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The New Vanilla


Why making time-of-use the default rate for residential customers makes sense.
Fortnightly's Energy Customer Management - July-August 2002

There is a timely and renewed national interest in price-responsive demand among utilities, independent system operators, policy makers, and regulators. The Federal Energy Regulatory Commission and Department of Energy co-sponsored a conference on demand response in February. Independent system operators in California, New York, and New England initiated widely publicized price-responsive retail load programs last summer. And individual utilities have recently introduced a variety of price-responsive demand programs. Puget Sound Energy developed what has been perhaps the best-known program, which placed 300,0000 residential customers on a time-of-use price as the default rate. It was fully voluntary, but customers had to opt off, not on.

On the energy policy side, officials like FERC Chairman Pat Wood are touting price-responsive demand as a way to potentially increase the effectiveness of wholesale markets. In the FERC’s “standard market design” white paper issued in March, demand response is included as an element of market design. The Senate energy bill approved and sent to the House in April would require utilities to offer real-time pricing to customers that request it. Both this bill and the energy bill passed by the House in August include tax credits and accelerated depreciation for advanced metering systems. 

Price-responsive demand programs are not new to the electric industry. What’s new is the high-level public discussion of their desirability—and even necessity. Public policymakers have long been willing to offer price-responsive demand programs to customers on a purely voluntary basis. But with a few notable exceptions—including some residential load-management programs in Florida and Gulf Power’s residential dynamic pricing program—small customers saw no reason to overtly choose them, and rate-regulated utilities gained little from marketing them. As a result, retail price-responsiveness languished in the wings.

Why Now?

Clearly what is new is the impact that price spikes and disruptions in emerging competitive bulk power markets have had on customers’ bills, system reliability, and the financial viability of delivery companies. Energy companies, policymakers, and customers—even residential customers—are now recognizing that price responsiveness may be a relatively effective way to improve market performance, reduce bills, and improve reliability in regions with constrained capacity.

The need to foster price-responsive demand by innovative public policy should not be surprising to those who have followed the research on customer preferences for electric options.  During the past five years, two large EPRI-sponsored studies measured the willingness of different types of customers to adopt price-responsive demand programs. These studies showed little willingness of customers to adopt time-of-use rates relative to fixed rates. As expected, the preference for time-of-use rates did increase with customer size: Large business customers had the greatest preference for such programs, while residential customers had the least.

The 2000 EPRI study concluded that, on