rate design indiana industrial energy consumers, inc. (indiec) indiana industrial energy consumers,...

Rate DesignRate Design

Indiana Industrial Energy Consumers, Inc.(INDIEC)

Indiana Industrial Energy Consumers, Inc.(INDIEC)

presented by

Nick PhillipsBrubaker & Associates, Inc.

presented by

Nick PhillipsBrubaker & Associates, Inc.

OverviewOverview• Major rate design criteria

• Basic rate components

• Demand and energy charge variations

• Other rate design features

• Adjustment clauses

• Alternatives to firm service

Major Rate Design CriteriaMajor Rate Design Criteria

• Reflect cost causation

– Equity

– Revenue stability

• Send appropriate price signals

– Control or reduce system costs

– Promote efficient use of existing assets

$

$

$

• Customer charge

• Facilities charge

• Demand charge

• Energy charge

Basic Rate ComponentsBasic Rate Components

Customer Charge

Demand Charge

Energy charge

Customer and Facilities ChargesCustomer and Facilities Charges

• Customer Charge– Flat fee per month– Covers typical service drop, metering,

billing

• Facilities Charge– Per kW monthly charge– Sometimes used to recover distribution

plant costs

Demand ChargeDemand Charge

• Recovers fixed costs

– Investment in plant

– Return on investment

– Carrying costs

• Assessed per kW (electric)

Energy ChargeEnergy Charge

• Recovers variable costs

– Fuel costs

– Variable plant operation and maintenance costs

• Sometimes used to recover fixed costs

• Assessed per kWh or per MWh (electric)

Demand Charge VariationsDemand Charge Variations

• Flat

• Declining block

• Seasonally differentiated

• Demand ratchet

Rate Design to CollectClass RevenuesRate Design to CollectClass Revenues

Total Class Revenues to be CollectedTotal Class Revenues to be Collected

e.g., Industrial Class Revenue Requirement = e.g., Industrial Class Revenue Requirement = $175.4 million$175.4 million

Total Class Revenues to be CollectedTotal Class Revenues to be Collected

e.g., Industrial Class Revenue Requirement = e.g., Industrial Class Revenue Requirement = $175.4 million$175.4 million

Recover Fixed Recover Fixed Costs through Costs through

Demand Charge Demand Charge ($/kW)($/kW)



Recover Variable Recover Variable Costs through Costs through Energy Charge Energy Charge

($/kWh)($/kWh)


($/kWh)($/kWh)

Recover Customer Recover Customer Costs through Costs through

Customer Charge Customer Charge ($/month)($/month)



Total Class Revenues to be CollectedTotal Class Revenues to be CollectedTotal Class Revenues to be CollectedTotal Class Revenues to be Collected

Rate Design to CollectClass Revenues - UnbundledRate Design to CollectClass Revenues - Unbundled

Production $Production $Production $Production $ Transmission $Transmission $Transmission $Transmission $ Distribution $Distribution $Distribution $Distribution $




($/kWh)($/kWh)







Demand By MonthDemand By Month

JJ FF MM AA MM JJ JJ AA SS OO NN DD00

1010

2020

MWMW

Customer 1Annual Billing Demand = 150,000 kWAnnual Billing Demand = 150,000 kW

00

1010

2020

MWMW

Customer 2Customer 2Annual Billing Demand = 240,000 kWAnnual Billing Demand = 240,000 kW

Declining Block Demand ChargesCustomer 1Declining Block Demand ChargesCustomer 1

Flat Rate:Flat Rate:

Multiple BlockMultiple BlockDemandDemand

1st 10,000 kW1st 10,000 kW

Add'l kWAdd'l kW

TotalTotal

Cost above flat rateCost above flat rate $ 34,000$ 34,000

DemandDemand RateRate Annual CostAnnual Cost

150,000150,000 $8.20$8.20 $ 1,230,000$ 1,230,000

120,000120,000 $9.00$9.00

$ 1,264,000$ 1,264,00030,00030,000 $6.15$6.15 184,000184,000

150,000150,000

$ 1,080,000$ 1,080,000

Declining Block Demand ChargesCustomer 2Declining Block Demand ChargesCustomer 2

Flat Rate:Flat Rate:

Multiple BlockMultiple BlockDemand:Demand:

