post it on our web site. •  Because of the large number of participants, everyone is in

listen mode only. •  Please use the chat box to send us your questions and

comments any time during the webinar. You may want to direct your question to a specific author.

•  The report authors will each have 15 minutes to present.

•  Moderated Q&A will follow, with the report authors

responding to questions typed in the chat box. •  The report and webinar slides are posted at feur.lbl.gov

AbouttheAuthors(inorderofpresenta,on)

LisaWoodisVicePresidentofTheEdisonFounda,onandExecu,veDirectoroftheIns,tuteforElectricInnova,on.Previously,WoodwasaPrincipalwithTheBra^leGroup,aPrincipalwithPHBHaglerBailly,andaProgramDirectoratRTIInterna,onal.RossC.Hemphillisanindependentconsultantonregulatoryandenergypolicyissues.Hiscareerovermorethan35yearshasbeendevotedtoenergyandregulatorypolicywithaprimaryfocusonratemakingtheoryandprac,ce.Hemphillhasworkedforu,li,es,researchins,tu,onsandregulatoryagencies,bothdirectlyandasaconsultant.Mostrecently,hewasvicepresidentofRegulatoryPolicy&StrategyforCommonwealthEdison.JohnHowathasbeeninvolvedwithenergyprogramsandpoliciessince1981,includingthepast17yearsatNa,onalConsumerLawCenter.Previously,heservedasResearchDirectoroftheMassachuse^sJointLegisla,veCommiêeonEnergy,EconomistwiththeElectricPowerDivisionoftheMassachuse^sDepartmentofPublicU,li,es,andDirectoroftheAssocia,onofMassachuse^sLocalEnergyOfficials.RalphCavanaghisco-directorofNaturalResourcesDefenseCouncil’senergyprogram,whichhejoinedin1979.CavanaghhasbeenaVisi,ngProfessorofLawatStanfordandUniversityofCalifornia-BerkeleyLawSchoolandaLectureronLawatHarvardLawSchool.HealsohasbeenafacultymemberfortheUniversityofIdaho’sU,lityExecu,vesCourseformorethan20years.From1993to2003heservedontheU.S.SecretaryofEnergy’sAdvisoryBoard.SeverinBorensteinisE.T.GretherProfessorofBusinessAdministra,onandPublicPolicyattheHaasSchoolofBusinessandaResearchAssociateoftheEnergyIns,tuteatHaas.HealsoisDirectoremeritusoftheUniversityofCaliforniaEnergyIns,tute(1994-2014)andtheEnergyIns,tuteatHaas(2009-2014).Hisresearchfocusesonbusinesscompe,,on,strategyandregula,on.Hehasservedonnumerouscommiêesandboardsforstateandfederalgovernments.JeffDeasonandLisaSchwartzwrotetheliteraturereview(chapter5)inthereport,notcoveredinthiswebinar.


FourPerspec4vesonFixedCostRecovery Wood/Hemphill

(utility)Howat

(consumer)Cavanagh

(environmental)Borenstein(economist)

Higherfixedcharges 8 0 0 91

Minimumbills 0 4 4 0

Demandcharges 8 0 82 0

Time-varyingrates 0 4 4 43

Tieredrates 0 4 4 0

Revenuedecoupling 0 44 45 0

Frequentratecases 86 9 0 0

Formularateplans 4 87 8 0

Lostrevenueadjustmentmechanisms

0 0 0 0

0 Poor 9Better 8 Good 4 Preferred

1Firstsetvolumetricpricetoreflectactualsocialmarginalcosts,includingcostsofexternalitieswhetherornottheutilityhastopaythosecosts.2Linkedtoperiodsofcoincidentpeakandsubjecttonegotiatedresolutionofimportanttechnicalissues. 3Reflectingfullsocialmarginalcost,withtheremainingrevenuerequirementbalancedbetweenhighervolumetricratesandhigherfixedcharges.4Assuminganumberofsafeguardsareimplemented(seereport).5Necessarybutnotsufficient.6Incombinationwithaformularateplanandonlyforsettingrevenuerequirement;ratedesignissuestobeaddressedlessfrequently(e.g.,everythreeyears).7Implementationofformularatesshouldnotdenyutilitycustomersandotherstakeholderstheabilitytoperiodicallyreviewandlitigateautility’scoststructure.

