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Residential Rate Structures Educational Forum Welcome

Residential Rate Structures Educational Forum Welcome. Educational Forum Goals. Educate the public about rate structure options. Describes the positives and negatives of various rate structure approaches . Provide information about residential energy usage based on income. Agenda.

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Residential Rate Structures Educational Forum Welcome

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  1. Residential Rate Structures Educational ForumWelcome

  2. Educational Forum Goals • Educate the public about rate structure options. • Describes the positives and negatives of various rate structure approaches. • Provide information about residential energy usage based on income.

  3. Agenda • 5:30 p.m. Welcome and Introduction of Guests – Brian Morgan, Board President • 5:40 p.m. Presentation – Residential Utility Rate Design Options • Mike Bull, Director of Policy and External Affairs – Center for Energy and Environment with Mark Beauchamp, President – Utility Financial Solutions, LLC • 6:15 p.m. Residential Rate Structures - Realities • Mark Kotschevar, General Manager and Peter Hogan, Chief Financial Officer • 6:30 p.m. Questions and answers about the presentations • Moderated by Krista Boston, Director of Customer Relations • 6:55 p.m. Summary and Next Steps • 7:00 p.m. Adjourn

  4. Presenters Presenter • Director, CEE Policy and External Affairs • Former Senior Policy Advisor for Gov. Tim Pawlenty • Former Senior Resource Planner for Xcel Energy • Former Senior Regulatory Analyst, MN PUC Presenter • President: Utility Financial Solutions • Providing rate consulting services to over 700 electric utilities in 40 states, Canada, Guam, Barbados, & Bermuda • Instructor for Cost of Service and Rate Design for the American Public Power Association • Speaker at national and regional state conferences Mike Bull Mark Beauchamp • CEE Contributor • Manager, CEE Regulatory Policy • Former Senior Regulatory Analyst and Local Energy Policy Manager for CenterPoint Energy • Former Business Analyst for CapX2020 Audrey Partridge

  5. Overview • Introductory Material • Rate Designs without Advanced Metering • Flat Rate with Monthly Customer Charge • Inclining Block Rates • Revenue Decoupling • Rate Designs with Advanced Metering • Time-of-Use • Residential Demand Charges (Three-Part Rate)

  6. What is Rate Design? • Rate Design is the process of translating a utility’s revenue requirements – the utility’s costs of providing service – into the prices paid by customers • Which costs? • Costs that are variable in the short term (“variable costs”) • Wages, taxes, fuel, etc. • Costs that are sunk or may be variable only in the long term (“fixed costs”) • Investments in utility infrastructure, etc.

  7. Bonbright’s Objectives of Rate Design • Recovers the utility’s total revenue requirements • Fairly distributes the burden of meeting total revenue requirements among customers • Promotes consumption at the level that is economically justified by costs incurred and benefits received and does not encourage wasteful use of utility services

  8. Bonbright’s Principles of Rate Design • Be forward looking – reflect long-run marginal costs • Focus on usage components of service that are most cost/price-sensitive • Be simple and understandable • Recover system costs in proportion to how much customers use and when they use • Give customers appropriate information and the opportunity to respond by adjusting usage • Where possible, be temporally and geographically dynamic

  9. Today’s Challenges and Opportunities for Utility Rate Design • Evolving Resource Mix • Cost of new utility-scale renewables can be lower than embedded wholesale costs of traditional generation • Low to flat customer demand growth • Customer-sited opportunities • Distributed solar • Energy Efficiency • Smart Appliances/Technologies • Electric Vehicles • Needs of Low-Income Customers • Economic Development

  10. Rate design and cost-shifts • There is no perfect rate design -- utility rates are rife with cost shifts that serve as inter-class and intra-class cross-subsidies • Several common cross-subsidies that do not reflect costs of service include: • Setting the same rates for single family and apartment dwelling customers • Setting economic development or other discounts for industrial customers • Allowing most customers to pay average “energy” rates that do not reflect the cost of energy generated on peak • Net metering for those customers with rooftop solar • Providing discounts to low-income customers

  11. Residential Rate Design Options Without Advanced Metering: • Flat Rate with Monthly Customer Charge • Inclining Block Rates • Revenue Decoupling With Advanced Metering: • Time-of-Use • Residential Demand Charges (Three-Part Rate)

  12. Rate Designs without Advanced Metering Infrastructure Flat Rate with Monthly Customer Charge Inclining Block Rates Revenue Decoupling

  13. Rate designs w/o AMI 1. Flat Rate w/ Monthly Customer Charge Description • A flat “volumetric” rate design charges customers per unit of energy used, at the same rate for all units. The volumetric rate may be adjusted seasonally • Flat rate designs usually include a fixed monthly customer charge that applies to each customer in a tariff class • This design is the most common rate design for residential rates in the U.S.

  14. Rate designs w/o AMI 1. Flat Rate w/ Monthly Customer Charge Considerations • Simple and transparent to customers and other stakeholders. Simple to administer • Fixed charge provides utility revenue certainty – higher fixed charge = more revenue certainty • Tension around whether fixed charge should be: • solely based on “customer-related costs” such as costs of billing and collection, meters and service connections or • include minimum distribution component (substation to home) • A low volumetric rate w/ high fixed charge can send price signal for customers to use electricity less efficiently • Reduces the value of EE and DG to the customer, reduces incentive to install EE/DG measures • May result in the utility investing in more infrastructure to serve excessive demand • Treats all kilowatt-hours equally – peak, off-peak; no price signal to shift usage

