The Principles and Practices of Time-Variant Pricing

1. The Principles and Practices of Time-Variant Pricing California Public Utilities Commission Ahmad Faruqui, Ph.D. July 30, 2014

2. The CPUC has enunciated the following principles for optimal rate design • 1) Low-income and medical baseline customers should have access to enough electricity to ensure basic needs (such as health and comfort) are met at an affordable cost • 2) Rates should be based on marginal cost • 3) Rates should be based on cost-causation principles • 4) Rates should encourage conservation and energy efficiency • 5) Rates should encourage reduction of both coincident and non-coincident peak demand • 6) Rates should be stable and understandable and provide customer choice

3. The CPUC rate design principles (concluded) • 7) Rates should generally avoid cross-subsidies, unless the cross-subsidies appropriately support explicit state policy goals • 8) Incentives should be explicit and transparent • 9) Rates should encourage economically efficient decision making • 10) Transitions to new rate structures should emphasize customer education and outreach that enhances customer understanding and acceptance of new rates, and minimizes and appropriately considers the bill impacts associated with such transitions

4. These 10 principles map nicely into the 3 principles that guide the practice of TVP • Economic Efficiency (2, 3, 4, 5 and 9) • TVP rates send cost-based price signals to consumers, leading to efficient use of capacity, during off-peak, on-peak and critical-peak hours • Equity (1, 7 and 8) • TVP reduces cross-subsidies between customers since customers who drive investments in peaking capacity pay for it • Gradualism (6, 10) • TVP can accomplish this if the public is educated in advance of the rollout, if the rollout comes with bill protection that is phased out over time, and if a flat rate choice is included in the package

5. TVP is being widely practiced across the globe Arizona • Over two decades, APS has enrolled 51% of its customers on an opt-in TOU rate and the SRP has enrolled about 30% of its customers on an opt-in TOU rate • SRP has show that the TOU rate has yielded a significant reduction in system peak demand • Both utilities offer rate choices to customers as they sign up for service • In both cases, the TOU rate appeals to large consumers who avoid the upper tier of an inclining block rate by going with TOU Illinois • Both Ameren and ComEd have enrolled about 25,000 customers on RTP in Illinois and are planning to roll-out Flat+PTR

6. TVP in the US (continued) Massachusetts • The DPU has issued a “straw” proposal that calls for default CPP+TOU pricing; customers could opt instead for a Flat+PTR • An order is expected before year-end Mid-Atlantic Region • BGE and PHI are rolling out Flat+PTRto some 2 million customers in Delaware and Maryland • PJM is allowing price-responsive demand to be bid into its multi-state capacity markets, as AMI and dynamic pricing are rolled out in its footprint of 60 million customers • Pepco has proposed Flat+PTR in the District of Columbia

7. TVP in the US (concluded) Oklahoma • In two years, OG&E has 81,000 customers enrolled on variable peak pricing (VPP) and/or TOU pricing and the goal is to reach 20 percent of customers over a three-year period • Smart thermostats are installed by OG&E to customers who sign up for these rates • In 2012, OG&E’s VPP and TOU pricing programs cut peak demand by 135 MW • The program is part of a portfolio of programs designed to eliminate the need for a 600 MW coal plant

8. TVP (for distribution networks) in Australia • The regulatory scene • The Productivity Commission has shown that TVP would lower costs for all customers • The Australia Energy Market Commission recommended that TVP should be made mandatory for large customers, optional for vulnerable customers and default for everyone else • Next month, the Australian Energy Regulator’s annual conference features two sessions on TVP • The businesses • AusGrid (Sydney) has enrolled some 20 percent of its residential customers on TOU rates • Distribution network service providers in Queensland and Victoria have completed pilots with TVP

9. TVP in Canada • The province of Ontario has deployed AMI to 4.5 million households and small businesses • The regulated retail rate plan replaced a two-tier inclining block rate with a TOU rate with on peak, intermediate and off-peak periods • About 90% of residential customers have chosen to receive service on the TOU rate plan and about 10% have chosen flat rates being offered by retailers • The Ontario Power Authority has shown that TOU rates lowered peak demand in the first year • Analysis is underway on the second-year results

10. TVP in Europe • A couple of years ago, Italy rolled out AMI to all 29 million households along with default TOU pricing • About 23 million residential and small-medium enterprises are on TOU pricing • A recent analysis of Italy’s default TOU concluded that more than half of customers have shifted consumption patterns in the first year • The overall customer savings were € 2.54 million in the first year • France began rolling out its tempo tariff a couple of decades ago • The tariff features on-peak and off-peak rates that vary across three types of days • About a third of EDF’s customers are on that tariff

11. TVP in Asia • Japan has been testing smart technologies and pricing in four cities • Dr. Koichiro Ito of Boston University has evaluated these projects and concluded that customers do respond to hourly marginal prices • Ito found that the various CPP treatments reduced peak demand by 11% on average • CLP Power in Hong Kong is running a two year pilot with PTR+TOU • The first year results provided evidence of demand response

12. Conclusions • TVP can contribute to many of the optimal rate design principles set out by the CPUC • TVP for residential and small business customers has been practiced widely across the globe • Both opt-in and opt-out deployments have yielded meaningful results

13. Presenter Information Ahmad Faruqui, ph.d. Principal│San Francisco Ahmad.Faruqui@brattle.com +1.415.217.1000 Dr. Ahmad Faruqui is a Principal with The Brattle Group who specializes in analyses and strategy relating to the customer. He has helped design, monitor and evaluate energy efficiency investments for a wide range of electric and gas utilities and testified before a dozen state and provincial commissions and legislative bodies. He has also worked for the Alberta Utilities Commission, Edison Foundation, the Edison Electric Institute, the Electric Power Research Institute, the Federal Energy Regulatory Commission, the Ontario Energy Board and the World Bank. His work has been cited in publications such as The Economist, The New York Times, and USA Today, and he has appeared on Fox News and National Public Radio. The author, co-author or editor of four books and more than 150 articles, he holds a Ph.D. in economics from The University of California at Davis and B.A. and M.A. degrees in economics from The University of Karachi. The views expressed in this presentation are strictly those of the presenter(s) and do not necessarily state or reflect the views of The Brattle Group, Inc.