The Dow Jones Utilities Index posted another year of solid gains in 2006. As might be expected, in connection with both the near-term and longer-term historical investor performance of the utility...
Utilities that are short on capacity and operate in a stable regulatory environment may be able to extract value from interruptible rates.
Regulated utilities have struggled for a long time to determine the value of an interruptible rate. As deregulation developed, many utilities moved away from interruptible rates that are disconnected from energy markets and started offering tariffs with dynamic pricing tied to the markets. Demand bidding and real-time pricing are two examples of the latter approach. The low prices in today's wholesale electric markets have resulted in a reduction in the value of the retail market-based rates for both the utility and the customer.
Utilities that are short on capacity and operate in a stable regulatory environment may still be able to extract some value from interruptible rates. The value of the interruptible rate hinges on delaying the need for capacity at a cost that is less than the cost of adding and operating the supply-side resource. To achieve this goal, the interruptible rate tariff must establish prices for both capacity and energy that reflect market prices.
What We Know So Far
Dr. Hans E. Nissel, in a June 1983 Public Utilities Fortnightly article, argued that interruptible customers do not contribute to a utility's peak demand because they represent no capacity cost. He proposed that the only cost for a utility to provide nonfirm service is energy and customer cost. In the end, he concluded that it was reasonable for interruptible customers to contribute to the capacity cost of the power pool construction and operation for firm service, since it makes nonfirm service possible.
The most basic definition of an interruptible rate is the offering of nonfirm power. Participating customers (mainly large industrial customers) accept decreased reliability in exchange for a reduced charge. The degree to which the utility can interrupt the customer's load impacts the value of the rate to the utility. In addition, utilities must consider how interruptible programs affect the costs of their operations. The provision of nonfirm service at a discount has value to a utility provided that the cost of the nonfirm service is less than cost of serving the load. In other words, the discount for the nonfirm power must be less than the cost of the resources to serve the customers with firm power.
Traditional interruptible rates represent a form of load management or demand response. One form of an interruptible service rate started with the large industrial firm rate and then discounted that rate by about 50 percent to compensate interruptible customers for the inconvenience caused by interruptions. AmerenUE's cancelled interruptible (10M) rate had this structure, as well as restrictions on interruptions and a requirement that the company "endeavor to obtain temporary power (capacity only or both capacity and energy) to meet" its requirements before calling an interruption.
The actual value of the interruptible rate depends on several factors. The biggest determinant of an interruptible rate's value is its intended use. Some examples of an interruptible rate's intended use are usage during times of system reliability issues only, system peak, sales to