Case Study - Moving customers to their cost of service? Perhaps not as straightforward as you’d like
Nuclear plant
The artistry of rate design vs. the cold hard facts of the cost of service study
The cost of service is the science, and the rate design is the art. The electric rate structure of any utility has decades of embedded history and political decisions.
The utility had not increased rates in 5 years and wanted to take the opportunity to move customer rates towards their cost of service and to incorporate distributed energy resources (DER) and electric vehicle charging into their rate structure. There are still inter-class subsidies in rate design, i.e., industrial rates are higher than the cost of service so residential rates are lower than their cost of service. The utility is focusing on closing those gaps.
We worked with the utility to design rates to reflect the costs to serve each customer class. We assisted the utility in developing rate structures to provide incentives for customers, including a residential time-of-use opt OUT rate. An opt OUT rate is a new approach to enticing customers to stay in a time-of-use rate and have incentives to alter their energy consumption load patterns towards off-peak hours.
The new rates also included a distributed energy resource (DER) rate, i.e., for customers with solar panels, that had a monthly meter charge for connection to the utility. The monthly meter charge represents an “available for use” charge that reflects the investment the utility has in metering and customer costs for a DER customer that should be paid by the DERC customer. Some customers in the DER community view a monthly meter charge as “unfair”, but from a cost of service perspective, a DER customer can receive power from the utility anytime. Otherwise, non-DER customers are subsidizing the metering and customer costs for the DER customers.
We also designed an electric vehicle (EV) off-peak charging rate and a subscription charging rate (i.e., the EV customer can charge all they want for one monthly rate). There’s an app for that.
Giving customers choices incentivizes them to monitor their power usage and shift how they use electricity to lower their power bills. The percentage of customers who are interested in doing so is low. Still, with opt-out rates carrying a 5% premium, the utility is confident that the lower rate structure of the time-of-use rate will spur more customers to stay in the rate vs. opting out. It will be interesting to see how this plays out.
About Russ Hissom - Article Author
Russ Hissom, CPA is a principal of Utility Accounting & Rates Specialists a firm that provides power utilities rate, expert witness, and consulting services, and online/on-demand courses on accounting, rates, FERC/RUS construction accounting, financial analysis, and business process improvement services. Russ was a partner in a national accounting and consulting firm for 20 years. He works with electric investor-owned and public power utilities, electric cooperatives, broadband providers, and gas, water, and wastewater utilities. His goal is to share industry best practices to help your business perform effectively and efficiently and meet the challenges of the changing power and utilities industry.
Find out more about Utility Accounting & Rates Specialists here, or you can reach Russ at russ.hissom@utilityeducation.com.
The material in this article is for informational purposes only and should not be taken as legal or accounting advice provided by Utility Accounting & Rates Specialists. You should seek formal advice on this topic from your accounting or legal advisor.