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Ratemaking and the Campaign Against Rooftop Solar
Rate design should balance consumer and investor interests.
Ensuring that rates are just and reasonable and not unduly discriminatory is at the core of regulatory oversight of electric utilities. These ratemaking standards were codified and initially interpreted by public utility commissions during a different era, when the industry's rapid expansion was the goal that aligned utility profits with the public interest.
This article examines these terms in the context of ongoing debates about utility rates and rooftop solar, as well as parallel episodes in the industry's history. It concludes that regulators should ensure that changes to rate design seek to balance consumer and utility interests. Rates that are intended to insulate utilities from economic and technological change while providing no benefits to consumers ought to be considered unjust, unreasonable, and unduly discriminatory.
Faced with revenue challenges due to flat demand, many utilities are arguing that misalignments between their costs and revenue collected from residential consumers must be corrected with revised rate designs. These utilities assert that unfair rate designs enable residential consumers who use less to pay less than the utility's measure of its cost to serve them.
They are urging regulators to eliminate cross-subsidies in residential rates that allegedly flow to consumers who have adopted rooftop solar and other technologies, from those who have not. Their proposed remedies include higher fixed fees and lower rates for distributed generation, which reduce ratepayers' incentives to adopt new technologies, or to otherwise buy less electricity from their utility.
The debates about these utility proposals reflect underlying tensions between regulatory goals. Just and reasonable rates must balance consumer and utility interests. While providing utilities with opportunities to profit during a period of flat demand is a legitimate end, increasing fixed fees weighs in favor of the utility, with little or no benefit accruing to ratepayers.
Rate regulation is intended to serve as a substitute for competition, but raising fixed fees and reducing rates for energy provided by alternative sources, such as rooftop solar, only reinforces the incumbents' position. These reforms blunt technological and business model innovations and consumer behavior trends that are ostensibly incompatible with the industry's century-old, top-down, cost-based revenue collection system.
The utility rate case is the primary forum for balancing consumer and utility interests. Ratemaking is intended to produce the rate that would result if electricity distribution were not a monopoly. Such a competitive rate permits a utility to recover its operating expenses, plus a reasonable rate of return on its investments.
This amount, commonly called the utility's revenue requirement, ties total utility costs to revenue earned from consumer rates. To be considered just and reasonable, the resulting rates may neither be too low so as to be considered confiscatory, nor too high to permit the utility to