Are regulators starting to rethink fixed charges?
Three states reduce their fixed rate charges in Q2 of 2018, leading observers to believe regulators are rethinking rate standards.
In 148 solar policy actions tracked by the North Carolina Clean Energy Technology Center for the second quarter of 2018, a handful of fixed charge reductions for utilities stand out. But whether this is the start of a trend is unclear.
Regulators have often rejected utility requests for fixed charge increases or lowered the requested increase. But reducing the existing fixed charge has been unusual. Rare reductions by regulators in three states this year could signal a new way of thinking about electricity rate design.
"That three states reduced residential fixed charges in one quarter stands out because we have only seen one or two reductions from the existing level in the last few years," Autumn Proudlove, senior manager of policy research at the North Carolina Clean Energy Technology Center (NCCETC), told Utility Dive. "It could be a coincidence, but we think it could be a trend and is something to watch."
The reductions happened for Connecticut's Eversource Energy, New York's Central Hudson Gas and Electric and Colorado's Black Hills Energy and left policy watchers wondering if a trend is emerging to protect low- and moderate-income (LMI) customers as well as energy efficiency (EE) and distributed energy resources (DER) initiatives.
Since about 2009, utilities have been asking regulators for increased residential fixed charges because electricity sales are falling, and per-kWh charges are not covering their costs. But the accepted principles of good rate design warn against increasing fixed charges because they charge the same amount on consumer bills, regardless of the customer’s level of use, and discourage customer investments in EE and DER because per-kWh usage reductions have less bill impact.
The fixed charge
The amount of money needed for utilities to cover their costs is called the revenue requirement and is collected in rates. For decades, up to the 2008 financial crisis, utility electricity sales expanded because of customer growth and growing per capita usage. That allowed utilities to meet revenue requirements through reasonable residential fixed charges and per-kWh charges.
After the financial crisis, U.S. electricity sales flattened, due primarily to reduced demand and accelerated by the impacts of EE and DER. In response, utilities requested higher fixed charges that provide revenue independent of usage.
Utilities continue to push for higher fixed charges as they provide the revenue stability needed to cover rising distribution system costs.
"The purpose of regulation is to enforce on monopolies the pricing discipline that markets enforce under competition."
Senior Advisor, Regulatory Assistance Project
In Q2 2018, the most common of the 148 state-level policy actions tracked by NCCETC were the 46 utility requests to increase their existing customer charges by an average 88%, NCCETC reported. The 15 decisions in Q2 allowed an average fixed charge increase of only 16% on the existing charge, which was only 14% on average of the requested increase.
"More regulators seem to be carefully considering what costs should be included in fixed charges and examining alternative designs that allow for cost recovery without negatively impacting policy objectives," Proudlove said.
Three fixed charges fall
A Q2 2018 Eversource rate case settlement lowered its fixed charge from $19.25/month to $9.21/month, the result of a statutory process that began after the Eversource Energy Connecticut 2014 General Rate Case (GRC).
Consumer and environmental advocates argued in the GRC that the utility's fixed charge should be reduced, according to Acadia Center Attorney Mark LeBel, who took part in the effort. Their initial proposal was rejected by Connecticut’s Public Utilities Regulatory Authority.
The advocates took their argument to Connecticut legislators in 2015 and won approval for a new statutory definition of what a fixed charge should be: the fixed costs, operations and maintenance expenses that are directly related to metering, billing, service connections and customer service.
The law was applied in the 2016 final GRC decision for United Illuminating, under which the fixed charge was reduced from $17.25/month to $9.64/month.
In a 2017 proceeding on the bill's method for calculating the fixed charge, Eversource acknowledged the applicability of the statute. But Its method would have kept the charge near its present level, because it added a provision prohibiting rates with inter-customer or intra-customer cost-shifts.
In December 2017, the method prescribed by the new law and used in the 2016 United Illuminating GRC was challenged in a separate proceeding and upheld by the commission. The commission also ruled calculations could include "policy considerations, economic conditions, or other facts and circumstances," which recognized stakeholder concerns with fixed charge impacts on low-and-moderate income customers as well as EE and DER adoption.
"The lower fixed charge was part of a thorough analysis of our rate review," Eversource spokesperson Albert Lara emailed UtiltyDive. The decision "was fair and reasonable and continues to be in the best interest of our customers."
In a New York Public Service Commission-approved (NYPSC) settlement of Central Hudson's 2017 GRC, the utility's fixed charge will drop from $24/month in 2019 to $19.50/month in 2021, LeBel said.
"Numerous commenters, including various town, city and county officials, stated that fixed customer charges are too high and need to be reduced," the settlement agreement reported. The charges undermine "policy initiatives seeking to give consumers more control over energy use and costs, and have a disproportionate impact on [LMI] customers who purportedly use less energy than average."
