Fights over electricity rates are brewing all across the country.
Utilities say new rate proposals will protect customers who haven’t moved to solar and energy efficiency. But those who have moved say the proposals only protect utilities.
“There are two categories of rate restructuring and rate design changes bubbling up,” explained Environmental Law & Policy Center Sr. Attorney Brad Klein. “The first is to move cost recovery from the variable per-kilowatt-hour charge and increase the monthly fixed charge. The other is to impose a monthly dollars-per-kilowatt charge on owners of distributed generation.”
Many proposals are in states with little distributed generation. “That reflects a lesson some utilities took from recent high profile battles in places like Arizona,” Klein said. “Once a lot of customers have solar, it becomes a really pitched battle to change the rate design.”
A nationwide trend
Klein said the trend emerged after the Edison Electric Institute’s Disruptive Challenges paper recommended “a monthly customer service charge…to recover fixed costs.”
He listed 23 state fights, including:
- a Madison Gas and Electric (MG&E) proposed $69 per month fixed charge with a variable rate reduction from $0.10 per kilowatt-hour to $0.04 per kilowatt-hour
- a Wisconsin Energies proposed fixed monthly charge to all customers and a per-kilowatt DG customer charge
- a $10 per month fixed charge before California’s commission
- a proposed fixed charge increase for Connecticut Light & Power residential customers of up to 59%
- a proposed Hawaiian Electric Companies $55 per month fixed charge increase with a $16 per month charge for PV owners
- a proposed 50% residential/small commercial customers monthly charge proposed by Missouri’s Empire District Electric
- an Idaho Power-proposed $5 to $20 per month fixed charge increase just rejected by Idaho’s commission
- