The Impact of Marginal Cost Pricing on Electric Utility Revenues – A Quantitative Case Study

The Impact of Marginal Cost Pricing on Electric Utility Revenues – A Quantitative Case Study

By John Kelly

Presented at the Rutgers University

Center for Research in Regulated Industries

20th Annual Western Conference

Hyatt Regency, Monterey, CaliforniaJune 28, 2007

TABLE 1 - RETAIL REVENUE FROM MARGINAL COST PRICING ($1,000)LOAD SURVEY MWH (BY HOUR) x DECREMENTAL COST

Class 1 2 3 4 5 6 7 8 9 10 11 12 Grand TotalRES 4,423$ 3,327$ 2,447$ 1,953$ 3,641$ 3,787$ 4,933$ 3,637$ 3,237$ 2,021$ 2,339$ 3,707$ 39,453$ GS 1,419$ 1,161$ 1,089$ 970$ 1,502$ 1,476$ 1,600$ 1,282$ 1,217$ 979$ 966$ 1,269$ 14,931$ HS 290$ 213$ 129$ 89$ 146$ 144$ 166$ 133$ 128$ 90$ 114$ 213$ 1,855$ GSD 1,255$ 1,043$ 991$ 913$ 1,470$ 1,423$ 1,531$ 1,210$ 1,182$ 984$ 923$ 1,136$ 14,062$ LLP 3,588$ 2,996$ 2,956$ 2,796$ 4,264$ 4,134$ 4,207$ 3,430$ 3,326$ 3,002$ 2,812$ 3,234$ 40,745$ LIGHTING 80$ 58$ 46$ 33$ 48$ 31$ 39$ 33$ 38$ 49$ 50$ 74$ 579$ TOTAL 11,056$ 8,798$ 7,658$ 6,754$ 11,070$ 10,996$ 12,476$ 9,726$ 9,127$ 7,125$ 7,204$ 9,633$ 111,624$

TABLE 2 - RETAIL REVENUE FROM TRADITIONAL RATES ($1,000)LOAD SURVEY MWH x 2004 YIELDS

Class 1 2 3 4 5 6 7 8 9 10 11 12 Grand TotalRES 4,864$ 4,368$ 3,803$ 3,497$ 4,395$ 6,844$ 8,790$ 7,889$ 7,208$ 3,457$ 4,253$ 4,978$ 64,346$ GS 1,506$ 1,439$ 1,441$ 1,419$ 1,463$ 2,263$ 2,537$ 2,489$ 2,965$ 1,416$ 1,408$ 1,555$ 21,902$ HS 199$ 175$ 116$ 88$ 104$ 217$ 310$ 249$ 235$ 91$ 123$ 181$ 2,087$ GSD 1,270$ 1,181$ 1,288$ 1,293$ 1,481$ 1,683$ 1,816$ 1,789$ 1,768$ 1,371$ 1,309$ 1,295$ 17,544$ LLP 3,234$ 3,174$ 3,659$ 3,364$ 3,813$ 4,343$ 4,454$ 4,639$ 4,347$ 3,842$ 3,520$ 3,370$ 45,759$ LIGHTING 142$ 124$ 120$ 105$ 98$ 88$ 99$ 105$ 113$ 129$ 134$ 146$ 1,402$ TOTAL 11,215$ 10,460$ 10,427$ 9,766$ 11,355$ 15,437$ 18,006$ 17,160$ 16,635$ 10,306$ 10,747$ 11,524$ 153,040$

TABLE 3 - RETAIL REVENUE COMPARISONS

Class 1 2 3 4 5 6 7 8 9 10 11 12 Grand TotalRES -9% -24% -36% -44% -17% -45% -44% -54% -55% -42% -45% -26% -39%GS -6% -19% -24% -32% 3% -35% -37% -48% -59% -31% -31% -18% -32%HS 45% 22% 12% 0% 40% -33% -46% -46% -46% -1% -7% 18% -11%GSD -1% -12% -23% -29% -1% -15% -16% -32% -33% -28% -29% -12% -20%LLP 11% -6% -19% -17% 12% -5% -6% -26% -23% -22% -20% -4% -11%LIGHTING -43% -53% -62% -69% -51% -64% -60% -68% -66% -62% -63% -49% -59%TOTAL -1% -16% -27% -31% -3% -29% -31% -43% -45% -31% -33% -16% -27%

Month

Month

Month

Credit: Richard Andrysik, Lincoln Electric System Marginal Cost Pricing Study, APPA Business & Financial Conference

Portland, Oregon, September 26, 2005

Chart 1Total Retail Revenue

with Marginal Cost Pricing

0

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TRADITIONAL RATES

MARGINAL COST PRICING



TABLE 4 - RETAIL REVENUE FROM MARGINAL COST PRICING ($1,000) PLUS CUSTOMER CHARGES (COST OF SERVICE)LOAD SURVEY MWH (BY HOUR) x DECREMENTAL COST

Class 1 2 3 4 5 6 7 8 9 10 11 12 Grand TotalRES 4,938$ 3,842$ 2,963$ 2,470$ 4,159$ 4,306$ 5,453$ 4,158$ 3,758$ 2,543$ 2,862$ 4,231$ 45,683$ GS 1,481$ 1,222$ 1,150$ 1,032$ 1,564$ 1,538$ 1,662$ 1,344$ 1,279$ 1,041$ 1,028$ 1,331$ 15,673$ HS 293$ 217$ 132$ 92$ 149$ 147$ 170$ 136$ 131$ 94$ 117$ 216$ 1,894$ GSD 1,259$ 1,046$ 995$ 917$ 1,474$ 1,427$ 1,534$ 1,214$ 1,186$ 988$ 927$ 1,140$ 14,105$ LLP 3,627$ 3,035$ 2,996$ 2,836$ 4,303$ 4,174$ 4,247$ 3,470$ 3,366$ 3,043$ 2,853$ 3,275$ 41,226$ LIGHTING 150$ 128$ 116$ 103$ 117$ 101$ 109$ 103$ 108$ 118$ 119$ 143$ 1,414$ TOTAL 11,748$ 9,491$ 8,352$ 7,448$ 11,766$ 11,693$ 13,174$ 10,425$ 9,828$ 7,827$ 7,906$ 10,337$ 119,995$




