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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

based upon historical consumption priced at a traditional standard tariff. This theoretically enables the seller recovery of embedded revenue requirements. The second part of the two-part RTP tariff is changes in load priced at hourly RTP usually based upon marginal or market cost. This enables the seller recovery of incremental cost of the incremental sale, but does not require any fixed-cost contribution on the incremental sale since fixed-cost requirements would have been satisfied in the first part of the tariff (there would be a moderate adder in the RTP price for profit and risk coverage that one might argue contributes slightly to fixed-cost coverage). Note that the buyer would pay RTP prices for increases above CBL and would be credited RTP prices below CBL.

The algebra would look as follows:

One can rearrange the algebra to read:

The "access charge" is computed at the end of the billing period, or ex-post. Notice the similarity of equations iii) and v). In other words, the is nothing more than the quantity contracted under a , or , and the spot price Pi is the same thing as the RTPi price in this analogy. The only major difference is between the standard tariff rate (Std) and the agreed to settlement price for the contract period (CfD). As mentioned previously, the CfD basically is the expected spot price plus a risk premium necessary to guarantee the price. The Std, on the other hand, can be thought of as (1) the expected marginal cost; (2) an inherent risk premium required when offering a guaranteed price like Std; and (3) a contribution to fixed-cost requirements. Also, because the Std contains the additional component of "contribution to fixed cost," the motivational forces are different from those of a CfD; basically a buyer wants as little CBL as possible. Even though it does provide price protection, it is at a cost above that of simple risk insurance. The buyer of CfDs however, may want to maximize his purchase of CfDs to minimize his price risk.

Now notice the similarity in equations ii) and vii). Each has an access charge that, once contractually entered into, the buyer cannot influence; all the buyer can now influence is total hourly purchase . These equations, which simply are transformations of equations iii) and v), make it clear why all quantity is subject economically to the spot price, whether below or above the CBL. This is why two-part RTP possesses such powerful price response attributes (see "Real-Time Pricing - Supplanted by Price-Risk Derivatives," Public Utilities Fortnightly, March 1, 1997).

So two-part RTP, with a few minor exceptions, is the same thing as a spot market coupled with a financial instrument called a or Swap. Both are conducted ex-post. The few minor exceptions are when:

  • The cost of the CBL is higher than the cost of the CfD because of the seller's need to satisfy the fixed cost revenue requirements.
  • The buyer of a CBL therefore wants as little CBL as possible, while the buyer of CfDs may want a little or a lot.

The Ex-Ante