Myth 1. RTP increases the utility's costs and revenue requirements. %n1%n
Reality 1. A well-conceived RTP program reduces the utility's costs and revenue requirements.
RTP programs can reduce peak demands for power, increase off-peak demands, and reduce the need for additional peak-load capacity. This increase in efficiency can lead both to higher company profits and greater customer savings. As the electric industry becomes more competitive, these savings will flow to those customers most responsible for lowering the utility's costs. According to projections from Entergy Corp., which ran a pilot RTP program called PowerView %n2%n for residential customers in Little Rock, Ark., for one year, each new RTP customer helps avoid installing an additional 1.5 kilowatts of capacity, saving $1,200 in capital costs. After accounting for the $850 telecommunications system in the PowerView project, the utility's net investment savings was estimated at $350 per customer. %n3%n
Myth 2. RTP is the same thing as peak-load pricing.
Reality 2. RTP involves much more than traditional peak-load pricing.
RTP is peak load pricing carried to the limit of six-minute, 15-minute or hour-long blocks, as opposed to eight-hour or longer blocks as in traditional peak-load pricing systems. Hence, instead of charging a flat 13 cents per kilowatt-hour, utilities can charge real-time prices that vary with marginal costs (em e.g,. from 4 cents to $2.50 in New York City. RTP approximates marginal and/or incremental costs much more closely than conventional peak-load pricing schedules.
Myth 3. RTP is only for industrial customers.
Reality 3. RTP is not only for industrial customers; it is for any customer or class of customers, provided that it is cost-effective.
No reason exists to restrict RTP to industrial customers other than the costs of implementation. RTP already is available to residential consumers on an experimental basis. As the costs fall, one may expect more RTP programs for residential customers.
Myth 4. RTP is harmful to residential customers.
Reality 4. RTP can benefit residential, commercial and industrial customers.
Customers with flexible demand can use RTP programs to help save on their electric bills by shifting demand off the system peak. The rates provide an incentive for customers to reduce consumption during peak hours and purchase additional low-cost power during off-peak hours. Appliances such as hot water heaters, air conditioners, freezers and ventilation fans can be programmed to shut off when electricity prices are lower. Using Consolidated Edison's RTP program, a Marriott Hotel in New York City saved more than $200,000 in the first summer of experimental testing.
Myth 5. RTP is a form of subsidy.
Reality 5. An RTP program based on covering at least short-run marginal costs during off-peak periods does not subsidize anyone.
An RTP program allows a utility to base its energy charges on incremental or marginal costs and recover its customer and demand charges by means of a negotiated monthly charge. Real-time electricity prices for the following day are transmitted to customers using electronic mail service (such as AT&T EasyLink) by 4:30 p.m. the day before. To offset these and other customer and capacity charges not related to usage levels, the RTP tariff includes a monthly service charge ranging from $155 to $270. Hence no subsidy is required.
Myth 6. Load control is superior to RTP.
Reality 6. A well-conceived RTP program is a load-control program based on marginal or incremental costs. It can be designed to be superior to a well-conceived, quantitative, load-control program.
An RTP program relies on price signals to shift load and thereby reduce capital requirements. Load control curtails demand directly by varying the amount supplied at the discretion of the utility with prior approval by the customer. RTP is preferable to load control because only those customers that value the power least are curtailed, and always at their own discretion. It avoids rationing. By contrast, load control often denies service to customers who value the power at more than the supplier's marginal cost.
Myth 7. One-part RTP promotes greater efficiency more than two-part RTP.
Reality 7. A two-part RTP program has greater potential for efficiency than a one-part plan.
Though more difficult to implement, two-part pricing is economically more efficient because energy prices are set much closer to the marginal cost. The two-part tariff also offers less price risk to the customer, since real-time prices apply only to peak usage. It promotes efficiency as long as the customers and the utility do not negotiate an understated or overstated customer baseline load. A one-part pricing program involves applying a direct adjustment to the marginal energy charges through an adder or multiplier. Though easier to implement, the one-part pricing tariff distorts the price away from marginal costs, and also increases the customer's price risk because real time prices apply to all usage. Hence, a two-part tariff results in greater efficiency than a one-part tariff. t
Albert L. Danielsen is professor of economics and director of the James C. Bonbright Center at the University of Georgia. He was one of the principal editors of Principles of Public Utility Rates, 2d Ed. (Pub. Utils. Reports, Inc.), the 1988 update of the classic text, Principles of Public Utility Rates, by James C. Bonbright (Columbia Univ. Press, 1961). Nainish K. Gupta is a graduate research assistant at the center and the university's economics department.
1Public Utility Research Center, Impacts of Mandatory Time of Use Rates on Conservation Programs, University of Florida, Gainesville, Fla., April 1995.
2See, Colman, Andrew and Douglas Castleberry, James Blomberg, and Rob Reynolds, "Competitive Edge: PowerView, a DSM-Focused Technology," PUBLIC UTILITIES FORTNIGHTLY, Nov. 1, 1993, p. 40.
3Flavin, Christopher and Nicholas Lenssen, "The Electricity Industry Sees the Light," Technology Review, May/June 1995.
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