7


Please use the chat box to send us your questions and comments any time during the webinar. You may want to direct your question to a specific author. We’ll address as many questions as we can following the presentation. The report and webinar slides are posted at feur.lbl.gov

ProvidingaRegulatoryPathfortheTransforma4on

oftheElectricU4lityIndustry

LisaWood,Execu4veDirectorIns4tuteforElectricInnova4on

RossHemphillRCHemphillSolu4onsLLC

9

Threekeytrendsinelectricpowerindustryareimportanttoday!

•  Majortransi,ontocleanenergyo  U.S.carbonemissionsare20%below2005levelsasofEOY2015o  U.S.carbonemissionswere15%below2005levelsasofEOY2014

•  Moredigitalanddistributedpowergrido  Digi,za,onofthepowerindustryiswellunderwayo  Distributedenergyresourcesaregrowingexponen,allyo  Bigdata:howaredatabeingusedtogeneratevalue?

•  Individualiza,onofcustomerserviceso  Fromlargecorpora,onswithsustainabilitygoalstoresiden,alcustomerswho

wanttobuyintosolarormanagetheirenergyo  “Asaservice”businesses

10

Trend1.Majortransi,ontocleanerenergyin10yearsinU.S.genera,onmix(EIA)

U.S. Electricity Generation Mix 2005

U.S. Electricity Generation Mix 2015

11

Trend2.Powergridbecomingmoredigitalandcomplexandintegra,ngmoredistributedenergyresources

Note: Industry capex $103.3 billion in 2015

12

Trend3.Individualiza,onofcustomerservices

•  Largecorpora,onswithsustainabilitygoals–increasinglysigningcontractswithu,li,esfor100%renewableenergy.MorethanRECso  energy+RECso  Statepolicyissue:aretheresourcesand

tariffsinplacetooffertheseservices?

•  Residen,alsolarop,ons:privateandu,lity-offeredsolaro  Statepolicyissue:whocanofferwhich

typesofsolartocustomers?•  Newbusinessesofferingservices

o  EdisonEnergy-Energyasaservicemodelo  Current-GE’snewenergybusiness

13

Regula,onsandpolicieswillfacilitateorblockthepaceofchangeintheseareas

•  Aswetransi,ontoacleanenergyfuture,howistheu,litybusinessmodelchanging?

•  Asthepowergridbecomesincreasinglydigitalanddistributedo  Howdowevalue&pricethepowergrid?o  Howdowevalue&pricedistributedenergyresources?

•  Ascustomersdemandmoreindividualiza,onofservices,howmustregula,onchangetoallowflexibilityinofferingservices?o  Atminimum,cri,caltobegintopricegridservicesappropriately

14

Guidelinesforpricinggridservices

•  Approacheswerecommendandwhyo Formularatemakingapproacheso Appropriatecost-basedapproaches

§  Fixedcharges§ Demandcharges

•  Approacheswedon’trecommendandwhyo Decouplingo Lostrevenueadjustmentmechanism(LRAM)o Minimumbill

15

Recommended:Formularatemaking

•  Anapproachtosevngtheappropriatelevelofrevenuerecoveryonanannualbasisthroughastreamlinedregulatoryprocess.UsingIllinoisasanexample:

It

•  Itisstreamlinedduetothreecomponentsoftheprocess:1.  Allowedreturnonequityisasimplearithme,ccalcula,onusingknownand

transparentinputs;2.  Costalloca,onandratedesignarenotpartoftheprocess;and3.  Determina,onofanumberofissuesfrequentlyli,gatedisse^ledbylaw.

16

FormularatemakingII

•  IllinoisApproach:Simpleandmethodicalo  U,li,esrequiredtomakefilingseachyearbyMay1tosetratesstar,ngJanuary1offollowingcalendaryear

o  Forexample,filingMay1,2016,willbeforrateyearstar,ngJanuary1,2017

o  Commissionhas240daystomakedecisiono  AllstepsinanormalratecasetakeplacepriortoCommissiondecision

•  Updatedcostinforma,oneachyearusingFERCForm1

•  Reconcilia,onofpreviouslyapprovedrevenuerequirementusingupdatedinforma,on

•  Illinoisisinthe5thyearofthisformulaprocess17

FormularatemakingIII

•  Howhasthisworked?Resultsayer5yearsinIllinois:o  Cri,calinfrastructureinvestmentsarebeingmadeo  Reliabilityandcustomerserviceperformanceareathistorichighs

o  Customersa,sfac,oncon,nuestoclimbo  Total(all-in)electricratesremainatorbelowinfla,onrate

•  AMIdeploymentisaheadofscheduleo Over20millionmanualmeterreadshavebeeneliminatedthusfar–andsmartmeterdeploymenthasjustexceeded50%.

o  Becauseoftheformula,thesesavingsflowbacktothecustomerseveryyearwiththeannualfiling.