1st 10,000 kW1st 10,000 kW

Add'l kWAdd'l kW

TotalTotal

Savings compared to flat rateSavings compared to flat rate 150,000150,000$$

240,000240,000 $8.20$8.20 1,968,0001,968,000

120,000120,000 $9.00$9.00 1,080,0001,080,000

120,000120,000 $6.15$6.15 738,000738,000

1,818,0001,818,000240,000240,000

$$

$$

$$


Seasonal Demand ChargesSeasonal Demand Charges

SummerSummerJune-SeptJune-Sept

WinterWinterOct-MayOct-May

First 10,000 kW $10.00$10.00 $8.20$8.20

Additional kW $8.00$8.00 $6.26$6.26

Seasonal Demand ChargesCustomer 1Seasonal Demand ChargesCustomer 1

Seasonal:Seasonal:SummerSummer

1st 10,000 kW1st 10,000 kWAdd'l kWAdd'l kW

Cost above non-seasonal flat rateCost above non-seasonal flat rate $ 52,080$ 52,080

40,00040,000 $10.00$10.00 $ 400,000$ 400,00022,00022,000 $8.00$8.00 176,000176,000

$ 1,282,080$ 1,282,080150,000150,000


WinterWinter1st 10,000 kW1st 10,000 kWAdd'l kWAdd'l kW

80,00080,000 $8.20$8.20 656,000656,000

8,0008,000 $6.26$6.26 50,08050,080TotalTotal

$$ 1,230,0001,230,000Non-Seasonal Flat RateNon-Seasonal Flat Rate

Seasonal Demand ChargesCustomer 2Seasonal Demand ChargesCustomer 2

Seasonal:Seasonal:Summer Summer

1st 10,000 kW1st 10,000 kWAdd'l kWAdd'l kW

Savings compared to non-seasonal flat rateSavings compared to non-seasonal flat rate 91,20091,200$$

40,00040,000 $10.00$10.00 400,000400,00040,00040,000 $8.00$8.00 320,000320,000

1,876,8001,876,800240,000240,000

$$

$$


WinterWinter1st 10,000 kW1st 10,000 kWAdd'l kWAdd'l kW

80,00080,000 $8.20$8.20 656,000656,000

80,00080,000 $6.26$6.26 500,800500,800TotalTotal

$$ 1,968,0001,968,000Non-Seasonal Flat RateNon-Seasonal Flat Rate

Demand RatchetDemand Ratchet

Establishes a minimum Establishes a minimum level of kW demand based level of kW demand based on demand established in a on demand established in a prior periodprior period

Demand RatchetsFormatDemand RatchetsFormat

60% of highest kW last 12 months60% of highest kW last 12 months

60% of highest 60% of highest summersummer kW last 12 months kW last 12 months


90% of highest kW last 12 months90% of highest kW last 12 months



RateRate

$7.68$7.68

7.937.93

7.427.42

$6.84$6.84

7.047.04

6.676.67

A. 60% RatchetA. 60% Ratchet

B. 90% RatchetB. 90% Ratchet RateRate

Impact of 60% SummerDemand RatchetImpact of 60% SummerDemand Ratchet


10101515202025253030

Ratcheted Demand = 15 MW

MW

MW

PriorPriorSummerSummer

Customer 3


10101515202025253030

Ratcheted Demand = 12 MW

MW

MW

Customer 4

PriorPriorSummerSummer

Impact of Demand RatchetImpact of Demand Ratchet

Customer 3Customer 3

No ratchetNo ratchet60% ratchet60% ratchet

Additional CostAdditional Cost


189,000189,000209,000209,000

$8.20$8.20$7.93$7.93

1,549,8001,549,8001,657,7001,657,700

$$

107,900107,900$$


No ratchetNo ratchet

60% ratchet60% ratchetBenefitBenefit

240,000240,000

240,000240,000$8.20$8.20

$7.93$7.931,968,0001,968,000

1,903,2001,903,200$$

64,80064,800$$

Energy Charge VariationsEnergy Charge Variations

Option A:Option A:

All Fuel in FCAAll Fuel in FCA

Option B:Option B:

With 1.5¢ ofWith 1.5¢ ofFuel EmbeddedFuel Embedded

Option C:Option C:

