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Making Sense of Peak Load Cost Allocations
Usage of utility services is rarely uniform across the day, month, or year. Dramatic increases in loads often appear at particular times of the day or in particular seasons of the year. Telephone utilities may choose not to meet extreme peak demands, but electric, natural gas, sewer, and water utilities usually do not enjoy that option. Failure to meet peak demands can lead to catastrophic consequences for both the customer and the utility, and can draw the attention of regulators. For that reason, utilities adopt design criteria for their production, transmission, and distribution facilities to ensure that peak loads are met.
When it comes to cost allocation, common wisdom assigns costs in proportion to class contributions to peak loads. The justification is simple: Since the equipment had to be sized to meet peak day loads, those costs should be allocated on the same basis. Many different peak allocators have been developed on this assumption: single coincident peak contribution, sum of coincident peaks, noncoincident peak, average and excess demand, peak and average demand, base and extra capacity, and so on. Such pure peak-load allocators may not be politically acceptable, but conceptually, at least, they appear to offer the only defensible approach.
Nevertheless, where capacity can be added with significant economies of scale, making cost allocations in proportion to peak loads violates well-known relationships between economics and engineering. What is missing is any tracing of the way in which the peak-load design criteria actually influence the costs incurred.
The Logical Flaw in Peak Allocators
Simply to assert that a particular design criteria is always met does not demonstrate or quantify the resulting impact on costs. Consider an extreme example. Assume that some customers require certain stability and reliability criteria, but that the utility can meet those criteria without any additional cost under existing production and distribution technology. In that case, it would not make any cost-causal sense to use such "costless" design criteria in allocating costs, though they are important to the design of the system.
In developing cost allocations, one needs to know more than what design criteria were used in the development of the utility's system. One also needs to know how (em quantitatively (em those design criteria affected the costs the utility incurred. Were they a major or minor determinant of costs? Did the design criteria affect costs proportionally, or was the relationship more complex?
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Some Known Relationships
Public utilities tend to be capital-intensive. They incur substantial fixed costs, often with substantial economies of scale. In this environment, the costs associated with meeting peak demands tend to increase much more slowly that the peak demands themselves. That is, the costs of meeting peak do not increase in proportion to peak loads.
Consider the relationship between the delivery capacity of a pipe and the installed cost of the pipe. In general, the delivery capacity of a pipe bears a geometric relationship to the diameter of the pipe; the exponent lies in the range of 2 to 2.5. That is, the capacity of the pipe increases faster than the