Stakeholders, including Acadia Center, had been unable to get the NYPSC to lower the fixed charge in National Grid's 2017 GRC.
In the 2017 Central Hudson GRC, the stakeholders’ arguments about the impacts of fixed charges got more traction. Joined by over 100 municipal leaders in the utility's territory, the groups "refused to accept a settlement without a fixed charge reduction," LeBel said.
There is a "relatively narrow" set of categories of cost that should go into the fixed charge and it should typically be under $10 per month, LeBel said. "New York has let utilities use a much more expensive definition of what can be included. This settlement is progress toward correcting that."
In Q2 2018, the Colorado Public Utilities Commission (CPUC) rejected the Black Hills Energy (BHE) request for a fixed charge increase from $16.50/month to $20.13/month and recommended lowering it to $8.77/month.
BHE argued its method for calculating the fixed charge "is appropriate because the Company must maintain a distribution system regardless of how much, if any, energy a customer consumes," the decision reported. Stakeholders argued the method leads to a fixed charge that "harms low-income customers," the filing in docket 17AL-0477E added.
Other stakeholders said the method’s fixed charge can “weaken price signals that encourage conservation, and undermine State energy conservation and greenhouse gas reduction policy,” the decision reported.
This debate took place in the context of a fight between BHE and the City of Pueblo, CO. Pueblo's City Council voted to join the 100% renewables movement and to consider terminating its agreement with BHE, in order to take charge of its own energy procurement. Local leaders went into the GRC dissatisfied with utility efforts to add renewables and protect LMI customers.
The method previously used by BHE in Colorado to calculate its fixed charge did not fully support the state's public policy goals, according to a recommended decision from the CPUC.
BHE recognizes its responsibility to help meet its Southern Colorado customers' demands for more renewables, spokesperson Julie C. Rodriguez emailed Utility Dive in December, adding the utility did what it could to support LMI customers unable to pay their bills, but there are "better ways" to meet the city's policy goals.
If changes in fixed and per-kWh charges are keeping customer costs equal, they should not be an issue for any stakeholder, the filing concluded in recommending a reduction to BHE's existing fixed charge. But "ratemaking is more complicated," it added. Public policy considerations "primarily for low-income customers and incentivizing conservation" are also important when considering "the level of fixed charges."
How a ratemaking trend might happen
"It is always hard to tell if a series of policy actions are actually indicative of a national trend but NCCETC will be watching for more reductions in existing fixed charges," Proudlove said, adding the BHE decision "suggests regulators are now looking at the methodologies used to calculate fixed charges and thinking about how they impact public policy."
The progress this quarter "could be something other regulators will consider, and other interveners might see as part of a settlement strategy," she said. Many advocacy organizations work as interveners regionally or nationally, she added. That increases the potential for something like this approach to fixed charges being used in new policy arenas. "If the intervenors see a policy approach working, they are likely to consider using it again."
However, not all utilities see a trend emerging.
Executives with Southern California Edison and Arizona Public Service emailed Utility Dive that they do not foresee a trend that would change regulators' take on fixed charges. But Consolidated Edison Rate Engineering Department Director Bill Atzl said, "it is an area to continue to watch."
Charging customers by volume is an "insufficient but serviceable approach," to fixed costs when loads are "predictable," DTE Energy VP for Corporate Strategy Camilo Serna emailed Utility Dive. However, load flattening leads to unrecovered infrastructure costs to utilities, which are then "shifted to the remaining traditional customers," he added.
One utility executive does see a new rate design trend coming, though he is not yet certain of specifics. More modern rate plans for residential customers are needed and would allow utilities to "better collect costs of the energy grid from customers consistent with the way they access and use the grid," Westar Energy Senior VP Greg Greenwood wrote in an email to Utility Dive.
The fixed charge should be for "the billing and collection service" and for "a connection charge for the size of your grid connection," RAP Senior Advisor Jim Lazar emailed Utility Dive. It is regulators' obligation to prevent fixed charges from interfering with public policy objectives, like protecting LMI customers and market-based initiatives for things like EE and DER, he added.
"A person living alone pays much less to the grocery store, where all fixed costs are built into the per-item prices, than a family of six, and we consider that fair," Lazar said. The per-item price is like the per-kWh price, which is where grocery store and the utility must meet their revenue requirements.
A fixed charge is like a price all customers would pay to enter the store. "A market cannot charge $20 to enter the store, because the customer would go to another store," Lazar said. "The purpose of regulation is to enforce on monopolies the pricing discipline that markets enforce under competition."
Regulators may be seeing that now.