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Inclining for the Climate

GHG reduction via residential electricity ratemaking.

Fortnightly Magazine - May 2009

rate. 3 Revenue under the new rate is equal to the quantity times the price in each tier: (1,667 kWh * $0.085/kWh) + (1,000 kWh * $0.125/kWh), or $267, identical to the revenue collected under the original flat rate.

Although the rate is revenue-neutral, the majority of the kWh sales (75 percent = 2,000 kWh ÷2,667 kWh) will see the tier-2 rate as the marginal rate, providing a strong conservation incentive. Higher prices lead to lower electricity demand. A 2004 meta-analysis of residential price elasticity studies reports 123 short-run estimates between -0.004 and -2.01, with an average of -0.35, and 125 long-run estimates between -0.04 and -2.25, with an average of -0.85. 4

An inclining block rate is consistent with accepted criteria for utility ratemaking: 5 It promotes efficient consumption. Since the per-kWh charge rises with consumption, it has the correct price signal in a rising marginal-cost environment. Plus it fairly apportions the costs of service. In a rising marginal-cost environment, it assigns a higher proportion of costs to large customers, who bear greater responsibility for the increasing costs.

Additionally, the inclining block rate maintains universal affordability. Low-income customers, who tend to consume less energy than other customers, enjoy the lower tier-1 rate. To be fair, an inclining block rate may result in less stable bills than the flat rate. But large bill spikes can be mitigated by an optional payment plan that aims to partly smooth large bill fluctuations.

The inclining block rate is non-discriminatory and easy to understand. The rate applies to all customers in the residential class, with bill differences reflecting consumption differences. Though more complicated than a flat rate, an inclining block rate remains easy to understand.

Finally, unlike time-varying or dynamic pricing rates, an inclining block rate can be implemented quickly and at very low cost using an electric utility’s existing billing and metering system.

One possible objection to residential inclining block rates in some jurisdictions is the need to maintain affordable electric space and water heating, particularly for low-income customers. This can be addressed, however, through the use of a design that offers a large tier-1 quantity for customers who have electric heating and no access to natural gas.

Rates in the States

Inclining block rates already are used throughout the United States. 6

Utility rates fall into four categories: inclining, flat, declining, and mixed. Flat rates provide a single price for all consumption, while declining block rates have per-kWh charges that decrease with consumption. Mixed rates vary by season (see Figures 2 and 3) .

Summer inclining block rates are well established in the West Coast and Southwest states, where in most cases at least one of the two largest utilities has inclining block residential rates. They also are prevalent in the Southeast and, to a lesser extent in the Northeast and around the Great Lakes.

However, a significant portion of the country employs flat rates. This category includes Maine and Texas, where the two largest residential providers are competitive energy providers rather than regulated utilities. In these cases, rate structure is not readily apparent,