Lately I'm reading up on the new Telecommunications Act. Last week I printed a copy from the Internet and stuffed it in my briefcase. Each night on the train I give it a go and skim a few sections...
Pricing Reform for the Local Disco: Setting Rates That Will Support Distributed Generation
How to replace the bundled utility tariff with a rational design for access, throughput, and congestion.
The seemingly imminent diffusion of distributed fossil technologies such as microturbines and fuel cells is motivating regulators to reexamine an area they have long ignored-the pricing of electric distribution services. This issue, explored in March in Washington, D.C. at a meeting of stakeholders from the National Association of Regulatory Utility Commissioners, has become more complex, given the potential for bypass by distributed generation (DG) technologies.
Consider the traditional two-part tariff for the regulated and bundled sale of electricity. It consists of a variable or volumetric energy charge (based on usage in kilowatt-hours), coupled with a fixed monthly customer charge. Regulators traditionally have set the energy charge at levels that significantly exceed marginal costs, which curtails demand. That pleases the conservationists. Consumer advocates also have tended to favor an overloaded volumetric charge, because it creates a subsidy that allows regulators to reduce the fixed monthly customer charge-all the better, they believe, for helping low-income users.
Yet that belief is misplaced. More correctly, the combination of arbitrarily high energy charges plus low customer charges helps low-usage customers. In fact, while many in that group do have low incomes and live in smaller homes-with fewer or smaller appliances and other electricity-driven conveniences-others may not. Some well-heeled customers who live in apartments on the Golden Mile along New York City's Central Park West use relatively little power-and they may own small ski chalets in Vermont that don't use much energy. To that extent, they also enjoy subsidies under this pricing scheme.
And why change? Integrated utilities have seen little incentive to object. Under traditional cost-of-service (COS) regulation, they were reasonably assured of collecting their revenue requirements despite this irrational pricing, whereby most of costs of the distribution network-costs that are largely fixed-are recovered through a variable charge. But this cozy situation is about to vaporize in the blue sky of restructuring. Just as unbundling has made generation costs more transparent, it will expose distortions inherent in pricing for local distribution as well, especially with the apparently imminent arrival of self-generation.
DG owners throw a wrench into the equation. By using less power from the grid, they contribute much less to utility revenues under the current pricing method, which relies on the volumetric charge to produce most of the distribution revenue. At the same time, however, they impose fixed access costs that essentially are unaffected by their lower usage. Quite simply, DG owners put utility revenues at risk. The practice of recovering fixed network costs through the volumetric charge threatens to produce revenue shortfalls whenever a customer takes less than the projected amount of energy.
This threat has led utilities to propose specialized rates and standby service charges for owners of distributed resources. Taken together, these proposals likely will create a labyrinth of tariffs that will discourage DG. By contrast, the preferred remedy actually is much simpler and not all that new: Set prices in a way that recovers the network's predominantly fixed costs from any connected customer, including the