18

Recommendedcost-basedpricingapproaches

•  FixedCharges–onecost-basedapproacho  Transparencyinpricinggridservices:Movetowardfixedandvariablechargesthatarecommensuratewithfixedandvariablecosts

o  Currentfixedcharges(e.g.,customercharges)arefarbelowleveloffixedcostsincurredbyu,li,es§  Forexample,fixedcostsforComEdarealmost50%ofcustomerbillyetmostofthisiscollectedviavolumetriccharge(notcustomercharge)

§  Somestakeholdersareopposedtochargingdirectlyforfixedcosts.

•  DemandCharges–anothercost-basedapproacho  C&Icustomershavehaddemandchargesinplaceforlong,me

§  Rewardshigherloadfactorconsump,onbehavior§  Incen,vizesdemandresponseandenergyefficiencyascustomersrespondtopricesignalstoreducetheirbills

§  But,maybeverydifficulttocommunicatetoresiden,alcustomers19

Approachesnotrecommended

•  Revenuedecoupling&LRAMapproaches•  Expostadjustment(ortrue-upmechanism)thatassuresfixedcostrecoverywhenenergysalesdecline(e.g.,typicallyusedforenergyefficiency)

•  AlthoughdecouplingworksforEE,thecostshiyforDGismuchgreaterpercustomer.Hence,decouplingexacerbatesthewell-knownDGcostshiyingissue!

•  Minimumbill•  Fixed-variablepricesignalsremainthesamebutthecustomerpaysaminimumbilleachmonth

•  Nottransparenttocustomer(e.g.,fullcostofgridservicesnotshown)

•  Quitesimilartocurrentcustomerchargewithsameissuessinceminimumbillamountunlikelytorecoverfullcostofgridservices

20

Finalthoughts•  Electricu,litycompaniesprovidebothgridservicesandenergy

servicestodayo  Yet,greatreluctancetochargeforgridservicesdirectly!

•  Whatisthewayforward?o  Adopttransparencyinpricingforgridservicesandenergyo Manyop,onsandapproaches–wedescribedafew

§  Formularatemaking(e.g.,Illinois)§  Chargingdirectlyforfixedcosts(e.g.,increasecustomercharge)§  Demandcharges

•  Whyisthisimportantnow?o  Asnumberofdistributedenergyresourcescon,nuestogrow,powergridisincreasinglyimportantastheintegratorandenablerofDERs

o  Cri,caltopricegridservicesright!21


Formoreinforma,on

22

LisaWood

VicePresident,EdisonFounda,onExecu,veDirector,Ins,tuteforElectricInnova,onlwood@edisonfounda,on.netwww.edisonfounda,on.netRossHemphillPresident,RCHemphillSolu,onsFormerVP,RegulatoryPolicy&Strategy,[email protected]



AConsumerAdvocate’sPerspec4veonElectricU4lityRateDesignOp4ons

forRecoveringFixedCostsinanEnvironmentofFlatorDeclining

Demand

JohnHowatNa4onalConsumerLawCenter

24

TheU,lityIndustryinTransi,on:Themorethingschange…

•  Genera,onandend-usetechnologiesandeconomics

•  Advancedcommunica,oncapabili,es

•  Flatordecliningsales

•  U,litybusinessmodelassump,ons

•  Regulatorymodelsandassump,ons?

25

…themoretheystaythesame

•  Homeenergyserviceremainsabasicnecessityoflife–  Enduses

o Hea,ngo Coolingo Ligh,ngo Refrigera,ono Communica,on

– Uninterruptedaccessrequiredtoensurehealth,safety,andeffec,vesocietalpar,cipa,on

•  Homeenergycostsandbenefitsareregressivelydistributed

26

UnderlyingAssump,onsandBiases

•  Toensureuninterruptedaccesstoaffordablehomeenergyservice:– Retaineffec,veregulatoryoversightofu,lity

o Procuremento Pricingo Termsofserviceo Billingo Customerserviceo Creditandcollec,ons

Effective regulatory consumer protections

Control costs affecting rates and bills

27

UnderlyingAssump,onsandBiases(cont.)

