EVOLVING UTILITIES, COST RECOVERY, AND PRICING:

A CONSUMER VIEW

Bob Nelson

Montana Consumer Counsel robnelson@mt.gov

“I used to be open minded, but my brains kept spilling out.”

Steven Wright

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 usage in 15 minute increment

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Bill Impacts: Standard Rates vs Demand Rates

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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

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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