Innovative Rates: Four Customers, Four Solutions
Flexible rate options can remain cost-based, even in a buyer's market, and yet
allow choice between price, reliability, and scheduling.
Customers with a choice are demanding, and getting, lower electric bills. These customers generally include municipals and large industrials. Municipals, as wholesalers, gained access to alternative suppliers via the Energy Policy Act of 1992. Large industrials enjoy various supply choices, including onsite generation or relocating to another service territory.
What factors underlie this buyer's market? First, many utilities have excess capacity available throughout much of the year. System load factors typically run about 60 percent. Second, customers are growing weary of subsidizing social programs and other customer classes. Third, customers want more control over their energy bills. Gone are the days of one rate fits all.
This buyer's market calls for innovative rates. In fact, electric utilities can tailor rate options to suit a variety of customer needs:
supply reliability, frequency of price changes (to enable production optimization), or energy management services (such as offpeak storage), among other things. From the utility perspective, innovative rate options can help retain or even increase customer load. Customers gain more control over bills and pay only for services they want. And if rate options track utility costs more closely, they will encourage customers to manage their load in a way that improves system load factor and reduces the utility's planning and operating costs.
Here are four case studies of customer needs and rate solutions, based on a given set of tariff assumptions. In the four scenarios, each customer profile is different: a cement manufacturer, a chemical manufacturer, and two pulp-and-paper companies (em one a manufacturer, the other a recycling firm. Similarly, each solution is unique.
For our analysis, we will assume that industrial customers have a choice between firm and interruptible time-of-use (TOU) rates. The TOU rate consists of a demand or kilowatt charge, applied against the highest demand established during the peak period of the month, and an energy or kilowatt-hour charge that varies between peak and offpeak periods and winter and summer seasons. The demand charge also varies with the season. The peak period falls between the hours of 7:00 am and 11:00 pm weekdays, excluding holidays; the offpeak period includes all other hours. Winter refers to the months of October through March; summer covers April through September. The utility is assumed to be winter peaking, and demand and energy charges are higher in this period to reflect higher planning and operating costs.
The interruptible rate consists of a discount applied to the interruptible demand in each month. The interruptible demand is that part in excess of the firm contract level. When an interruption is called, the customer must cut load down to firm levels within 10 minutes. Interruptions are limited to the 16-hour peak period, weekdays only, up to 15 percent of the hours in a month and 500 hours per year. The discount applied to the firm demand charge and the level of interruptibility are based on the expected cost and the maximum operating pattern of a new