One wouldn’t necessarily expect the components of an electric bill to make headlines, but recent decisions in some states have caused controversy. The controversy involves the size of the monthly customer charge applied to residential consumers. Until recently, U.S. regulators generally allowed a charge of $10/month or less on residential customer bills—an amount sufficient to cover customer-specific costs such as billing and collection.
In recent years, as energy efficiency programs and renewable energy installations have resulted in stagnant or declining sales, many utilities are seeking to recover a portion (or all) of their distribution costs in a monthly fixed fee. Utilities have normally recovered these costs through a per-kWh charge.
Increasing fixed charges is problematic for a number of reasons. When a larger portion of the utility revenue requirement is recovered in a fixed monthly charge, a smaller amount is recovered in the per-kWh rate. This reduces the customer’s incentive to consume only the power they need, because they’re charged a high fixed rate regardless of their power usage. A lower per-kWh charge makes any increased usage relatively painless. The additional consumption likely to ensue as a result of this change in price signal is quite possibly enough to offset a full decade of utility programmatic energy efficiency efforts.
Utilities are naturally concerned to see decreasing sales and revenues, and all users of the grid have an interest in the utility recovering adequate revenues to ensure safe and reliable service. Fortunately, there are alternatives to increasing fixed charges to address revenue adequacy concerns. Approaches which look at the issue as a whole, such as revenue regulation or “decoupling” mechanisms, ensure that everyone benefits. Developing this type of mechanism requires much more thoughtful consideration of the costs and benefits accrued to both the customer and the utility, and ultimately leads to a rate design that more effectively aligns utility compensation with societal goals.
Those not ready to develop a full-blown revenue regulation scheme or under pressure to increase the customer charge will find Electric Utility Residential Customer Charges and Minimum Bills: Alternative Approaches for Recovering Basic Distribution Costs helpful. The paper suggests a minimum bill for residential consumers as an alternative to a high fixed charge. A minimum bill ensures that the distribution utility receives sufficient revenue from each customer, but does not cause as large a change in the per-kWh rate. The minimum bill does not apply unless a customer uses less than a certain amount of power each month. Since a large majority of customers use enough electricity to pay more than the minimum amount through their usage charges, it has a minimal impact on most users. But, it still guarantees that every customer contributes at least a minimum amount toward the utility revenue requirement.
As a result, a minimum bill preserves the incentive to conserve energy by not drastically decreasing the per-kWh charge, and also provides some additional revenue per customer for the utility. This concept is similar to a “minimum” that some entertainment venues apply where customers do not buy enough food and drink, as opposed to a “cover charge” which is more like a utility customer charge.
Because solar customers often net-meter their usage to zero kWh, a minimum bill recovers additional revenues from solar customers, compared to net-metering with a conventional rate design. A minimum bill also creates less of a disincentive to distributed generation customers than the proposed high fixed charges, since in some months, their usage of grid-supplied power will likely be above the minimum.
RAP is working on a much more detailed review of residential and commercial rate design, due to be published in the second quarter of 2015. Until then, check out the following rate design resources:
- Pricing Do’s and Don’ts
- Rate Design Where Advanced Metering Infrastructure Has Not Been Fully Deployed
- Time Varying and Dynamic Rate Design
- Designing Distribution Tariffs Well
- Revenue Regulation and Decoupling