Smart Rate Design for a Smart Future
Rate design is the regulatory term used to describe the pricing structure reflected in customer bills and used by electric utilities in the United States. Rate design is not only the itemized prices set forth in tariffs, it is also the underlying theory and process used to derive those prices. Rate design is important because the structure of prices—that is, the form and periodicity of prices for the various services offered by a regulated company—has a profound impact on the choices made by customers, utilities, and other electric market participants. In "Smart Rate Design for a Smart Future," RAP reviews and updates the rate design principles laid out in James Bonbright’s 1961 "Principles of Public Utility Rates," and in Garfield and Lovejoy’s 1964 "Public Utility Economics."
The electric utility industry is facing a number of radical changes, including customer-sited generation and advanced metering infrastructure, which will both demand and allow a more sophisticated method of designing the rates charged to customers. In this environment, traditional rate design may not serve consumers or society best. A more progressive approach can help jurisdictions meet environmental goals and minimize adverse social impacts, while allowing utilities to recover their authorized revenue requirements. In this paper, RAP reviews the technological developments that enable changes in how electricity is delivered and used, and sets out principles for modern rate design in this environment. Best practices based on these principles include time-of-use rates, critical peak pricing, and the value of solar tariff.