Bill Graf Moderator Partner Deloitte & Touche LLP Regulated Utilities and Rate Design
Bill Graf Moderator
Partner
Deloitte & Touche LLP
Regulated Utilities and Rate Design
Mark B. Lively Consulting Engineer
Utility Economic Engineers
Regulated Utilities and Rate Design
Regulated Utilities and Rate Design
Supplemental Prepared Remarks Yesterday I heard Richard Stavros ask a question.
I met Richard about 10 or 15 years ago when he was editor of Public Utilities Fortnightly (PUF) and published an article I wrote. 25 years ago, long before Richard got there, PUF published my first article, "Tie Riding Freeloaders--The True Impediment to Transmission Access," Public Utilities Fortnightly, 1989 December 21. I wrote "Tie Riding Freeloaders" as personal therapy after being on the next to the last flight of Pan Am 103. The last flight, the next day, crashed in Lockerbie, Scotland.
Mark B. Lively 3
Regulated Utilities and Rate Design
Supplemental Prepared Remarks My PUF article discusses the concept of pricing unscheduled
flows of electricity. If you have two electric utilities connected by a transmission line, there will always be some flow on the transmission line. Ask any power engineer. If the flow is unscheduled, it is called inadvertent interchange, as would be any deviation from any schedule. If there are 2 lines, owned by different economic interests, and we schedule power to flow on one of those lines, some power will flow on the other line. The unscheduled flow might be called low flow or parallel path flow. I say there needs to be a way to price inadvertent interchange and loop flow following economic principles which may not be in accord with normal accounting costs. I call the concept WOLF, for Wide Open Load Following.
Mark B. Lively 4
Regulated Utilities and Rate Design
Supplemental Prepared Remarks Yesterday Walt Patterson of Chatham House advocated
microgrids. This is where one of the two utilities is very small, perhaps even very, very small. In the extreme it might be a single residential customer, the concept of my slides. The electric industry in the U.S. started with microgrids. Sam Insul saw that by connecting microgrids with transmission, he could build bigger, more efficient power plants and shut down a slew of small inefficient power plants, which prior to automation had 24x7 staffing at each plant. Eliminating 24x7 staffing at dozens of power plants pays for a lot of transmission, as does a halving of fuel costs.
Mark B. Lively 5
Regulated Utilities and Rate Design
Supplemental Prepared Remarks
But Sam Insul didn't have something like WOLF pricing to pay for transmission, so he bought each microgrid, built the transmission, and formed utility holding companies, which grew into the electric utilities we have today.
Mark B. Lively 6
Regulated Utilities and Rate Design
Supplemental Prepared Remarks I have written extensively about microgrids. I see they have
the same issues as traditional utilities, including how to pay participants. In a fun article, I wrote about how a neighbor, think Heather Heard of Deloitte, was a greenie, with solar and wind mills, while I was a troglodyte with a dirty diesel. We connect our houses electrically. Where there is a huge renewable surplus, the transaction price is very low and I can shut down my diesel as being uneconomic. When there is a shortage, the transaction price is very high. This 7 year old article is “Microgrids And Financial Affairs - Creating A Value-Based Real-Time Price For Electricity,” Cogeneration and On-Site Power Production, September, 2007.
Mark B. Lively 7
Regulated Utilities and Rate Design
Supplemental Prepared Remarks 22 years ago, I helped Tampa Electric Company with its standby tariff,
where customers paid a monthly fee in the form of a demand charge of sorts to TECo for TECo to stand ready 24x7 to provide backup to their microgrids. TECo's Bill Ashburn is my guest, my "plus one," at this conference. Walt Patterson's microgrids need such standby, but then so does any customer with alterative supplies, whether a home owner with solar or a gas customer with a heat pump. Having these part time customers pay for standby reduces the amount the utility must collect from "standard" customers, customers without alternative supplies. This rate change reduces the subsidies being paid by standard customers, subsidies which would otherwise overly encourage customers to make investments in uneconomic alternative supplies.
Mark B. Lively 8
Importance of Rate Design
• Rate design can create cross subsidies within a
rate class, i.e., residential subsidizing
residential
• Cross subsidies give wrong incentives
– Electric Utilities “overly” promote PV
– Gas Utilities “overly” promote
• Heat pumps
• Wood stoves
9 Mark B. Lively
Residential Gas Consumption
• Need for pipes is based on demand
• Pricing is based on throughput
10 Mark B. Lively
0
5
10
15
20
25
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20
Daily Gas Consumption
11 Mark B. Lively
0
5
10
15
20
25
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20
Daily Gas Consumption
Need for pipes based on
maximum throughput
12 Mark B. Lively
0
5
10
15
20
25
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20
Daily Gas Consumption
Need for pipes based on
maximum throughput
Revenue for pipes based
on total throughput
13 Mark B. Lively
Residential Gas Consumption
• Need for pipes is based on demand
• Pricing is based on throughput
• Opportunity for residential cross-subsidy
14 Mark B. Lively
0
5
10
15
20
25
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20
Daily Gas Consumption
0
5
10
15
20
25
20 13 12 5 17 4 10 2 14 6 8 3 1 16 19 7 15 11 9 18
Daily Gas Consumption
15 Mark B. Lively
Standard With Heat Pump
With Wood Stove
Residential Consumption
16 Mark B. Lively
Customer
Type MCF
MCF
Allocation
Traditional 210 $ 354.93
Heat Pump 90 $ 152.11
Wood 55 $ 92.96
355 $ 600.00
$600 $1.690
Standard Rate Design
17 Mark B. Lively
Subsidy of Standard Rates
Customer
Type
Customer
Allocation
MCF
Subsidy
Traditional $200 $ 154.93
Heat Pump $200 $ (47.89)
Wood $200 $ (107.04)
$ 600.00 $ -
18 Mark B. Lively
Subsidy of Standard Rates
Customer
Type Demand
Demand
Allocation
MCF
Subsidy
Traditional 20 $ 240.00 $ 114.93
Heat Pump 20 $ 240.00 $ (87.89)
Wood 10 $ 120.00 $ (27.04)
50 $ 600.00 $ -
$600 $12.000
19 Mark B. Lively
Residential Gas Consumption
• Need for pipes is based on demand
• Pricing is based on throughput
• Opportunity for residential cross-subsidy
• Encourages sub-optimal customer actions
20 Mark B. Lively
Residential Electricity Consumption
• Need for wires is based on demand
• Pricing is based on throughput
21 Mark B. Lively
0
0.5
1
1.5
2
2.5
3
3.5
4
4.5
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24
Residential Hourly Load Curve
72 KWH of consumption
22 Mark B. Lively
0
0.5
1
1.5
2
2.5
3
3.5
4
4.5
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24
Residential Hourly Load Curve Need for wires based on maximum throughput
23 Mark B. Lively
0
0.5
1
1.5
2
2.5
3
3.5
4
4.5
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24
Residential Hourly Load Curve Need for wires based on maximum throughput
Revenue for wires based on total throughput
24 Mark B. Lively
Residential Electricity Consumption
• Need for wires is based on demand
• Pricing is based on throughput
• Opportunity for residential cross-subsidy
25 Mark B. Lively
26 Mark B. Lively
0
0.2
0.4
0.6
0.8
1
1.2
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24
Solar Production Curve
7.6 KWH of Solar 1.0 KWH at Noon
0
0.5
1
1.5
2
2.5
3
3.5
4
4.5
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24
Residential With Sum Solar
27 Mark B. Lively
-2
-1
0
1
2
3
4
5
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24
Residential With Lots of Solar
28 Mark B. Lively
Standard Rate Design
Customer
Type KWH
KWH
Allocation
Traditional 72.0 $ 181.89
Some Solar 64.4 $ 162.69
Solar Ratchet 51.9 $ 131.12
Solar Net Net 49.2 $ 124.29
237.5 $ 600.00
$600 $2.526 29 Mark B. Lively
Subsidy of Standard Rates
Customer
Type Demand
Demand
Allocation
KWH
Subsidy
Traditional 4 $ 150.00 $ 31.89
Some Solar 4 $ 150.00 $ 12.69
Solar Ratchet 4 $ 150.00 $ (18.88)
Solar Net Net 4 $ 150.00 $ (25.71)
16 $ 600.00 $ -
$600 $37.500
30 Mark B. Lively
Residential Electricity Consumption
• Need for wires is based on demand
• Pricing is based on throughput
• Opportunity for residential cross-subsidy
• Encourages sub-optimal customer actions
31 Mark B. Lively
Mark B. Lively 32
y = 0.0154x + 0.3487 R² = 0.0784
$0.024
$0.028
$0.032
$0.036
$0.040
$0.044
$0.048
$0.052
$0.056
0%
10%
20%
30%
40%
50%
60%
70%
80%
0 1 2 3 4 5 6 7 8 9
$
/
K
W
H
L
o
a
d
F
a
c
t
o
r
Customer Demand (KW)
Customer Load Factor vs. Demand 0.025*KW+0.300
$100/KW and 40% PV Energy
Normal LF Adjusted Linear LF Needed Revenue Adjusted Revenue Requirement Linear (Normal LF)
Commodity Subsidies
• Gas markets vary by day, soon intra-day
