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The Wires Charge: Risk and Rates for the Regulated Distributor

Fortnightly Magazine - September 1 1997

is simple: The wires part of the electricity industry is based on capacity and not usage. There is a significant economic loss to electricity consumers if wires charges are levied on a per-kilowatt-hour basis.

Moreover, charging for wires on kilowatt-hour usage is discriminatory. Customers who buy from low-priced providers and use more electric energy will be forced to pay an unfairly larger portion of the transmission and distribution costs.

Open-access fees should be assessed on a per-customer basis within classes of customers and allocated across customer classes based on the true cost of serving each customer class. Generally, costs vary between customer classes based on the voltage at which they take power off the system. The higher the voltage, the lower the wires cost of serving the customer. Line loss factors must also be determined for each customer class, and these also vary based on voltage. Hence, commissions can define customer classes by voltage and assign an allocation factor for wires that fairly spreads the cost across.

An Example: A Residential Access Charge

We have calculated sample open-access tariffs for South Carolina Electric & Gas using their own 1995 rate filing data. We use SCE&G because it is in our home state, and we recently filed a restructuring proposal with the state PSC that analyzes open-access tariffs in South Carolina.

By our estimates, the wires charge paid to SCE&G by an open-access provider should be around $21.42 per month per residential customer if the right rate of return and implied capital structure are used. If, however, the South Carolina commission uses the wrong factors and the historical average rate of return and capital structure are used, then the open-access fee would increase $2.83 per month per residential customer. SCE&G has more than 400,000 residential customers. The size of this potential mistake is around $14 million annually. Nationwide, a $2.83 mistake per residential customer per month is $3.5 billion annually.

Besides the $21.42 wires fee paid by a competitive open-access electricity provider to SCE&G, customer costs run $3.36 per month per residential customer. SCE&G and the open-access provider will share these costs, but they will continue to show up on the customer's bill. Finally, given a forecast cost of electric energy of 3¢/kWh and average usage of 1,062 kWh per month, competitive energy costs will be $31.86 per month. So, adding the energy charge to the access fee yields the expected competitive cost of electricity for residential customers in the SCE&G territory at $56.64 per month. This compares with $79.33, the amount that SCE&G requested in its recent rate filing (see Figure 1).

If the South Carolina commission does it right, residential consumers stand to gain $22.69 per month from competition, or $272 per year, based on 1995 consumption.%n12%n If the commission errs in unbundling the rate of return, consumer savings will only be $19.86 per month or $238 per year. A mistake by the commission reduces the potential savings from competition by 12 percent.

Of course, open-access fees will not apply directly to all residential customers. Many customers will choose to remain