Class 1 2 3 4 5 6 7 8 9 10 11 12 Grand TotalRES 2% -12% -22% -29% -5% -37% -38% -47% -48% -26% -33% -15% -29%GS -2% -15% -20% -27% 7% -32% -34% -46% -57% -26% -27% -14% -28%HS 47% 24% 14% 4% 44% -32% -45% -45% -44% 3% -5% 19% -9%GSD -1% -11% -23% -29% -1% -15% -15% -32% -33% -28% -29% -12% -20%LLP 12% -4% -18% -16% 13% -4% -5% -25% -23% -21% -19% -3% -10%LIGHTING 6% 3% -4% -2% 20% 15% 10% -2% -4% -9% -11% -2% 1%TOTAL 5% -9% -20% -24% 4% -24% -27% -39% -41% -24% -26% -10% -22%

Month

Month

Month




with Marginal Costs plus Customer Charge

0

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TRADITIONAL RATES




TABLE 6 - RETAIL REVENUE FROM MARGINAL COST PRICING ($1,000) PLUS CUSTOMER AND FACILITIES CHARGES (COST OF SERVICE)LOAD SURVEY MWH (BY HOUR) x DECREMENTAL COST





Class 1 2 3 4 5 6 7 8 9 10 11 12 Grand TotalRES 9% -4% -12% -19% 3% -32% -34% -43% -43% -16% -24% -7% -22%GS 15% 3% -3% -9% 24% -21% -24% -36% -48% -9% -9% 2% -15%HS 55% 33% 29% 23% 60% -24% -40% -38% -37% 21% 9% 29% 0%GSD 16% 7% -6% -12% 16% 0% -2% -17% -19% -10% -12% 5% -4%LLP 29% 13% -3% 2% 29% 11% 10% -11% -7% -3% -1% 15% 6%LIGHTING 7% 5% -3% -1% 21% 16% 11% -1% -3% -7% -9% 0% 2%TOTAL 17% 4% -6% -9% 17% -14% -18% -30% -31% -9% -12% 2% -10%

Month

Month

Month



Credit: Richard Andrysik, Lincoln Electric System Marginal Cost Pricing Study, APPA Business & Financial ConferencePortland, Oregon, September 26, 2005

TABLE 6 - RETAIL REVENUE FROM MARGINAL COST PRICING ($1,000) PLUS CUSTOMER AND FACILITIES CHARGES (COST OF SERVICE)LOAD SURVEY MWH (BY HOUR) x DECREMENTAL COST





Class 1 2 3 4 5 6 7 8 9 10 11 12 Grand TotalRES 9% -4% -12% -19% 3% -32% -34% -43% -43% -16% -24% -7% -22%GS 15% 3% -3% -9% 24% -21% -24% -36% -48% -9% -9% 2% -15%HS 55% 33% 29% 23% 60% -24% -40% -38% -37% 21% 9% 29% 0%GSD 16% 7% -6% -12% 16% 0% -2% -17% -19% -10% -12% 5% -4%LLP 29% 13% -3% 2% 29% 11% 10% -11% -7% -3% -1% 15% 6%LIGHTING 7% 5% -3% -1% 21% 16% 11% -1% -3% -7% -9% 0% 2%TOTAL 17% 4% -6% -9% 17% -14% -18% -30% -31% -9% -12% 2% -10%

Month

Month

Month


with Marginal Costs plus Customer and Demand Charges

0

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Chart 42004 Average Marginal Cost

0

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1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24

HOUR ENDING

$ /

MW

H

JAN APR JUL OCT



Chart 52004 Average Marginal Cost

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HOUR ENDING

$ /

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SUM WIN



Average Generation Costs by Season

Average Generation Costs by Season



Marginal Energy Costs by Season





Marginal Energy Costs and Average Generation Costs by

Season



Average Generation Costs by Month





Marginal Energy Costs by Month



Marginal Energy Costs and Average Generation Costs by Month



Revenue from Marginal Energy Costs



Revenue From Marginal Energy Costs Plus Customer Charges



Revenue From Marginal Energy Costs Plus Customer and Demand Charges





















Time-Of-Use Rate Periods

Peak Period

Off-Peak





































Chart #

Estimated Power Supply Revenues with Average Costs and Marginal Cost Pricing

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Average Cost Pricing

Marginal Cost Pricing

Chart #Estimated Average Hourly Revenues with Average Costs and Marginal Cost

Pricing, Year 2004

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Hour

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Chart #Estimated Average Hourly Revenues by Season (December, January,

February), with Average Costs and Marginal Costs Pricing

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Chart #Estimated Average Hourly Revenues by Season (March, April, May), with

Average Costs and Marginal Cost Pricing

0

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1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 0

Hour

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Chart #Estimated Average Hourly Revenues by Season (June, July, August), with

Average Costs and Marginal Cost Pricing

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Chart #Estimated Average Hourly Revenues by Season (September, October,

November), with Average Costs and Marginal Cost Pricing

0

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1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 0

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Documents

The Impact of Marginal Cost Pricing on Electric Utility Revenues – A Quantitative Case Study