• Electric markets vary by hour, or intra-hour
• Periodic adjustment clauses protects utility net income from variable commodity cost
• Cross subsidies associated with commodity rates can still encourage inappropriate customer investments
33 Mark B. Lively
Conclusions
• Standard Energy Rate Design Produces Subsidies Relative to Demand Rates
• Subsidies Encourage Investments That Reduce Billing Energy
• Wires/Pipes Costs Stay the Same
• Death Spiral by Rate Design
34 Mark B. Lively
Eric Ackerman Director
Alternative Regulation
Edison Electric Institute
Regulated Utilities and Rate Design
A Crossroads
“The nation’s energy technologies and are advancing
faster than the rules, rates and administrative
processes that govern how America’s utilities
operate…At the heart of this challenge is the
application of a 20th century regulatory model for a
21st century.”
-- Powering Forward: Presidential and Executive Agency Actions to Drive
Clean Energy in America, Center for the New Energy Economy, January
2014. needs
Legacy Rates Are Unsustainable
Reliance on volumetric (kWh) charges for fixed cost recovery leads to cost shifting (the “Green Energy Divide”)
Need to increase fixed charges
Rate incentives for PV and other favored technologies (net metering, non-compensatory backup and standby)
contribute to ever larger cost shifts
DER industries are no longer fledgling
Rate policies need to evolve to cost-based service agreements
DER will reach 30% of Installed US Capacity by 2020
Effectively all incremental growth in capacity will come from customers
30%
Customer-Grid Evolution Customer DER driven by resilience, economics & environmental objectives
• Increasingly networked, increasingly transactive
© Copyright 2014, Newport Consulting Group, LLC
Operational Evolution: 1978-2001 Transactive Energy: 2020+
DER at scale will likely lead to multi-party transactions and the creation of local balancing & distributed markets to integrate customer DER
Utilities Need New Flexibility
Utilities need new flexibility to offer differentiated value-added services Reliability services Network management services Transaction management services
Utilities need flexibility to develop distributed energy
In rate base (microgrids) Outside of rate base (community solar, customer sided
applications)
Conclusions
1. The Utility of the Future = f(grid modernization)
2. Integrated control & operation is key
3. The Utility of the Future needs a new regulatory model.
4. The foundation for that model will be new rate policies.
Philip R. O’Connor, Ph.D. President
PROactive Strategies, Inc.
Leave No Price Undistorted: Energy Utility Rate Design
Rate Design: A Regulatory Afterthought
• “Revenue Requirement” has been the main focus in traditional vertical monopoly regimes and now in competitive regimes for delivery rates
• Historically embedded rate design features perpetuate divergence from cost of service study indications
• There is an enduring cross-subsidy temptation
• The politics of price signals – “dangerous knowledge”
– Traditional “cost of service” misprices surplus & shortage
• Inertia & Incrementalism v. Initiative & Innovation
Traditional Tensions In The Rate Design Process
• Regulatory resource allocation: Limited professional staff - revenue tends to trump rate design
• There are better & worse “arbitrary” cost allocations
• High profile issues, though often of limited consequence, such as return on equity and charitable contributions tend to receive more attention than will rate design efficiencies
• Tradition of favoring volumetric cost recovery over fixed rates is politically & intellectually difficult to confront
• Short commissioner tenure limits rate design education
New Tensions In The Rate Design Process: Competitive Markets & New Policy Goals
• State-level energy efficiency and load reduction goals
• Renewable portfolio standards and net metering
• Movement to competitive markets by states with one-third of total national load removes most cross-subsidy from supply, leaving less room for overall cross-subsidy through delivery rates
• Many competitive states have not significantly altered process – similar complexity & resources for delivery-only rates
• Diversity of residential retail products in competitive states may invite regulatory intervention to limit offerings
There Is Not A Clear Prevailing Philosophy Of Rate Design At State Level
