April 8, Daniel P. Wolf Executive Secretary Minnesota Public Utilities Commission th Place East, Suite 350 St. Paul, Minnesota

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1 April 8, 2016 Daniel P. Wolf Executive Secretary Minnesota Public Utilities Commission th Place East, Suite 350 St. Paul, Minnesota RE: Comments on Notice Seeking Comment on Procedural Schedule, In the Matter of an Alternative Rate Design Stakeholder Process for Xcel Energy Docket No. E-002/M Dear Mr. Wolf: Fresh Energy and Minnesota Center for Environmental Advocacy (MCEA) submit these comments in response to the notice issued on February 16, 2016 by the Commission in the abovementioned docket. We appreciate the effort by Commissioners, staff, and other stakeholders to seek input on principles and objectives to guide rate design in Minnesota. We want to note the significant efforts we and other stakeholders have invested in the alternative rate design stakeholder work to date in this docket and in stakeholder discussions led by the Department. We also note that alternative rate designs, in particular time-varying rates, were identified in the recent Commission staff report on the stakeholder grid modernization workshops in Docket No Attachment 1 to these comments summarizes the series of comment periods, stakeholder meetings, and Commission hearings that have occurred in this docket and Xcel Energy s last rate case to date. Regarding the list of draft principles and objectives for alternative rate design Attachment A in the Commission s notice The draft principles and objectives accurately capture the goals of what rate design should achieve in Minnesota. In addition, the principles and objectives are inclusive of (but not limited to) the principles of rate design published by James Bonbright in his seminal and oft-cited work Principles of Public Utility Rates (see Attachment 2). The notice s proposed objective three states that rates should be equitable, generally based on costcausation principles and avoiding cross-subsidies, unless it is necessary to meet explicit state policy goals (emphasis added). While this objective is important, there are inherent cross subsidies in the current rate structures among customers in the same customer class. For example, the costs to connect and service a customer that lives in a large apartment complex are likely significantly smaller per customer than the costs to connect customers that live in single family homes in less populated areas of a utility s service territory. Short of applying a unique rate to every customer that accounts for every costs incurred by that customer, cross-subsidies at some level are unavoidable in the rate-making process. The Commission should be cautious of seeking to address one or several specific cross-subsidies at the risk of creating or exacerbating others.

2 Regarding the attached list of proposed initial rate design options Attachment B in the Commission s notice In general, the five proposed initial rate design options are appropriate at this time. Each rate design has been implemented and tested in utility service territories in other states, and some have already been used here in Minnesota. While some of the rate design options face significant implementation challenges for some utility service territories (for example, current and future metering infrastructure capabilities), these rate designs warrant further discussion and study as utility investments, Commission decisions in other dockets, and advancing technologies change the landscape for these designs. Revenue Decoupling Mechanisms Revenue decoupling mechanisms are generally not included in customer rate design discussions, and it is important to distinguish the difference between the intended outcomes of decoupling and rate design. In our August 7, 2015 comments in Docket no. E002/M , Fresh Energy and MCEA included the following table to clarify the different intentions: However, based on the principles and objectives presented in Attachment A of the Commission s notice, revenue decoupling is a viable policy for achieving objective 4 of maintaining revenue stability. At the same time, revenue decoupling preserves objective 5 regarding conservation and energy efficiency by implementing adjustments through a volumetric rate. The Commission should consider how revenue decoupling mechanisms complement the proposed alternative rate designs under discussion. Pilot Rate Design Projects In our December 1, 2015 Comments in this docket, Fresh Energy and MCEA recommended that the Commission direct Xcel Energy to develop a suite of time of use rate pilots that can help the utility, the Commission, and stakeholders assess the impact of these rates on customer s experiences and bills, energy conservation, and other rate design goals. 1 In those comments we also highlighted the robust time-of-use pilot that the Company proposed to the Commission in Docket no. E002/M The Company s initial pilot proposal in that document is attached to these comments in Attachment 3. As the Company s proposal in that docket shows, time-of-use rates can be designed and implemented in a variety of different ways that can impact customer behavior change outcomes. 1 Clean Energy Organizations (December 1, 2015). Comments. Docket no. E002/CI