•  Toensureuninterruptedaccesstoaffordablehomeenergyservice:– Preservethelong-termviabilityofu,litydistribu,oncompaniesthatretaintheobliga,ontoserveallcustomers

•  Energyefficiencyistheleast-cost,premiumenergyresource

•  Theu,lity“throughputincen,ve”iscounterproduc,vetoimplementa,onofeffec,veenergyefficiencyprogramming.

28

IncreasedFixedCustomerCharges

•  Since2014electricu,li,esinatleast34stateshaveproposedtoshiyrecoveryofrevenuerequirementsfromvolumetricchargestomonthlyfixed,customercharges.

•  Intra-classcostshiy–  Shiyscostswithinarateclassfromhigh-volumeconsumerstolow-volumeconsumerswithinarateclass

–  DatademonstratesthatinnearlyallregionsoftheUSelectricityusageisbelowtheresiden,alclassaveragefor:o Low-incomehouseholdso Elderhouseholdso Householdsofcolor

•  Diminishedefficiencyincen,veandcustomercontroloverthebill

29

MadisonGas&ElectricCompany-Compara,veBillImpact:Low,AverageandHigh-VolumeResiden,alGeneralServiceCustomers

Low-volumeCustomer Average-volumeCustomer High-volumeCustomer

MonthlyUsage(KWH) 450 900 1400

Ini,alMonthlyCustomerCharge $10.44 $10.44 $10.44

RevisedMonthlyCustomerCharge+GridConnec,onCharge $19.00 $19.00 $19.00

Ini,alVolumetricCharge $0.13992 $0.13992 $0.13992

RevisedVolumetricCharge $0.12986 $0.12986 $0.12986

Ini,alMonthlyBill $73.40 $136.37 $206.33

RevisedMonthlyBill $77.44 $135.87 $200.80

$Increase $4.03 ($0.49) ($5.52)

%Increase 5.5% -0.4% -2.7%

30

3,964

6,186

7,368

8,201

9,956

3,794

4,806

5,814 6,043

9,731

<$25,000 $25,000-$49,999

$50,000-$74,999

$75,000-$99,999

>=$100,000 <$25,000 $25,000-$49,999

$50,000-$74,999

$75,000-$99,999

>=$100,000

Connec4cut,Maine,NewHampshire,RhodeIsland,Vermont Massachusees

Median2009Residen4alElectricityUsage(KHW)byIncomeCategory:MAandCT/ME/NH/RI/VT

31

4,702

7,464

4,224

6,056

<=150%FPL Over150%FPL <=150%FPL Over150%FPL


Median2009Residen4alElectricityUsage(KHW)by150%PovertyStatus:MAandCT/ME/NH/RI/VT

32

5,277

7,377

4,526

6,030

65orMore Lessthan65 65orMore Lessthan65


Median2009Residen4alElectricityUsage(KHW)byAgeofHouseholder:MAandCT/ME/NH/RI/VT

33

3,831

5,988

7,265

4,6634,343

5,890

AsianAlone BlackorAfrican-AmericanAlone

WhiteAlone AsianAlone BlackorAfrican-AmericanAlone

WhiteAlone


Median2009Residen4alElectricityUsage(KHW)byRaceofHouseholder:MAandCT/ME/NH/RI/VT

34

0

2000

4000

6000

8000

10000

12000

14000

16000

18000

Conn

ec,cut,M

aine

,New

Ham

pshire,R

hode

Island

,

Massachuse^

s

New

York

New

Jersey

Penn

sylvania

Illinois

Indiana,Ohio

Michigan

Wisc

onsin

Iowa,M

inne

sota,N

orthDakota,Sou

thDakota

Kansas,N

ebraska

Missou

ri

Virginia

Delaware,Districto

fColum

bia,M

aryland,W

est

Georgia

NorthCarolina,Sou

thCarolina

Florida

Alabam

a,Ken

tucky,M

ississippi

Tenn

essee

Arkansas,Lou

isiana,Oklahom

a

Texas

Colorado

Idaho,M

ontana,U

tah,W

yoming

Arizo

na

Nevada,New

Mexico

California

Alaska,H

awaii,Oregon,W

ashington

Total

Average2009HouseholdElectricityUsage(KWH)byStatusAboveorBelow150%ofPoverty

Income+150%FPL

Income<=150%FPL

Source: U.S. Energy Information Administration, 2009 Residential Energy Consumption Survey

