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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

hourly quantity component for access charge settlement purposes. Thus, the new model solves a hang-up that many utilities have with the ultra successful two-part RTP pricing found in Georgia and North Carolina.

It should also be noted that the benefits of both ex-ante and ex-post access charge/credits are not limited to the regulated arena. A non-regulated seller easily could adapt these products to competitive markets.

Access Charge

An access charge is a mechanism for the selling party to recover those costs from the buying party that may not be covered in an hourly (or periodic) spot price. From the buyer's perspective, an access charge may offer price stability, thereby avoiding the volatility of the spot price market. From the seller's perspective, an access charge may offer financial stability by ensuring cost recovery. In theory, the access charge also could be negative- i.e., the access charge makes up for the difference between the spot price and the financial requirements, which could be negative in periods of high spot prices.

For instance, the selling utility may have financial revenue requirements including fixed cost coverage and risk insurance cost totaling up to 5 cents/kWh on average for a particular load shape (load shape being the quantity per hour requested by the buying party).

The expected average marginal cost to the seller for supplying the product for the expected load shape might be 3 cents/kWh. The difference of 2 cents/kWh is necessary to cover non-marginal cost to serve the expected load shape. This 2 cents/kWh can be expected to be covered by the seller through a fee of 5 cents/kWh. Or, the seller can charge an upfront access fee of 2 cents/kWh plus hourly spot prices that may have significant volatility with an expected average of 3 cents/kWh. 2

Should the 2 cents/kWh be collected upfront by considering the forecasted expected spot price of 3 cents/kWh (ex-ante), or based upon and collected after the actual spot prices are determined at the end of the billing period (ex-post)? There are formidable and separate ramifications for both the seller and the buyer depending upon employing ex-ante or ex-post development of the access charge.

Financial Instruments

Many commodity industries, which offer their product on a spot market, also offer financial instruments to reduce risk in these spot markets. These instruments are financial contracts with agreed-to terms stating quantity, time period, and price. The actual quantity purchased on the spot market is not an issue because the financial contract specifies the quantity upon which the settlement will be made. The price of the settlement of this financial instrument is the difference between the agreed-to price and the actual spot price. There are also physical instruments that specify delivery of the physical commodity for a fixed quantity as part of the contract, but so long as the buyer can sell the physical back into that spot market if he doesn't want it, the net effects of the financial instrument and the physical instrument are similar. For the sake of simplicity, we will focus our attention on the financial product.

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