3 In response to the Commission s December 18, 2015 Order in this docket, Xcel filed a compliance filing report on metering capabilities of the Company s current AMR meters and the functionalities of AMI meters. 2 We understand that the Company s current 2 period residential whole house time of use rate and the electric vehicle rate tariff use the Company s existing AMR meters. The Company s filing indicated a shortage of meters available for customers on these tariffs: A meter exchange is required for customers who choose to change from a total consumption tariff to a TOU tariff. Xcel Energy has a few hundred existing meters that could be used for commercial installations and almost non-existent stock for residential type applications. 3 We are concerned if there is indeed a shortage, as these meters are necessary for Commission-approved tariffs available to the whole residential customer class. Once any meter supply concerns are addressed, we understand that these same meters can be used for other 2 period time-of-use rate pilots that study the customer adoption, energy savings, and bill effects of an on-peak period shorter than the 12 hour period in the current time of use tariff. Building on the information submitted by Xcel in this docket on the current metering capabilities, we recommend that the Company develop new time-of-use rate proposals. Previous Rate Design Pilots Minnesota Power is currently engaging in a multi-faceted rate design pilot testing time-of-use and critical peak pricing rates with groups of customers in its service territory. The best lessons we can learn from these reports are potential impacts on peak load to reduce coincident system peak demand (objective 6) and customer understanding and satisfaction with the pilots (objective 7). Attachment 4 provides a preliminary report on Minnesota Power s time-of-use pilot as of March 6, 2014, as provided on the SmartGrid.gov website. 4 Similarly, Attachment 5 provides an update and requested adjustment on the utility s time-of-use pilot program, as well as preliminary results on the critical peak pricing pilot currently underway for a subset of Minnesota Power s residential customers. Low customer charges based on marginal costs, time-of-use rates, and revenue decoupling mechanisms best meet the principles and objectives in Attachment A Customer charges based on the marginal cost to serve one additional residential customer with very small use levels, with the remainder of the revenue difference made up in a higher volumetric rate, best meet the following objectives: Objective 2: Rates should be based on marginal costs. Customer charges based on marginal cost, not average or embedded costs, best meet this objective. 2 Compliance Filing from Xcel Energy (February 16, 2016). Xcel Energy Informational Metering Report. Docket No. E002/M Ibid. Page

4 Objective 3: Rates should be equitable, generally based on cost-causation principles and avoiding cross-subsidies, unless it is necessary to meet explicit state policy goals. As discussed above, cross-subsidies occur in all customer classes and are inevitable in a rate design that falls short of recovering every cost incurred by a customer from that customer. Customer charges based on marginal costs appropriately meet the cost-causation principles in this objective. Objective 5: Rates should encourage conservation and energy efficiency. Ensuring that a greater portion of a customer s bill is recovered through a volumetric rate preserves customers financial incentive to invest in energy efficiency and engage in conservation practices and behaviors. Objective 7: Rates should be stable, understandable, and provide customer choices. Low customer charges and subsequently higher volumetric charges ensure that customers pay directly for the energy they use, which is an understandable concept for many customers. Furthermore, this concept provides customers with choices regarding how they use their energy, and preserves the potential for customers to generate their own energy if they choose. Objective 8: Rates should encourage economically efficient decision-making. Ensuring that a greater portion of a customer s bill is recovered through a volumetric rate preserves the price signal to customers to use energy economically and avoid wasting energy. Time-of-use rates best meet the following objectives: Objective 6: Rates should reduce coincident system peak demand. Time-of-use rates that accurately align on-peak rates with coincident system peak demand sends the appropriate price signal to customers to reduce energy use at coincident peak times. Objective 9: Rates should be aligned with wholesale market prices that reflect the varying price of electricity throughout the day and year. Time-of-use rates that accurately reflect wholesale market prices for the utility in on-peak rates for customers will effectively achieve this objective. Revenue decoupling mechanisms best meet the following objective: Objective 4: Rates should allow a utility to recover its revenue requirement in a manner that maintains utility revenue stability, and minimizes year-to-year under- or over-collections. Decoupling provides revenue stability by ensuring that the utility recovers its Commissionapproved revenue requirement, no more and no less. Through regular adjustments on customer bills decoupling accounts for under- or over-collection of utility revenues in a given time period, with applicable caps to minimize fluctuations from year to year.

