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Pricing Reform for the Local Disco: Setting Rates That Will Support Distributed Generation

The Proposed Distribution Tariff
Fortnightly Magazine - July 1 2000

R.99-10-025, filed April 12.

A Numerical Illustration

The illustration in the table on p. 50 uses residential consumption data collected from sources such as the U.S. Energy Information Administration. It adopts a cost of 4.0 cents per kilowatt-hour for energy, a figure assumed to include environmental adders. 5 This energy initially could be purchased from the UDC or, under full retail wheeling, from a retail marketer.

The average total U.S. monthly residential bill is $71.79 (8.86 cents per kilowatt-hour) with average monthly consumption of 810 kWh. 6 Subtracting the estimated $7.50 customer charge leaves a total energy charge of $64.29, or 7.9 cents per kilowatt-hour. A 300-kWh customer pays the same energy charge of 7.9 cents per kilowatt-hour. 7 However, the total bill of $31.31 implies a higher per-unit charge (10.4 cents per kilowatt-hour) than paid by the customer with higher usage-because the customer charge remains fixed and has a proportionately greater impact on the low-use customer.

Panel II of the table illustrates how the revenues can be reallocated so they are more cost-based, while keeping the total bill unchanged for users with both average (810 kWh) and small (300 kWh) demands. The cost-based variable rate for energy is 4.5 cents per kilowatt-hour, including a throughput charge of 0.5 cent per kilowatt-hour. That yields a total energy component of $36.45, which, when subtracted from the original average bill ($71.79), yields an estimated $35.34 for the kilowatt-based access charge. This figure obviously will over-recover network costs to the extent that our assumed market energy price is lower than the price under integrated monopoly service. Actual values, which will have to be determined in each case, therefore may yield lower access charges.

Similar arithmetic for the 300-kWh customer yields an energy bill of $13.50 and an access charge of $17.81. Both customers pay the same total electric bill they did before if usage remains unchanged. That is in contrast to the results typically obtained when a traditional fixed customer charge is raised uniformly, in which case customers that use less than the average amount of electricity find their bills increasing. As shown in the table, the bills remain unchanged, but we have shifted the components by reducing the volumetric charge to levels more in keeping with costs. 8

The dynamics do not stop here, however. Customers will respond to the lower volumetric charge by buying more electricity. Now, with the volumetric charge reduced to 4.5 cents per kilowatt-hour, the average consumer expands his or her usage from 810 kWh to 1,429 kWh per month. 9 This adjustment for elasticity yields a total bill of $99.63 (up from $71.79), but the consumer is better off. Specifically, the bill rises by 38.8 percent (see Panel III of the table), but usage increases 76.4 percent. Indeed the societal welfare gain is $10.63 per residential customer per month , as illustrated by the triangular area in the figure "Price Usage, and Consumer Surplus Under Retail Wheeling." 10 This amount is substantial, totaling $12 billion per year for the nearly 100 million residential electricity customers.

How can spending more