No FCANo FCA

0.543¢0.543¢

2.043¢2.043¢

2.000¢2.000¢

1.457¢1.457¢

-0.043¢-0.043¢

--------

2.000¢2.000¢

2.000¢2.000¢

2.000¢2.000¢

FormatsFormats Base RateBase Rate FCA*FCA* TotalTotal

*Fuel Cost Adjustment*Fuel Cost Adjustment

Other Rate Design FeaturesOther Rate Design Features

• Voltage Differentiated Rates

• Time Differentiated Rates

• Coincident Peak Rates

Voltage Differentiated RatesVoltage Differentiated Rates

SecondarySecondary $12.00$12.00

PrimaryPrimary $ 9.00$ 9.00

$ 6.37$ 6.37Subtransmission/Subtransmission/

TransmissionTransmission

Separate RatesSeparate Rates

Demand ChargeDemand Charge $12.00$12.00

Delivery Delivery VoltageVoltage Credits:Credits:

$5.63$5.63PrimaryPrimaryTransmissionTransmission

$3.00$3.00

One RateOne Rate

OROROROR

Time Differentiated RatesTime Differentiated Rates• Typical demand charges are based on

non-coincident peak demands

• Utilities size shared facilities to meet the maximum system demand

– Generation

– Bulk transmission

• On-peak use is a better price signal

Time Differentiated Rates Demand ChargesTime Differentiated Rates Demand Charges

$8.20$8.20

Non-TOUNon-TOU Time-of-UseTime-of-Use

- - - - - OR - - - - -- - - - - OR - - - - -per kW ofper kW of

Maximum Maximum

$8.77$8.77 per kW of On-Pkper kW of On-PkDemandDemand

DemandDemand$5.96$5.96 per kW of On-Pkper kW of On-Pk

DemandDemand

$2.63$2.63 per kW of Maxper kW of MaxDemandDemand

++

TOU Demand ChargesAssumed Operating DemandTOU Demand ChargesAssumed Operating Demand

10,00010,00010,00010,000

kWkW


12,00012,00012,00012,000

8,0008,0008,0008,000

PeakPeak Off-PeakOff-Peak

10,00010,00010,00010,000

kWkW

12,00012,00012,00012,000

8,0008,0008,0008,000

PeakPeak Off-PeakOff-Peak


4,0004,0004,0004,000 4,0004,0004,0004,000

TOU Demand ChargesCustomer ImpactsTOU Demand ChargesCustomer Impacts


Non-TOU ChargeNon-TOU Charge

TOU ChargeTOU ChargeAdditional CostAdditional Cost

120,000120,000

120,000120,000$8.20$8.20

$8.77$8.77984,000984,000

1,052,4001,052,400$$

68,40068,400$$


Non-TOU ChargeNon-TOU Charge

TOU ChargeTOU ChargeSavingsSavings

144,000144,000

120,000120,000$8.20$8.20

$8.77$8.771,180,8001,180,800

1,052,4001,052,400$$

128,400128,400$$


Time Differentiated RatesEnergy ChargesTime Differentiated RatesEnergy Charges

0.5430.543¢¢

Non-TOUNon-TOU Time-of-UseTime-of-Use

per kWh of per kWh of Metered Metered EnergyEnergy

0.6000.600¢¢ per kWh of per kWh of On-Pk EnergyOn-Pk Energy

0.4840.484¢¢ per kWh of per kWh of Off-Pk Off-Pk EnergyEnergy

Coincident PeakDemand ChargesCoincident PeakDemand Charges

• Coincident peak = customer demand at the time of the utility’s system peak

• Refinement of on-peak pricing

• Requires advanced metering

• Used for unbundled transmission service

Adjustment ClausesAdjustment Clauses

• Track cost changes

• Monthly, semi-annually, annually

• Avoid frequent base ratecases

• Automatic vs. non-automatic

• May vary between rate schedules

Examples of Adjustment ClausesExamples of Adjustment Clauses

• Fuel and purchased power

• Environmental cost recovery

• Capacity cost recovery (CCR or PCRF)

• Conservation

• Fuel and purchased power

• Environmental cost recovery

• Capacity cost recovery (CCR or PCRF)

