Rethinking Rate Design

Deck: 

Berkeley Lab’s Discussion with Five Experts

Berkeley Lab’s Discussion with Five Experts

Fortnightly Magazine - November 2016
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In a changing power system, how should utilities recover their costs? The evolution of the power system, driven by technological innovation, shifting loads, changing policies and new customer expectations is raising some fundamental questions about utility regulation.

Many utility investments, such as poles and wires, are fixed costs, at least over the short term. Most of their revenues, however, vary based on how much energy customers use, that is, kilowatt-hours.

If customers buy less energy, whether due to less energy-intensive industries, greater efficiency, or self-generation, utility revenues decline. And growth in U.S. electricity use has gradually slowed each decade since the 1950s.

"Companies are investing more than twenty billion dollars per year in the distribution grid." – Lisa Wood

This trend has spurred new thinking about ways to charge customers for electricity services. Most utilities charge residential customers a fixed monthly fee, plus an amount based on energy consumption. Increasing the fixed charge is one way to ensure utilities have more stable revenues to cover fixed costs, and fixed charges have increased over time.

Raising fixed charges is also a response to concerns about revenue loss from higher levels of distributed energy resources, particularly customer-owned solar power systems. In 2015, utilities in about half the states proposed significant increases in fixed charges for all customers, or in some cases just for customers with onsite distributed generation.

To shed light on the issue, a new report in an ongoing series from Berkeley Lab called Future Electric Utility Regulation addresses various ways to recover fixed utility costs. Using a point-counterpoint format, experts from utility, consumer, environmental and economic perspectives discuss different types of ratemaking strategies and rate designs.

The authors of the report recently sat down to discuss their perspectives. The following are highlights of the discussion.

Lisa Wood

Many would agree that we are witnessing a major transition in the power sector. We see three key trends in the utility industry.

First, there is a transition to clean. Carbon emissions are down twenty percent below 2005 levels, and coal has fallen from fifty to about thirty-four percent of generation. We’re seeing a lot of renewables come into the grid and a transition from coal to gas.

Second, things are getting more digital and distributed. Half of homes have smart meters now (about sixty-five million), and that number is rising. Companies are investing more than twenty billion dollars per year in the distribution grid, out of one hundred billion in total investment.

We have two-way power and information flows and exponential growth in distributed energy resources. This is probably the most fundamental and important reason why we’re having this

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