Principles of Modern Rate Design
Drawing on his recent paper, “Rate Design Where Advanced Metering Infrastructure Has Not Been Fully Deployed”, RAP senior advisor Jim Lazar highlighted five universal pricing principles in a 60-minute RAP webinar on September 5th. He emphasized that prices ideally should be forward-looking and reflect long-run marginal costs, be simple enough for the customer to understand, and should concentrate on the energy or usage sensitive components of service, if they are to encourage the consideration of economic alternatives to grid-supplied resources–e.g. energy efficiency and customer-sited energy production. In addition, if utility system costs vary by season or time of day, or if a significant portion of utility investment is driven primarily by load in particular months or particular hours of the day, then efficient pricing should reflect these cost drivers. Finally, environmental externalities, not paid by utilities, tend to justify higher-than-average prices for incremental consumption, because it is at the margin where changes in behavior and usage patterns occur. Mr. Lazar describes how time-tested and sound rate design practices, applicable to both conventional or advanced metering technology, can benefit customers and lead to more efficient electricity consumption.