Fixed charge battle looms in Texas as regulators tackle rate design reform

A legislative effort to chart new ratemaking mechanisms in the Lone Star State has the utility sector drawing familiar battle lines

On orders from their lawmakers, Texas utility regulators are looking at new rate design mechanisms that could lead to new possibilities on the grid – or yet another debate about fixed charges.

Back in Mary, energy consulting firm Christensen and Associates completed a review of 11 different rate design options for the Public Utility Commission of Texas (PUCT), compiling a list that is “thorough and comprehensive,” according to Keith Wall, director of regulatory affairs at utility CenterPoint Energy.

Now part of a larger review of utility ratemaking in Texas, the Christensen report and other new research offer Texas the “opportunity to modify regulatory methods to meet 21st century needs,” Suzanne Bertin, Executive Director of the Texas Advanced Energy Business Alliance (TAEBA) told Utility Dive.

New rate design options are currently under consideration in a handful of states like New York and California, with regulators aiming to align utility business practices with the deployment and operation of third-party resources like rooftop solar and battery storage. While many in Texas see that opportunity emerging in their state, early rate reform discussions there have raised concerns the state may be headed down a familiar path of contention regarding fixed charges, with little upside for non-utility stakeholders. 

“Most of the mechanisms described by the [Christensen] paper are about revenue stabilization for the utilities and that is one goal,” said Environmental Defense Fund Senior Director Diane Munns, a former Iowa Public Utilities Board Chair. "But to fulfill the instructions [from lawmakers], the commission should also look at mechanisms that optimize the use of the grid and the use of customer-sited solutions and new technologies.”

Outline of the Christensen report

Texas Senate Bill 774, passed in May 2015, ordered the commission to take up a study of new rate alternatives and present them to the legislature for consideration. The intent is to prepare the Texas grid for the new services and technologies while also ensuring the viability of utility finances. 

The first result of the process is the Christensen study, and many of its mechanisms would significantly change traditional cost-of-service ratemaking in Texas.

A revenue decoupling mechanism, one of the study’s central recommendations, “adjusts energy prices to compensate for differences between actual sales and test-year sales per customer." This decouples the utility’s revenues from its electricity sales.

With traditional cost of service ratemaking, the utility loses revenue when its customers increase their energy efficiency and install distributed energy resources (DERs) that reduce their electricity consumption. Decoupling removes the disincentive, allowing the utility to be indifferent to the new customer-sited opportunities, the study adds.

Lost revenue adjustment mechanisms (LRAMs) “adjust rates between rate cases” and make possible timely recovery of revenues that might be lost to efficiency and DER. Through an LRAM, the utility is made whole without the complications of a regulatory proceeding, the study explains. That removes another disincentive to implementing the efficiency and DER programs customers are increasingly demanding.

Revenue decoupling and LRAMs are familiar rate designs in many U.S. states, but the Christensen report also outlines more ambitious regulatory approaches. One of the more forward-looking is a call for ratemaking based on performance, which “provides incentives for utilities to maintain or improve service quality.”

Performance regulation today is often applied to metrics of customer engagement and satisfaction, said Steve Isser, president of Energy Law and Economics and one of the PUCT’s proceeding consultants, but it can be applied to broader measures of utility service quality as well.

In full-blown performance based ratemaking (PBR), the utility is rewarded for meeting any kind of performance targets established through the regulatory process, including for efficiency and DER growth, he said. It is also penalized for falling short of the targets. The idea is most notably under trial in New York, where the Reforming the Energy Vision docket envisions a slate of performance-based incentives that will eventually evolve into market-based payments to utilities.

"Decoupling removes disincentives. PBR provides incentives,” Isser said. “Decoupling says the utility will not be penalized for doing what it is asked to do. PBR says the utility will be rewarded for doing better than it is asked to do.”

By contrast, the Christensen study also lists straight fixed-variable (SFV) rates as an alternative mechanism. SFVs “allow utilities to recover substantially all fixed costs through fixed monthly charges (per customer-month) or peak demand charges (per peak kW) that are independent of the volumes of electrical energy consumed,” it reports.

In other words, SFV would “[eliminate] volumetric charges as a means of recovering the costs of base rate inputs,” leaving fixed and demand charges to do the work.  

