How Have Regulators and Utilities Responded to Revenue Erosion?

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1 June How Have Regulators and Utilities Responded to Revenue Erosion? Dan Hansen Christensen Associates Energy Consulting June 2017

2 June Utility Fixed Cost Recovery Issues Traditional regulated rates recover fixed costs through volumetric rates This leads to utility revenue attrition when sales decrease, without a corresponding reduction in costs This rate design leads to some incentive issues: Utility disincentive to promote conservation, energy efficiency (EE), and distributed generation (DG) Utility incentive to increase customer usage Cross-subsidies from non-dg to DG customers, or from the utility to DG customers in between rate cases (disputed by solar advocates based on value of solar) Incorrect price signals to customers, compared to marginal cost to serve (caveat: environmental externalities)

3 Sources of Utility Fixed Cost Under-recovery Distributed generation (e.g., residential rooftop solar) Conservation and energy efficiency Naturally occurring or based on customer or legislative actions Improved appliance efficiency Phasing out incandescent light bulbs Building standards As caused by energy efficiency resource standards (EERS) Poor economic conditions Mild weather conditions Stakeholders will not necessarily want to treat all of these causes equally June

4 June Energy Efficiency Resource Standards (EERS) An Energy Efficiency Resource Standard (EERS) establishes specific, longterm targets for energy savings that utilities or non-utility program administrators must meet through customer energy efficiency programs. Most state EERSs were put in place during the 2000s. There is no federal EERS. From ACEEE:

5 June Is DG different than EE? Both DG and EE have the potential to lead to utility revenue erosion However, there are some differences: 1-way power flow vs. 2-way power flow Accommodating 2-way power flow may require incremental distribution investments 2-way power flow is facilitated by a constant connection to the grid, but may result in zero or negative billed kwh in a given month Need to back up intermittent DG vs. relative permanence of EE An LED bulb that burns out does not suddenly become an incandescent bulb Clouds passing overhead reduce PV generation but do not eliminate the underlying load Potentially higher magnitude of kwh losses from DG vs. EE Not uncommon for net metered customers to have zero billed kwh in a month

6 June Net zero DG customers would show up on the y-axis. Average Usage vs. Maximum Demand

7 June Methods of Addressing Utility Fixed Cost Under-recovery Higher customer charges Take fixed cost recovery out of the energy charges and put it into the monthly customer charge Adverse bill impacts for low-use customers No financial incentive to manage demand; reduced incentives to conserve Revenue decoupling Utility recovers pre-specified fixed cost amount (e.g., revenue per customer) through a tracking account Primarily supported to remove the utility s disincentive to promote conservation DG effects: reduces or eliminates utility losses, does not address cross-subsidies Lost fixed cost recovery mechanism (LFCR) Put pre-specified $/kwh in lost fixed costs in a tracking account (more narrow than decoupling), where losses could be from EE programs or DG Recover from all kwh in class in subsequent period If it covers all DG output (versus only exported DG output), need to separately meter DG output DG effects: reduces or eliminates utility losses, does not address cross-subsidies

8 June Methods of Addressing Utility Fixed Minimum bill Cost Under-recovery (2) Typically proposed at levels below fixed costs Keeps vast majority of fixed cost recovery in the energy charges Does not distinguish between customers with different demand levels DG Access Charge Charge a flat $ per kw of nameplate capacity fee to customers with DG Fee is intended to offset expected loss in fixed cost recovery due to net metering May not be allowed in some jurisdictions (where utilities can t price DG differently) Does not give DG owner an incentive to manage the resource (e.g., using battery storage to manage output intermittency)

9 June Methods of Addressing Utility Fixed Cost Under-recovery (3) Demand-based rates A three-part rate has customer, energy, and demand charges Even a net-zero-kwh customer would pay for demand-related costs through the demand charge (the energy-related bill would remain zero) Can have more than one demand charge to recover different kinds of demandrelated costs (trade-off simplicity vs. full reflection of costs to serve) Reduces or removes cross subsidy (from embedded costs only, not externalities) Could apply to all customers or only DG customers Load Factor Adjustment (LFA) rider is offered at the Intermountain Rural Electric Association in Colorado Applies to all new residential customers beginning service after 12/30/2015 Customers who fall below a load factor (LF) threshold pay a demand charge (e.g., $4.04 per kw, measured as 60-minute demand in any hour of the billing month) Because it applies to all low-lf customers, it can t be characterized as singling out only DG customers

10 June Methods of Addressing Utility Fixed Cost Under-recovery (4) Third-party EE administrator Does not directly address lost revenues, but is intended to render the utility s disincentive to promote EE irrelevant Some evidence that third-party administrators value utility participation in EE programs (Oregon decoupling evaluation) More frequent rate cases Does not recover losses in between rate cases Re-sets rates to account for EE and DG effects as reflected in test-year sales Allow utilities to earn a rate of return on EE investments or other EE incentives Provides the utility with a direct incentive to conduct EE Can exist alongside decoupling or LFCR

11 June What has Wisconsin Tried? Customer charges have increased in recent years Still well below level required to recover all customer- and demand-related costs Third-party administrator Focus on Energy (FOE), funded by non-bypassable charge on customer bills Frequent rate cases? Revenue decoupling Pilot program at Wisconsin Public Service, not made permanent From Docket 6690-UR-122, Order page 30 (12/18/2013): WPSC has not offered ratepayers anything in return for the risk reduction that the utility would realize if the RSMs were continued. In addition, because Wisconsin has separated the administration of energy efficiency programs from the utilities through FOE, it is not clear that WPSC can influence ratepayer decisions relating to energy efficiency. The Commission is also persuaded by the unwillingness of CUB and WIEG, representatives for the customer classes who are primarily affected by continuation of the RSM, to continue to embrace the decoupling pilot. For these reasons, the Commission does not find it reasonable to continue the electric RSM and the natural gas RSM as proposed by WPSC.

12 Issues / Discussion Need to address revenue erosion? If DG has low penetration, perhaps customers accept NEM cross subsidies via decoupling or rate cases Many people want the problem to get bigger and DG is likely to get less costly Need for demand-based rates? Trade is facilitated by the grid; can reduce costs for all Widespread DG adoption + NEM could lead to two classes of customers: those who pay for the grid and those who don t, though all use it Some demand-related concept (or higher fixed charges) may be necessary at some point Should they cover T&D costs alone, or also generation? Environmental externalities Not included in embedded-cost based rates Would a carbon tax work? A Conservative Case for Climate Action, NY Times Op-Ed, Feb. 8, 2017 Value of solar? June

13 June Questions? Contact Dan Hansen, Christensen Associates Energy Consulting Madison, Wisconsin

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