EFFICIENT PRICING OF STANDBY DISTRIBUTION SERVICES

1. EFFICIENT PRICING OFSTANDBY DISTRIBUTION SERVICES Presented to Edison Electric Institute Distributed Generation Task Force Milwaukee, Wisconsin By Kelly Eakin, Vice President Laurits R. Christensen Associates, Inc. June 20, 2001

2. Efficient Pricing Of Standby Distribution ServicesThe Message • Rate design principles the same for standby and full-requirements rates. • Efficiency requires fixed costs recovered through fixed charges. • Properly unbundled distribution rates are equally applicable to standby and full-requirements services for each class. • Other industry objectives should not interfere with efficient pricing of standby services.

3. Distribution Service Rate Design Principles & Goals (1) • Recover the Costs of the Distribution System • Fixed • Variable • Marginal • Accurate Reflection of the Total Costs of Serving Each Customer Class  • Compatibility with Efficient Price Signals In Competitive Supply Market

4. Distribution Service Rate Design Principles & Goals (2) • Eliminate Cost-Rate Disparities • between pricing components • between customer classes • Fairness in the Apportionment of Total (Common) Costs • Rates Should Encourage Customers to Make the Most Efficient Consumption Decisions

5.  Distribution Service Rate DesignIn Practice (1) • Fixed Costs Recovered Through Fixed Charges • Level of Fixed Charges • For the system it is determined by the aggregate customer load • Contribution by each customer group is then their individual maximum load • Process requires determining the expected maximum load for each customer • Maximum measured demand during a specified period is best approach

6. Distribution Service Rate DesignIn Practice (2) • Preferred Approach is an Access Charge   • Most Practicable Approaches  • Ratcheted Demand Charges • Contract Demand Charges  • “As-Used” Demand Charges Insufficient • Will Under-Collect Needed Revenue Requirement, or • Unfairly Fall on Full Requirements Customers  • This approach is equally applicable to standby services.

7. Distribution Service Rate DesignCounter Argument #1 Claim: “On-Site Generators Are Different – Rate Design Should Be Different” Response:No. From a distribution service rate design perspective, they are the same as other customers that relies on the system to deliver power consumed from the grid • they impose about the same costs on distribution • they derive similar benefits from the distribution • they can be in a separate class but pricing should not be different

8. Distribution Service Rate DesignCounter Argument #2 Claim: “Coincident Peak (CP) Method is a superior method to allocate fixed costs to OSGs.” Response: CP was useful to allocate generation before the days of hourly pricing. However, CP approach not appropriate for distribution services • Distribution planned on a location basis • Customers are not billed on a location basis • Maximum demands of the customers the most reliable indicator of distribution costs imposed and benefits received

9. Distribution Service Rate DesignCounter Argument #3 Claim: “Fixed charges will discourage new generation. Rates policy should encourage generation.” Response: Efficient rates for standby will encourage efficient on-site generation while discouraging uneconomic bypass.

10. Efficient Pricing Of Standby Distribution Services Questions & Discussion