  15. Rate designs w/o AMI 2. Inclining Block Rates Description • Inclining Block Rates are designed to charge customers a higher per-unit rate as their usage increases over certain “blocks” or thresholds within a billing cycle • Example: A three-tier inclining block rate would identify three blocks of consumption (0 kWh-150 kWh, 150 kWh-250 kWh, and 250 kWh and up) and assign a progressively higher rate to consumption in each block

  16. Rate designs w/o AMI 2. Inclining Block Rates Considerations • Inclining block rates encourage efficient use of electricity • Low income advocates support inclining block rates, arguing that low income customers tend to be low usage customers • May be difficult to design blocks to be cost-based • High usage customers may subsidize low usage • Block rates can be confusing to customers and require customer education • Customers must have timely access to their consumption data to avoid being surprised by higher than expected bills

  17. Rate designs w/o AMI 3. Revenue Decoupling Description • Revenue decoupling separates the link between utility revenues and how much energy the utility sells, ensuring utility revenues equal the amount determined to be needed • Regulators determine the amount of revenue a utility may collect each year • Actual revenues are trued up to this allowed revenue amount via an annual surcharge or refund, adjusting the rates for the following year up or down • Usually built on a standard rate design

  18. Rate designs w/o AMI 3. Revenue Decoupling Considerations • Provides revenue certainty for the utility regardless of fluctuations in sales volumes • Decoupling supports energy efficiency efforts • Decoupling removes the negative revenue impacts to the utility of energy efficiency and customer-owned distributed generation • Revenue decoupling mechanisms are relatively complicated • Consumer advocates can view decoupling with suspicion, in that it shifts risks from the utility to ratepayers • May exacerbate existing cost shifts • Does not affect price signals sent to customers

  19. Rate Designs with Advanced Metering Infrastructure Time of Use Rates Demand Charges (Three Part Rates)

  20. Rate designs w/ AMI 1. Time-of-Use Rates Description • Time-of-use rates are designed to recognize differences in a utility’s cost of service and marginal costs at different times (hours, days, seasons) • Time-of-use rates charge different prices according to a pre-set schedule. Prices are higher during peak time and lower during off-peak times • The concept is to send a significant price signal (e.g. an on-peak rate that is 3x or 4x off-peak) in order to get customers to shift usage to times when system costs are lower and to reduce peak demand

  21. Rate designs w/ AMI 1.Time-of-Use Rates Considerations • Time-of-use rates align utility costs and revenues better than flat rate models • Time-of-use rates send more accurate price signals and encourage more efficient energy usage than traditional flat rates • Over time, time-of-use rates may flatten the utility’s demand curve and reduce system costs by avoiding or deferring investments • More complicated for the customer - requires significant customer education • May harm customers that cannot shift energy usage as easily as others • Often an initial TOU rate has bill protection mechanisms for low-income customers • Time-of-use rates can be designed to encourage off-peak charging of electric vehicles

  22. Rate designs w/ AMI 2.Demand Charges (Three-Part Rate) Description • A demand charge can be added to an existing fixed charge and volumetric rate to capture costs caused by the customer’s peak demand • Demand charges assign a cost to a customer for the strain that customer places on system resources • Demand charge can be “coincident” or “non-coincident” depending on whether the charge is for the customer’s contribution to system peak or for the customers’ own peak

  23. Rate designs w/ AMI 2.Demand Charges (Three-Part Rate) Considerations • Demand charges allow the utility to recover the costs of serving peak loads • More fairly allocate costs as opposed to averaging into volumetric rate • Coincident demand charges help to better match actual costs incurred to prices charged • Non-coincident demand charges do not send price signals to customers to shift usage to lower cost times • But accounts for all of the costs the customer imposes on the system (not just on system peak) • Customer peak can fluctuate monthly or be “ratcheted” -- set customer peak at highest point in a pre-determined period for several billing cycles • Ratcheting can stabilize revenues from customers with large swings in demand • Once demand peak is set, no incentive to conserve • Can be confusing to residential customers; rarely used in the residential context

  24. Key Sources • National Association of Regulatory Utility Commissioners (NARUC). (2016, November). Distributed Energy Resources Rate Design and Compensation. • https://www.naruc.org/rate-design/ • Zummo, Paul and James Cater. (2016, November). Rate Design Options for Distributed Energy Resources. American Public Power Association. • https://www.publicpower.org/system/files/documents/ppf_rate_design_options_for_der.pdf • Lazar, Jim and Wilson Gonzalez. (2015, July). Smart Rate Design for a Smart Future. Regulatory Assistance Project. • http://www.raponline.org/wp-content/uploads/2016/05/rap-lazar-gonzalez-smart-rate-design-july2015.pdf • Lazar, Jim. (2013, April). Rate Design Where Advanced Metering Infrastructure Has Not Been Fully Deployed. Regulatory Assistance Project. • www.raponline.org/document/download/id/6516/

  25. Rate Changes - Realities • Any rate structure must cover the costs. • Changes to rate structures are a balancing act. • Any rate structure change would require a multi-year plan including technology investments and public education. • Changes to the rate structure have the potential to create winners and losers.

  26. Customer Usage by Census Track Question: Does income impact use? Average Monthly Use Year Ended Nov 2017: 615Kwh/Month

  27. Customer Usage

  28. Customer Usage

  29. Customer Usage Summary • Homes in the first block of the Census tract have lower average kWh usage. • Lower income customers have varying usage patterns: • Mobile Homes, Electric Heat, Age of Housing • Non Cost based rate structures have unintended cost shifts. • Distributed generation, Electric Vehicles

  30. Next steps • The Board will continue discussing the subject of rate structures. • Staff will gather information on the capabilities and limitations of our existing metering infrastructure. • No change in rate structure is planned for 2019.

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