National Consumer Law Center, June 2014

35

RevenueDecoupling-AbridgedCatalogofConsumerAdvocateObjec,onsandConcerns

•  Lossofabilitytoli,gateau,lity’scoststructure–  Tracker/riderapproachtoregula,on–  Revenuesdonotnecessarilytrackcosts

•  U,lityriskmi,ga,onwithnocommensuratebenefittoconsumers

•  Increasedpricevola,lity•  Proposedasmechanismtopromoteenergyefficiency– Nodirectlinktou,lityEEinvestmentlevel–  EEmandatedbystatuteinmanystatessononeedfordecoupling

•  Increasedcustomerconfusion(“ThelessIusethemoreIpay?”)

36

DecouplingDesignElementstoProtectConsumersandAddressAdvocates’Concerns•  Regulatoryreviewofu,litycoststructuretoresettherevenuebaseline

–  Incorporateappropriatemechanismtoaccountformodifiedu,lityriskprofile

–  Timingandapproachcontroversial–  Regulartrue-upofundepreciatedvalueofu,litycapitalinvestments–  Fullratecaseevery3years?

•  Cap/collaronupwardpriceadjustments•  Limitcostadjustmentsbetweenratecases

–  #customers–  O&M

•  CommitmentsregardingtargetedEEinvestmentandimplementa,on–  Commitmentsaboveandbeyondpre-exis,ngmandates–  e.g.,hardtoreachresiden,alcustomers,whole-house,deepresiden,al

retrofits•  Combinewithproposaltoimplementincliningblockratestructure

–  Surchargetotailblock–  Surcredittoini,alblock

37

Time-varyingrates

•  IFPROPERLYDESIGNEDANDIMPLEMENTED,mayallowsomeindividualcustomerstoreduceenergybills– Poten,alforadverseimpactsonconsumerswithlessabilitytoshiyusageo Applianceinventoryo Usageneedsandpaêrnso Accesstoenergyefficiency,genera,onandmanagementresources

•  In2015,52Mresiden,alsmartmetersamong123MUShouseholds

•  AbsentARRAfunding,newAMIdeploymenthasslowedconsiderably

38

TVRVariantsandResiden,alConsumers

•  Time-of-Use(TOU)– Presetintariff,varypredictablyby,meofdayorseasono Mostpredictable

•  Cri,calpeakpricing(CPP)– Pre-setpricingforspecified#ofdaysorhoursduringpeakmonthso Lesspredictable

•  Real-,mepricing(RTP)– Tiedtowholesalepowermarkets

o Leastpredictable39

AMIEssen,alConsumerProtec,ons

•  Costs–  Smartmeterproposalsmustbecost-effec,ve–  U,li,esmustsharetherisksassociatedwithinvestmentsinnew

technologies•  PlanningFramework

–  Considerfullrangeofalterna,vesavailabletomeetpredeterminedpolicygoalsandobjec,veso  e.g.,regulatorsshouldassessforcost-effec,venessallalterna,vestoAMItomeet

systempeakreduc,ongoals,suchasdirectloadcontrolprograms•  Pricing

–  Time-basedordynamicpricingmustnotbemademandatory–opt-in–  Anynewdynamicpricingstructureshouldberolledoutwith“shadow

billing”andlow-income“holdharmless”provisions–  Pre-paidserviceshouldnotbeallowed–especiallyinlow-income

households•  See“AddiConalSlides”atendofwebinarslidedeck

40

OtherRateDesignOp,ons

•  MinimumBills– Minimumconsump,onlevel– Minimumbillamount

•  Residen,alDemandCharges–  Consumercontrol/response–  Coincident–non-coincidentcharges–  See,me-varyingratesconcerns

•  FormulaRates–  Performancestandards– Doesnotmi,gateconsumerinterestinperiodicallyli,ga,ngu,litycoststructure

41

Since1969,thenonprofitNa4onalConsumerLawCenter®(NCLC®)hasworkedforconsumerjus,ceandeconomicsecurityforlow-incomeandotherdisadvantagedpeople,includingolderadults,intheU.S.throughitsexper,seinpolicyanalysisandadvocacy,publica,ons,li,ga,on,expertwitnessservices,andtraining.www.nclc.org

42John Howat: [email protected]