5 Policies to ensure low-income and other at-risk or medical needs customers can continue with alternative rate designs Minnesota currently has Low Income Home Energy Assistance Programs (LIHEAP) through state agencies and several investor-owned utilities in the state. These programs served an estimated 156,068 households in the state with heating assistance in fiscal year However, not all low-income customers who qualify for LIHEAP actually receive LIHEAP. As noted by Pam Marshall in Xcel Energy s previous rate case, roughly 25 percent of Xcel Energy s residential customers qualify for LIHEAP but only 5.57 percent of customers received LIHEAP assistance in One policy that may help low income customers who do not receive LIHEAP assistance is a lifeline rate that discounts the first very low-use block of energy used. Applying this to all residential customers will ensure that low-use customers will receive a discounted rate. 7 This also encourages customers above this block to use less, satisfying objective 5 regarding energy efficiency and conservation. Considerations for customers who have specific at-risk or medical needs are critical when determining the impacts of utility rates on customers. Rates should first be set to meet the broader objectives and principles proposed in the Commission s notice, then seek to offer exceptions and provisions to ensure that low-income and vulnerable customers receive affordable electric service. The scope of this proceeding should stay focused on residential customers While many of the principles and objectives laid out in the Commission notice could also apply to rates for industrial and commercial customers, there are significant differences in use patterns and customer diversity within the Commercial and Industrial customer classes that warrant additional discussion. Some rate structures in the commercial and industrial customer sectors, such as demand charges that are not coincident with the utility s peak demand, can serve as disincentives for companies to invest in energy efficiency, combined heat and power, and other on-site generation investments that may otherwise be cost effective under different rate formulas. However, we are concerned that opening the scope of this docket to include commercial and industrial customer rate designs will divert stakeholder resources from developing actionable pilots that move this discussion forward after stakeholders have already invested nearly two years of effort developing the record. Therefore, we recommend that the focus of this docket remain on rate designs for the residential customer class. Recommendations Fresh Energy and MCEA recommend that the Commission: Adopt the proposed principles and objectives for determining rate design in Minnesota, 5 LIHEAP Action Center. Minnesota results. 6 Direct Testimony of Pam Marshall. Docket no. E002/GR Filed June 5, Page The record provided by Pam Marshall and Roger Colton record in Xcel Energy s last rate case shows that the majority of low-income customers are low-use customers. Docket no. E002/GR

6 Find that the initial rate design options are appropriate for consideration at this time, and the Commission should include revenue decoupling mechanisms as a means to achieve objective 4, Find that low customer charges based on marginal costs, time-of-use rates, and revenue decoupling mechanisms best achieve the proposed principles and objectives, Evaluate LIHEAP, lifeline rates, and alternative rate design exemptions as appropriate policies for ensuring service at affordable costs for low-income, at-risk, and medical needs customers while offering alternative rate designs to the general residential customer class, and Keep the scope of the proceeding focused on the residential customer class at this time. We also recommend that the Commission direct Xcel Energy to develop a series of proposed time-of-use rate pilots designed to meet the adopted rate design principles and objectives. These pilots should test different time-of-use implementation strategies to: Determine the best application for Xcel Energy s residential customers, Address customer engagement needs to ensure customers are familiar with their rates, and Incorporate best practices from studies and reports from other states and utility experience in Minnesota. Please contact us at the information below with any questions. Sincerely, /s/ Will Nissen Will Nissen Director, Energy Performance Fresh Energy 408 Saint Peter Street, Suite 220 St. Paul, MN (651) nissen@fresh-energy.org /s/ Holly Lahd Holly Lahd Director, Energy Markets Fresh Energy 408 Saint Peter Street, Suite 220 St. Paul, MN (651) lahd@fresh-energy.org /s/ Hudson Kingston Hudson Kingston Staff Attorney Minnesota Center for Environmental Advocacy

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