Utility proposals to add SFV or increase the fixed charge portion of their rate structures have dominated ratemaking discussions across the county in the last few years, but regulators have tended to scale requests back due to concerns that SFV rates and similar proposals could act as a disincentive to new technologies and services.

Of the 37 fixed charge requests decided by regulators in 2015, 16 were dismissed, according to 50 States of Solar, the quarterly national policy update from the North Carolina Clean Energy Technology Center. Of those approved, utilities’ median fixed charge increase request of 92% was reduced to only about 20%.

Debates about SFV rates and the fixed and demand charges that comprise them often have a way of sucking the air out of many ratemaking conversations. A debate over them, for instance, recently took over a conference session at the National Association of Regulatory Utility Commissioners summer meeting, where state regulators were discussing the new NARUC draft Manual on Distributed Energy Resources Compensation.

In a similar fashion, debates over SFV rates dominated a just-completed PUCT workshop on alternative rate mechanisms. Going forward, it may be the biggest question Lone Star State regulators and lawmakers face as they consider moving toward a 21st century rate design.

The fixed charge debate

Ahead of the PUCT workshop on alternative rate mechanisms, Office of Public Utility Counsel (OPUC) consultant William Perea Marcus advised the PUCT in written comments. The OPUC represents utility customers in front of the commission.

Ratemaking must “maintain an appropriate balance” between utilities and customers and ensure that rates are “just and reasonable” for both, Marcus argued.

Fixed charges and SFV rates can help utilities recover their fixed costs more effectively, but OPUC concluded that benefit fails to balance out disadvantages SFV presents to consumers, Marcus wrote. SFV rates would “reduce the ability of customers to control their bills by controlling their usage.”

They would also disadvantage low and moderate income (LMI) customers by failing to reflect the fact that “most distribution costs are caused by demand, and are greater for larger users,” he added. This would lead to small users subsidizing large users.

“The current rate design of collecting demand-related distribution costs in energy rates for residential and small commercial customers is fair and cost-based and should not be changed,” Marcus wrote.

CenterPoint Energy, however, supports the SFV rate idea.

“It allows us to recover our costs in a way that we see our costs come in,” Wall said. With SFV rates, the transmission and distribution utilities (TDUs) "could recover their costs, which are largely fixed, and would be indifferent to distributed generation and energy efficiency.”

Wall also made the point, echoed by PUCT Staff representative Darryl Tietjen, that “adoption of the SFV rate design by the commission would not need legislative approval.”

During the PUCT workshop, representatives from Oncor, Texas New Mexico Power Company and Southwestern Public Service were all present. While none explicitly endorsed SFV rates, many utility officials expressed support for their underlying principles, and none voiced concerns with the idea.

AEP Texas, on the other hand, was more explicit, saying it “supports beginning to look at SFV rates and their impacts in Texas,” according to Director of Governmental Affairs Gilbert Hughes.

Retail providers, clean energy advocates react

In the deregulated Texas electricity market, transmission and distribution utilities (TDUs) own the wires from the generating plant to the customer’s meter, but they don’t sell that electricity themselves. Power marketing and sales are left up to retail retail electricity providers (REPs), who buy power on the open market and deliver it according to consumer preferences.

They, by and large, have a much different opinion of SFV rates than TDUs.

Moving to SFV rates or other alternative ratemaking designs would carry a “significant price tag" for the retail market, REP Coalition Spokesperson Steve Davis told the commission.

The REP Coalition is made up of the Alliance for Retail Markets, Reliant Energy, the Texas Energy Association of Marketers, First Choice Power, CPL Retail Energy, WTU Retail Energy, and TXU Energy.

Currently, about 80% or more of the customer bill is recovered through volumetric charges, but with an SFV rate fixed transmission and distribution (T&D) costs would be recovered through flat rates, Davis went on. That would sharply increase T&D costs paid by REPs and passed to customers.

That would make the cost of electricity higher to the customer and the REP, but only benefit the TDUs, he said.

Some improvements to Texas’ periodic rate adjustments and cost tracker mechanisms might be of benefit, Davis said, but “radical revisions” to the state’s “current ratemaking paradigm” like SFV rates could have "adverse repercussions in the competitive market in the short and long term."

The Christensen paper suggests SFV rates support efficiency in the rate structure, but also that they will affect different consumer classes in different ways.

