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Inclining for the Climate

GHG reduction via residential electricity ratemaking.

Fortnightly Magazine - May 2009

but the small amount of published rate data available shows flat rates are used.

In the West, Southeast, and Great Lakes regions, inclining block rates also are widely used in non-summer seasons. Much of the country, however, employs declining block rates in non-summer seasons, particularly a central swath of the country and much of the Northeast. In seven states—Iowa, Indiana, Mississippi, North Dakota, Ohio, Pennsylvania, and West Virginia—at least one of the two largest utilities uses declining block rates year-round.

Green Inclination

Utilities that emphasize demand-side management (DSM) programs might be expected also to use inclining block rates, which provide a strong incentive to conserve and shorten the payback period for energy-efficiency measures. However, this is not entirely the case for the sample of utilities studied in the authors’ review of rate designs, as shown by a comparison of rate structures and DSM expenditures reported on EIA Form 861. 7

To be sure, utilities with higher DSM expenditures are more likely to employ inclining block-rate structures. The energy providers in the survey with relatively higher DSM expenditures were more than twice as likely as others to use year-round residential inclining block rates—28 percent vs. 12 percent, respectively. 8 Nevertheless, the comparison also reveals room for improvement. Many utilities with higher DSM expenditures don’t yet employ residential inclining block rates (56 percent), or employ them during summer only (16 percent); several employ declining block rates for part or all of the year. These utilities miss an easy opportunity to boost the effectiveness of their DSM programs.

They also miss an opportunity to reduce their aggregate GHG emissions as estimated under the following assumptions.

According to EIA data, the jurisdictions in the study sample with flat or declining block rates serve approximately 350 TWh of residential load per year. This sales assumption excludes: A) sales by utilities in the sample that use inclining block rates in any portion of the year; and B) sales by utilities not in the sample. Including A) or B) magnifies the sales assumption and the savings opportunity.

These jurisdictions with flat or declining block rate structures adopt simple two-tier inclining block residential rates that are 15-percent lower than the original rate in the first tier, and 25-percent higher than the original rate in the second tier, in keeping with the example presented earlier.

Also in keeping with the earlier example, 75 percent of the 350 TWh sees the tier-2 rate as the marginal price, while the remainder sees the tier-1 rate as the marginal price.

Small users (1,000 kWh and below) facing the tier-1 rate as the marginal price have an average short-term price elasticity of -0.05; larger users facing the tier-2 rate as the marginal price have a moderately higher average short-term price elasticity of -0.1. These elasticities are conservatively low, given the meta-analysis of other studies, and are applied under the assumption that users respond to marginal price changes. 9 The percentage in consumption by user group is estimated as the percentage change in price times the elasticity value.

GHG-emission rates among the affected utilities are equal