• Legacy rate design features and philosophies largely develop during a period of utility growth – both in energy consumption and expansion of networks
• In a few states – such as California -- legacy designs include elements such as inverted pyramid tiered volumetric rates
• NARUC has not initiated a shared effort at reconsideration
• FERC provides some examples of rate design consistency
• Regulators will not develop a broad consensus absent widespread industry momentum for change
Unintended Consequences: Policies & Practices In Conflict
• Electric plug-in vehicles: Volumetric & non-TOU rate designs and inverted pyramid may discourage use
• Net metering that includes delivery may encourage rooftop solar but shifts distribution costs to others
• Conventional rate design limits the use and value of smart meters being deployed pursuant to other policies – such as pre-pay, demand response and time-of-use
• Disconnect between gas & electric rate design may send wrong price signals for distributed generation
Learning From Experience
• In telecom, technology and competition changed the underlying cost structure – flat rates were replaced by usage sensitive pricing & now wide range of options
• Vertically integrated, traditionally regulated monopoly electric rates no more stable or less volatile monthly than all-in prices in competitive states
• It is far easier politically to address legacy cross-subsidy issues in competitive retail conditions
The Great Lakes Comparison: Michigan Long Delayed Addressing Rate “Skewing”
Change in Residential Rate as Ratio to C&I Rate from 1997 to 2013
(0.15)
(0.10)
(0.05)
-
0.05
0.10
0.15
0.20
Illinois Ohio Michigan Indiana Wisconsin
Ch
an
ge
in R
ati
o
The Michigan Double Whammy: Residential Ratio & Price Up Big
1997 to 2013 Change in Residential ¢/KWH & Residential-to-C&I-Price Ratios
(2.0)
-
2.0
4.0
6.0
8.0
(0.2) (0.1) - 0.1 0.2 0.3
Ch
ange
in P
rice
(Cen
ts p
er K
Wh)
Change in Ratio
Michigan
Illinois
Ohio
Wisconsin
Indiana
Path To A New Focus On Rate Design
• Re-Develop a utility regulatory philosophy rooted in adherence to accurate price signals that inform customers of the economic cost & value of service
• Embrace the idea that regulators can help to lead change
• Consider the opportunity for reducing cross-subsidy tensions by moving to customer choice of supply
• Free-up resources for rate design focus by moving to formula-based delivery rate design (Illinois example)
Illinois’ Energy Infrastructure & Modernization Act – A New Approach
• Aimed at assuring $3 Billion 10 year incremental investment in smart grid, AMI and network hardening
• Annual adjustment based on FERC Form 1 data and formula ROE of 580 BP over average Treasuries
• Metrics & penalties & rate increase limits
• Initial rate design case separate from revenue need
• Separate rate design cases at least every 3 years or on the motion of the Commission
Philip R. O’Connor, Ph.D. PROactive-Strategies, Inc. -- Chicago, Illinois
Dr. Phil O’Connor is President of PROactive Strategies, a Chicago consulting firm providing advice in the energy and insurance industries. For over two decades Phil has been recognized as a leading advocate of competitive market solutions for regulated businesses.
Phil is the author of Customer Choice in Electricity Markets: From Novel to Normal, published by COMPETE Coalition in November 2010 and co-author with Terrence L. Barnich of “The Grand Experiment: Has Restructuring Succeeded on Either Continent?”, published in Public Utilities Fortnightly, February 2007. He co-authored with John L. Domagalski “Regulation and Relevancy: Assessing the Impact of Electricity Customer Choice,” in ElectricityPolicy.com, January 2013.
In addition to a lengthy career in the private sector, Phil has had extensive government and political experience, having chaired the Illinois Commerce Commission serving as Director of the Illinois Department of Insurance and as a member of the Illinois State Board of Elections. Five consecutive Illinois Governors have appointed him to various boards and commissions.
From March 2007 to March 2008, Phil served in the U.S. Embassy in Baghdad, Iraq with the US Army Corps of Engineers and the US State Department as an advisor to the Iraqi Ministry of Electricity. A magna cum laude graduate of Loyola University of Chicago, Phil received his Masters and Doctorate in Political Science from Northwestern University.
[email protected] 312-446-3536 312-9804860
Regulated Utilities and Rate Design