Pandemic Priorities for Utility Regulation and Policy – Part I

Deck: 

During the Coronavirus Chaos and Afterwards Too

Fortnightly Magazine - May 2020

Thirty-eight percent of sales of electricity, nationally, were to residential customers in 2019. Thirty-six percent, which is almost as much, were to commercial customers. 

However, forty-seven percent of sales revenue, nationally, came from residential electric bills. That's almost half of all the sales revenue of electric utilities, and in retail competition states, this includes electricity marketers as well. 

That forty-seven percent from residential electric bills is a far larger slice of the pie than the thirty-six percent that came from commercial electric bills. Which coincidentally is the same exact percentage as that for the sales of electricity to commercial customers, thirty-six percent in both cases for the commercial class of customers. 

Residential electric bills are a much larger percentage of sales revenue, forty-seven percent, than sales of electricity to residential customers, thirty-eight percent. Why is that? It actually has to do with the third major class of electricity customers, the industrial class. 

Reuters Events – Energy Transition North America 2022 – #ETNA2022 – Register Now – Houston, Texas; November 9–10

Industrial electric bills are a much smaller percentage of sales revenue, sixteen percent, than sales of electricity to industrial customers, twenty-five percent. And why is that? Because residential customers have always paid the most per kilowatt-hour, on average, industrial customers have always paid the least per kilowatt-hour, and what commercial customers have paid has always been in the middle. 

So if the coronavirus crisis has caused sales of electricity to commercial customers to collapse — as everything from shopping malls to schools to sporting venues have shut down for the duration — that thirty-six percent of sales revenue from commercial electric bills is likely to fall considerably. How will this impact utilities' sales revenue overall and crucially, their ability to support their costs of service and a reasonable rate of return? 

Recall that what residential customers pay per kilowatt-hour is significantly greater than what commercial customers pay. So if a particular quantity of kilowatt-hours of usage simply shifts from commercial customers to residential customers, one-for-one, then sales revenue would actually rise. In this scenario, utility regulators would need to be concerned about the over-compensation of utilities not their under-compensation. This scenario however is unlikely.

Instead, we can expect that the kilowatt-hour shift from commercial to residential customers will be quite a bit less than one-for-one. Sure, sales of electricity to residential customers are certain to increase somewhat due to the shelter-in-place policy being followed throughout the country. The key word though is, somewhat. 

It's important to understand that the electricity usage of very many American households is fairly insensitive to whether their occupants are at home or not during weekday daytime hours. In very many homes, the electrical demands of air conditioning, refrigeration and other equipment, appliances and devices are, regrettably, not much affected by the physical presence of people on say a Tuesday afternoon.

This contrasts with the situation for the commercial class of customers. If the local college, concert hall, and office complexes are closed, electricity usage will drop drastically and stay down until we're clear of this coronavirus crisis.

We expect therefore that sales of electricity to commercial customers will crater and sales of electricity to residential customers shall go up but not soar sufficiently to entirely make up for the commercial class shortfall. Will the higher rates of residential customers — versus commercial customers — mean that utilities will be kept whole? That's a really important question right now for utility regulators.

The answer probably depends upon the service territories of the utilities they regulate. Suppose a utility's service territory is heavily urban and suburban. For these utilities, the commercial class tends to be well above the national average of thirty-six percent in terms of sales of electricity and sales revenue. 

Reuters Events – Energy Transition North America 2022 – #ETNA2022 – Register Now – Houston, Texas; November 9–10

Examples can be found in the states of California, Illinois, Massachusetts, New Jersey, and New York. These five states have utilities that are much more dependent than thirty-six percent on their commercial class of customers. And so some utilities in these states are more likely to be severely impacted by the fall in commercial class usage and revenues that cannot be fully made up by the rise in residential class usage and revenues.

As if this problem wasn't enough of a concern, utilities and utility regulators quickly responded to the coronavirus crisis by allowing late-paying residential customers to continue their electric service and to do so without financial penalties. This was an admirable step of course for our society. Nonetheless, this policy means that the increase in residential usage may not translate into a significant or any increase in revenues from residential electric bills that are actually paid in a timely fashion. The small net increase in residential class revenues, if any, may not be enough for some utilities to compensate for the collapse in their commercial class revenues.

So, what to do? During the crisis, some costs will come down such as the fuel and other variable costs of electric generation in accordance with the lesser sales of electricity to commercial customers. Though some costs may come up such as for the protection of utility crews from the virus. Considering all the factors together, of utility revenues and costs in this new normal, it might become necessary for regulators to review rates to keep the utility whole.

Which might not be that timely given that very many customers will be hard-pressed economically, both residential and commercial customers. All of this suggests that some hard choices lie ahead for those of us in utility regulation and policy and dedicated to the public interest.