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Metering and Billing: Building a Better Pricing System

Two-part real-time pricing reflects the two-part pricing found in other business sectors.

Fortnightly Magazine - May 2004

Georgia Power Co., Duke Power Co., and their customers have reaped the benefits of two-part real-time pricing (RTP) for nearly 10 years. In the regulated electric industry, two-part RTP pricing operates under the premise that: (1) the most efficient and least expensive price to charge for a volatile commodity is a spot price based upon the commodity's spot market or, in the absence of a spot market price, the commodity's marginal cost (one can also argue that the market price is the utility's marginal cost); 1 and (2) under most circumstances, revenues received from this spot price are insufficient to satisfy the overall revenue requirements of the utility's embedded/financial cost, such that a second pricing component, besides the spot price, is necessary. This second component is an agreed-to fixed load shape of hourly kilowatt-hour usage, often referred to as a customer baseline load shape (CBL) and priced at the utility's standard rate, which will then recover cost obligations beyond the spot price. The bill can be thought of as a fixed load shape at standard tariff prices, and changes from this load shape priced at spot prices.

One could also consider the fixed load shape subject to the spot price and a settlement at the end of the billing period based upon the difference in the actual spot price and the standard tariff. This difference settled at the end of the billing period is referred to as ex-post, meaning it's not determined until the end of the billing period. This settlement also can be referred to as an access charge/credit, and it ensures that the customer pays only the standard tariff for the CBL amount.

This access charge/credit ends up serving two purposes. First, it ensures that the utility recovers the allowed revenue on the customer's CBL. Second, it provides a form of price protection for the RTP customer on the amount of load under the CBL. The amount of the charge or credit depends on the differences between the actual RTP prices in the month and the standard tariff prices; relatively low RTP prices result in an access charge, while periods of high RTP prices that exceed standard tariff prices result in implicit credits to the customer.

This structure has been a perfectly acceptable and efficient means to price electricity, but a second structure for pricing electricity can now be introduced. Either structure is sound and efficacious. Each methodology has its advantages, and utilities should consider which method best serves their needs.

A utility could offer both methods.

The fact that the access charge/credit is calculated at the end of the billing period and involves maintaining a historical load shape appears to some parties to represent an unattractive complication to the consideration of two-part RTP. The goal of this paper is to reveal how a properly constructed ex-ante access charge can perform as efficiently as an ex-post access charge, thereby enabling electric utilities, as well as other industry utilities, to offer spot pricing without continually tracking an

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