A Principled Approach to Rate Design

Transcription

1 30 JANUARY 2018 A Principled Approach to Rate Design Colorado Public Utilities Commission Commissioners Information Meeting Docket 17M-0204E John Shenot Senior Associate The Regulatory Assistance Project (RAP) Fort Collins, Colorado United States jshenot@raponline.org raponline.org

2 Allocation of costs is not a matter for the slide rule. It involves a judgment of a myriad of facts. It has no claim to an exact science. Justice William O. Douglas US Supreme Court Colorado Interstate Gas Co. v. Federal Power Commission 324-US 581,589 (1945) 2

3 Foundational Work on Principles of Public Utility Regulation Bonbright (1961): Principles of Public Utility Rates Garfield & Lovejoy (1964): Public Utility Economics Kahn (1970): The Economics of Regulation Regulatory Assistance Project (RAP) 3

4 Bonbright s Principles: Economic Tariffs should keep the utility viable Effectively yield the total revenue requirement and result in relatively stable cash flow and revenues from year to year Tariffs should fairly apportion the utility s cost of service among consumers Should not unduly discriminate against any customer or group of customers. Tariffs should promote economic efficiency in the use of energy as well as competing products and services while ensuring the level of reliability desired by customers Regulatory Assistance Project (RAP) 4

5 Bonbright s Principles: Non-Economic Tariffs should be practical Simple, understandable, acceptable to the public, feasible to apply, and free from controversy as to their interpretation Rates should be relatively stable Customers experience only minimal unexpected changes that are seriously adverse. Regulatory Assistance Project (RAP) 5

6 Applying Ratemaking Principles to the Recovery of Grid Costs (i.e., System Capacity Costs)

7 Functionalization & Classification of Costs Regulatory Assistance Project (RAP)

8 Retail Rate Design Retail rate can consist of separate lines for: Customer charge ($/month) Volumetric energy charges ( /kwh) Demand charges ($/kw) Usually for commercial/industrial customers only Other charges (e.g., taxes) Regulatory Assistance Project (RAP) 8

9 Energy Charge Options Flat rate Inclining/declining block rates Time of Use (TOU) and other time-varying rates Combinations of the above Regulatory Assistance Project (RAP)

10 Demand Charge Options Bill on Coincident Peak (CP) Demand: An individual customer s usage at the time(s) of systemwide maximum usage Bill on Non-Coincident Peak (NCP) Demand: An individual customer s highest usage at any time during the billing period NO demand charge recover demand-related costs via volumetric energy (or customer) charges Regulatory Assistance Project (RAP)

11 Diversity: A Key Issue for Demand Charges Many customers use system capacity at different times and can share system capacity: Church: Nights and Weekends Schools: 7 AM to 4 PM Some pre-empt capacity continuously: Denny s 24-hour Mini-marts Regulatory Assistance Project (RAP) 11

12 Individual Load Shapes Vary Customer 3: 38% Load Factor Customer 3 Regulatory Assistance Project (RAP) 12

13 The Utility Serves the Combined Load of Multiple Customers Sum of NCP Demands: 6.5 kw CP Demand: 4.0 kw Regulatory Assistance Project (RAP) 13

14 A Caricature of the Problem: High School Stadium Lighting CP Demand: None NCP Demand: High 1% Load Factor! Regulatory Assistance Project (RAP) 14

15 Garfield & Lovejoy s Principles for System Capacity Costs All customers should contribute to the recovery of capacity costs The longer the period of time that customers pre-empt the use of capacity, the more they should pay for the use of that capacity Any service making exclusive use of capacity should be assigned 100% of the relevant cost The allocation of capacity costs should change gradually with changes in the pattern of usage Allocation of costs to one class should not be affected by how remaining costs are allocated to other classes More demand costs should be allocated to usage on-peak than off-peak Interruptible service should be allocated less capacity costs, but still contribute something Regulatory Assistance Project (RAP) 15

16 Garfield & Lovejoy Principles Applied to CP Demand Charge All customers should contribute to the recovery of capacity costs The longer the period of time that customers pre-empt the use of capacity, the more they should pay for the use of that capacity Any service making exclusive use of capacity should be assigned 100% of the relevant cost The allocation of capacity costs should change gradually with changes in the pattern of usage Allocation of costs to one class should not be affected by how remaining costs are allocated to other classes More demand costs should be allocated to usage on-peak than off-peak Interruptible service should be allocated less capacity costs, but still contribute something Regulatory Assistance Project (RAP) CP Demand Charge N N Y N N Y Y 16

17 Garfield & Lovejoy Principles Applied to NCP Demand Charge All customers should contribute to the recovery of capacity costs The longer the period of time that customers pre-empt the use of capacity, the more they should pay for the use of that capacity Any service making exclusive use of capacity should be assigned 100% of the relevant cost The allocation of capacity costs should change gradually with changes in the pattern of usage Allocation of costs to one class should not be affected by how remaining costs are allocated to other classes More demand costs should be allocated to usage on-peak than off-peak Interruptible service should be allocated less capacity costs, but still contribute something NCP Demand Charge Y N N N N N N Regulatory Assistance Project (RAP) 17

18 Garfield & Lovejoy Principles Applied to TOU Energy Charge All customers should contribute to the recovery of capacity costs The longer the period of time that customers pre-empt the use of capacity, the more they should pay for the use of that capacity Any service making exclusive use of capacity should be assigned 100% of the relevant cost The allocation of capacity costs should change gradually with changes in the pattern of usage Allocation of costs to one class should not be affected by how remaining costs are allocated to other classes More demand costs should be allocated to usage on-peak than off-peak Interruptible service should be allocated less capacity costs, but still contribute something Regulatory Assistance Project (RAP) TOU Energy Charge Y Y Y Y Y Y Y 18

19 Summary of Rate Design Options vs. Garfield & Lovejoy Criteria Regulatory Assistance Project (RAP) 19 Energy Analysis and Environmental Impacts Division

20 Bonbright s Principles Tariffs should keep the utility viable Tariffs should fairly apportion the utility s cost of service among consumers Tariffs should promote economic efficiency in the use of energy as well as competing products and services while ensuring the level of reliability desired by customers Tariffs should be practical Rates should be relatively stable CP Demand Charge NCP Demand Charge TOU Energy Charge Regulatory Assistance Project (RAP) 20

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22 RAP s Own Take on Rate Design Offers 3 simple principles to guide rate design for a modern, transactive electric grid Lazar, J., & Gonzalez, W. (2015): Smart Rate Design for a Smart Future Available at: Regulatory Assistance Project (RAP) 22

23 Principle #1 A customer should be allowed to connect to the grid for no more than the cost of connecting to the grid. Regulatory Assistance Project (RAP) 23

24 Principle #2 Customers should pay for the grid and power supply in proportion to how much they use Regulatory Assistance Project (RAP) 24

25 Principle #2 Customers should pay for the grid and power supply in proportion to how much they use and when they use it. Regulatory Assistance Project (RAP) 25

26 Principle #3 Customers delivering services to the grid should receive full and fair value no more and no less. Regulatory Assistance Project (RAP) 26

27 About RAP The Regulatory Assistance Project (RAP) is an independent, non-partisan, non-governmental organization dedicated to accelerating the transition to a clean, reliable, and efficient energy future. Learn more about our work at raponline.org John Shenot Senior Associate The Regulatory Assistance Project (RAP) Fort Collins, Colorado United States jshenot@raponline.org raponline.org