EnvironmentallyPreferredApproachesforRecoveringElectric

U4li4es’AuthorizedCostsofServices:Op4onsforSekngandAdjus4ng

ElectricityRates

RalphCavanaghNaturalResourcesDefenseCouncil

44

Figure1.GrowthinNa@onalElectricityConsump@onandPopula@on

45

Figure2.PeakandEnergyImpactsbyLevelizedCostBundlefor2035–NorthwestPowerandConserva@onCouncil

46NorthwestPowerandConserva,onCouncil,SeventhNorthwestConserva,onandElectricPowerPlan,Chapter12:Conserva,onResources,p.12-6,h^ps://www.nwcouncil.org/media/7149675/7thplandray_chap12_consvres_20151020.pdf



TheEconomicsofFixedCostRecoverybyElectricU4li4es

SeverinBorenstein

HaasSchoolofBusinessandEnergyIns4tuteatHaasUniversityofCalifornia,Berkeley

48

Why is there a Cost Recovery Problem? n  Because prices matter

q  For Economic Efficiency – prices that deviate from full social marginal cost create deadweight loss, i.e., reduce the total wealth created in the economy

q  For Equity – particularly the sense that fairness suggests large-quantity consumers should pay more towards recovering a revenue shortfall than small-quantity consumers

q  For Income Distribution – with concern about a widening income inequality, desire to assure that low-income households can afford basic necessities such as energy

n  As supply and energy efficiency options grow q  tariff policy can no longer focus only on equity and distribution q  volumetric sales decline, making existing tariffs less sustainable

49

Why we care about efficient pricing: setting price equal to social marginal cost n  Departures from efficient pricing cause behavior

that reduces economic value creation n  Price greater than social marginal cost

discourages consumption that creates value q  If SMC=$0.10, but utility charges P=$0.20, discourages

consumption that creates value n  Makes cost of charging an electric vehicle gasoline equivalent price

of $3.15/gallon rather than $1.58/gallon n  Or discourages outdoor lighting that improves safety

n  Price below SMC encourages overuse q  Setting P<SMC encourages insufficient energy efficiency and

wasteful use

50

So, start from setting volumetric price to reflect social marginal cost n  Social => includes costs of externalities whether

or not the utility has to pay those costs q  If utility doesn’t have to pay, pricing externalities is still efficient,

and it raises additional revenue

n  Marginal cost => q  Short-run MC: electricity price is time-varying q  Does not include costs that are sunk or fixed at that time q  But that DOES NOT mean that setting p=SMC generates no

revenue towards paying fixed and sunk costs

51

Efficient pricing will generate revenue towards fixed and sunk costs

Demand

Marginal Cost

P

Q

Revenue in Excess of Marginal Cost

52

More so if externalities are not paid by utility, but still priced in electricity

Demand

Marginal Cost

P

Q

Social Marginal Cost

Additional revenue from pricing externalities

Revenue in Excess of Marginal Cost

53

But for most utilities, efficient pricing will still yield revenue shortfall n  Because much of distribution costs are fixed

relative to quantity of electricity consumed n  Because utility revenue covers many other costs

that are not marginal q  Low-income, DG and EE programs. Expensive past contracts.

n  Because reduced quantity means low SMC n  Plus declining demand due to DG and EE

makes the revenue shortfall greater q  Because price is set above MC, so decline in quantity reduces

net revenue

54

Options for Recovering Revenue Above Efficient Time-Varying Pricing

n  Average Cost Pricing q  Recover all additional revenue from flat volumetric adder

n  Fixed Charge (independent of quantity consumed) n  Tiered Pricing

q  Increasing-block or Decreasing-block pricing

n  Minimum Bills n  Demand Charges

q  Traditional definition: customer non-coincident peak usage q  New usage: customer non-coincident usage during peak period

n  Frequent rate cases or Decoupling

55

Fixed Charges

n  Very attractive on efficiency grounds because almost no elasticity of connection in response

n  But real issues of equity q  Should my home’s fixed charge be the same as Google’s? q  Distinction based on usage means it’s not a fixed charge

n  Concern about impact on low-income consumers n  Claim that “Fixed costs should be recovered with

fixed charges” has no basis in economics

56

Tiered Pricing n  Possible to combine with time-varying pricing,

but tariff can be complex q  e.g., time-varying energy pricing combined with tiered adder price

n  Increasing-block redistributes income, but q  Very poorly targeted way of helping low-income q  Equity issue when no adjustments for number of occupants q  Some customers’ prices deviate greatly from SMC

n  Decreasing-block q  A midpoint between fixed charge and flat volumetric pricing q  Possibly viewed as more equitable than fixed charge q  Can make efficiency sense if SMC is lower than P needed to

meet revenue requirement

57

Minimum Bill is never the best option n  A minimum bill is identical to a fixed charge plus

free electricity P=$0.10/kWh and minimum bill=$8 is identical to Fixed Charge=$8, 80 kWh free, then P=$0.10