• Conservation

Regulated Alternatives to “Plain Vanilla” Firm ServiceRegulated Alternatives to “Plain Vanilla” Firm Service

• Interruptible Service

• Real Time Pricing

• Interruptible Service

• Real Time Pricing

MENUMENU

Interruptible ServiceSalient CharacteristicsInterruptible ServiceSalient Characteristics

• Lower quality of service

• Curtailment may be controlled by a third party (e.g., RTO, utility or supplier)

• No production capacity required

• No production capacity costs

• Number, duration and annual hours of interruption usually limited

• Lower quality of service

• Curtailment may be controlled by a third party (e.g., RTO, utility or supplier)

• No production capacity required

• No production capacity costs

• Number, duration and annual hours of interruption usually limited

Interruptible ServiceConditions Requiring InterruptionInterruptible ServiceConditions Requiring Interruption

• Inadequate generation capacity

• Underfrequency problems

• Economics

• Inadequate generation capacity

• Underfrequency problems

• Economics

Interruptible ServiceBenefitsInterruptible ServiceBenefits

• Planning reserves

• Operating reserves (10 minute response)

• Spinning reserves (instantaneous response)

• Market opportunities

• Planning reserves

• Operating reserves (10 minute response)

• Spinning reserves (instantaneous response)

• Market opportunities OFF

Interruptible RatesPricingInterruptible RatesPricing

Energy Charge/kWhEnergy Charge/kWh

Demand Charge/kW*Demand Charge/kW*

oror

Energy Charge/kWh*Energy Charge/kWh*

Demand Charge/kW*Demand Charge/kW*

2.500¢2.500¢

$6.37$6.37

2.500¢2.500¢

$6.37$6.37

2.500¢2.500¢

$3.18$3.18

Incremental + 10%Incremental + 10%EnergyEnergy

$0.00$0.00

FirmFirm InterruptibleInterruptible

*Subtransmission delivery*Subtransmission delivery*Subtransmission delivery*Subtransmission delivery

Valuing InterruptibilityExample of Calculation MethodValuing InterruptibilityExample of Calculation Method

• Relies on the utility’s avoided cost of a peaking unit

• Demand charge reduction based on the peaking unit’s levelized investment cost, including carrying costs

• More hours available for interruption yields a larger rate reduction

• Relies on the utility’s avoided cost of a peaking unit

• Demand charge reduction based on the peaking unit’s levelized investment cost, including carrying costs

• More hours available for interruption yields a larger rate reduction

• Varying amounts of notice

–Day-ahead–30-minute notice–10 minute notice– Instantaneous

• Greater rate reductions forless notice

Interruptible RatesTerms and ConditionsInterruptible RatesTerms and Conditions

Interruptible RatesTerms and ConditionsInterruptible RatesTerms and Conditions

• Annual interruption hours are often limited

• Notice period to convert to firm service

• Noncompliance penalty

• Buy-through provision

• Annual interruption hours are often limited

• Notice period to convert to firm service

• Noncompliance penalty

• Buy-through provision

Real Time PricingHow Is It Different?Real Time PricingHow Is It Different?

• Traditional firm rates recover average embedded cost of service

• RTP prices vary by hour to reflect current/projected marginal system costs

• Simulates competitive market

• Traditional firm rates recover average embedded cost of service

• RTP prices vary by hour to reflect current/projected marginal system costs

• Simulates competitive market

Real Time PricingConsiderationsReal Time PricingConsiderations

• Price volatility

– Hourly RTP prices are oftentied to market clearing power prices (natural gas costs)

– Large adders for shortage costs in critical peak periods

• Customer bears more price risk

• Customer must respond effectively to price signals

• Price volatility

– Hourly RTP prices are oftentied to market clearing power prices (natural gas costs)

– Large adders for shortage costs in critical peak periods

• Customer bears more price risk

• Customer must respond effectively to price signals

Real Time PricingEnergy Policy Act of 2005Real Time PricingEnergy Policy Act of 2005

• By mid-2007, state regulators must consider a requirement that utilities offer time-based rates to each customer class

• Time-based rates include RTP

• By mid-2007, state regulators must consider a requirement that utilities offer time-based rates to each customer class

• Time-based rates include RTP

rate design indiana industrial energy consumers, inc. (indiec) indiana industrial energy consumers,...

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