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Innovative Rates: Four Customers, Four Solutions

Fortnightly Magazine - January 15 1996


Customer A

Flexible Interruption Conditions

Customer A, a cement manufacturing firm, was forced to take firm service because it could not withstand interruptions for more than eight hours a day under its interruptible, time-of-use (TOU) rate. Interruptions in excess of eight hours didn't leave enough time to make up lost production, forcing clients of Customer A to turn to alternative suppliers.

Customer A needed a level of service falling between that offered under current firm and interruptible tariffs. The utility's planners found that a load that could be interrupted for up to eight hours a day would meet half the requirement of future peaking generation. As a result, an additional option with interruptions limited to eight hours per day was made available at a discount on the firm demand charge equal to half of that under the interruptible tariff.

Adding this interruptible option improved Customer A's competitive position without impacting its market share. The utility gained a satisfied customer and, at the same time, reduced its own costs by deferring the need for future supply facilities.

Customer B

Flexible Rate with Varying Prices

Customer B, a chemical manufacturer, needed to optimize production according to changing market conditions:

s Customer B's process is electrolytic (em load can be increased or decreased readily within a wide band, allowing it to take advantage of low-cost energy even when available for only short periods of time.

s Electricity costs in Customer B's process represent roughly 70 percent of incremental production costs.

s Customer B has similar chemical plants located throughout North America.

s Under TOU rates, this particular plant had the highest average production costs of all of plants in North America. The plant was economical to operate only in the summer and winter offpeak periods (em about 50 percent of the time.

s Customer B's manufacturing process carries high fixed costs that are recovered through the price of the product. At low production levels there was simply not enough product to reduce the impact of the fixed-cost component in the price.

Given the high degree of flexibility in the load, the utility's stakeholders felt that a real-time pricing (RTP) tariff offered a potential solution. Customer B provided input on rate design issues (em such as the timing of rate notification and the treatment of forecast uncertainty (em indicating that it would need an alternative to the monthly demand charge in order to optimize production within the peak and offpeak periods to take advantage of varying energy prices. An all-energy rate (in effect, an hourly demand charge) provided the solution.

By opting for the RTP rate, Customer B would lose the security of the stable rate structure available under TOU rates, risking consistently higher energy rates. To address this possibility, the utility's rate included a guarantee that the variable energy rate component would not exceed, on average, a prespecified level over the course of the year. The level was to reflect marginal costs under a low-probability utility planning


Customer B received an RTP rate design similar to that shown in Table 1: A monthly