58

Alternative to Minimum Bill n  Lower fixed charge, marginal price that reflects the

full marginal cost (including pollution externalities) Instead, if SMC=$0.06, set F=$3.20 P=$0.06 for first 80kWh P=$0.10 for more kWh => Exact same bill amount for anyone consuming more than 80kWh, slightly lower for less than 80kWh => Or, F=$8 and lower marginal price towards efficient level 59

Demand Charges n  Old “demand charge” – non-coincident peak –

had only cost basis in customer’s service level q  Why not charge directly for service level?

n  New “demand charge” – for customer peak usage during peak period q  An inefficient and more-volatile version of dynamic pricing

n  Even peak-period demand charge fails to address actual level of system stress

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Frequent Rate Cases or Decoupling

n  May be potential cause of A revenue shortfall, but not cause of THIS revenue shortfall

n  Cost recovery when P=social marginal cost raises insufficient revenue is not a problem of regulatory lag q  and wouldn’t go away if lag did

n  Very important to identify what problem we are trying to solve

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Conclusion n  There is no perfect answer to meeting the

revenue shortfall from efficient pricing n  But some answers are a lot better than others n  Fixed charges should play a role, possibly based

in part on service levels n  Marginal prices should have to meet real social

marginal cost test, not vague goals n  Some old tariff designs – demand charges and

minimum bills – may be comfortable, but don’t meet the cost-based test

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Ques,ons?

?


Please use the chat box to send us your questions and comments. You may want to direct your question to a specific author. The report and webinar slides are posted at feur.lbl.gov

Additional Slides John Howat, National Consumer Law Center

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ElectricityConsump,onGraphsandTables

•  Websitedetailingelectricityconsump,onby–  Incomecategory–  Raceofhouseholder– Ageofhouseholder

•  h^p://www.nclc.org/energy-u,li,es-communica,ons/u,lity-rate-design.htmlorGoogle“NCLCratedesign”

•  U.S.EnergyInforma,onAdministra,on–Residen,alEnergyConsump,onSurvey

•  27“ReportableDomains”•  ClickonstateorregiononUSmap

65

4,785

7,119

4,764

5,827

La4no/Hispanic NotLa4no/Hispanic La4no/Hispanic NotLa4no/Hispanic


Median2009Residen4alElectricityUsage(KHW)byEthnicityofHouseholder:MAandCT/ME/NH/RI/VT

66

AMI:ConsumerAdvocateQues,onsandConcerns

•  Cost–  Isfulldeploymentofsmartmetersandrelatedcommunica,on

infrastructuretheleast-costmeansofachievingloadreduc,onandsystemopera,onspolicyobjec,ves?

–  WhoassumesthecostriskofAMIinvestment?Whopaysifan,cipatedu,litysystembenefitsdonotmaterialize?

•  Dynamicpricingwinnersandlosers–  Willconsumerslessabletorespondto“pricesignals”bepenalized?

•  Remotedisconnec,on–  Willthenewabilitytoshutcustomers’serviceoffremotelyincreaserates

oflow-incomehouseholdservicedisconnec,on?

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AMIEssen,alConsumerProtec,ons

•  Nodegrada,onofexis,ngconsumerprotec,onsrelatedtodisconnec,ons,no,fica,onbymailofdisconnec,ons,etc.

•  ConsumerEduca,on–  Includecomprehensiveconsumereduca,onandbillprotec,onprogramsinanyevalua,onorimplementa,onofsmartmeters

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ForMoreInforma,onontheSeries

69

LisaSchwartzElectricityMarketsandPolicyGroup

LawrenceBerkeleyNa,onalLaboratory(510)486-6315

[email protected]


Documents

Future Electric U,lity Regulaon Series Report #5: Future ...€¢ Unique point-counterpoint approach highlights different views on the future of electric utility regulation and business