Randy Chapman of the Texas Legal Services Center, speaking on behalf of low- and middle-income customers, agreed. SFV rates act as “a disincentive” because higher fixed rates or demand charges limits the bill impact from efforts to reduce usage.

There are “no particular reforms needed,” said a spokesperson for the Solar Energy Industries Association and SolarCity in a brief statement to the PUCT workshop. The commission “appears to have the mechanisms needed,” for ratemaking.

If the commission were to consider incorporating SFV rates into a new rate design, however, solar advocates would take a “strong position against them,” the SEIA spokesperson said said.

TAEBA’s Bertin expanded on that point in a lengthier statement. Incentives that align utility and customer incentives can “maximize the use of available Texas infrastructure to meet customer demand for distributed generation, DER, demand response, efficiency, and storage but SFV rates will not do that.”

The order in SB 774 offers the commission an opportunity “to adopt new ratemaking mechanisms to create incentives for non-wires alternatives that will use DER to lower customer cost and increase customer efficiency,” she added.

Instead of the disincentives in SFV rates, the commission should consider the revenue decoupling concepts used across the country in both regulated and restructured markets as well as the newer concept of performance based rates, Burton said.

“Traditional ratemaking is backwards-looking and asks 'what did we get for how much?' but performance based ratemaking aligns goals of customers and utilities by asking 'what do we want and how do we achieve it?'” she explained. “It turns the focus away from costs and mimics competition.”

The rest of the Christensen report

Aside from those already described, the Christensen paper names three mechanisms that are “broad revisions to traditional cost-of-service ratemaking.”

In formula rate plans (FRPs), pre-decided formulas allow automatic rate adjustments to keep the utility’s actual rate of return on equity “within or near a specified band,” the paper says. FRPs can reduce the frequency and costs of rate cases and utilities’ financial risk and lead to customer savings, according to Christensen.

Entergy Texas Regulatory Policy VP Jay Lewis endorsed FRPs as used in Arkansas. But only four states have them and Texas has a system of “cost trackers” that are more efficient, according to testimony from Centerpoint and Oncor.

If the commission adopts an FRP, “other design issues would need to be resolved in ways that would not advantage the utility relative to ratepayers,” OPUC’s Marcus advised the commission.

Non-TDU stakeholders at the workshop largely viewed FRPs as designed more to stabilize the utility’s revenue stream than to drive new technologies and services.

Multi-year rate plans (MRPs) limit the frequency of rate cases, Christensen reports. This gives utilities some latitude. But they require something like LRAMs to protect utilities and PBRs to protect customers. They are unlikely to play a big role in the Texas discussion because TDUs now only face rate cases when they choose to and other stakeholders want more oversight, not less. Similary, price cap plans, which rates or revenues according to factors like inflation, were named in the Christensen paper but are not widely used and were largely ignored during the PUCT workshop.

Next steps

Obtaining the Christensen paper was the first step in SB 774 compliance for the commission, followed by the Aug. 10 workshop with input from a wide group of stakeholders.

A draft report from PUCT Staff with Texas-specific recommendations and options, will go to the commissioners later this year, PUCT Spokesperson Terry Hadley told Utility Dive. Regulators will present the legislature with their final report by mid-January, for the next legislative session.

The Christensen paper stresses something important, EDF's Munns said — the choice between ratemaking mechanisms must begin with Texas’ policy priorities.

“A mechanism that meets one policy goal will fail to address other policy goals, and may even conflict with other policy goals,” Munns quoted from Christensen. And while other states undertaking ratemaking reforms are doing it with explicit environmental or renewable energy goals in mind, those motivations remain weaker among Texas utilities and lawmakers.

There are both new rate mechanisms and new rate designs in the paper, Oncor Vice President Liz Jones pointed out. “Oncor is supportive of the existing rate mechanisms.”

The Commission is doing a good job of overseeing the Texas TDUs and no further costly proceedings are needed, she added. “Rate cases for the sake of rate cases are not good public policy.”

Beyond the concern with SFV rates, “most of the other alternative ratemaking mechanisms discussed in the report are not necessary and some are not desirable for adoption in Texas,” OPUC’s Marcus added.

Munns had a different take. For the Texas commissioners, the key question raised by SB 774 is which rate mechanisms will most effectively set rates, she said.

“To answer that, they first must decide what their goals are.”

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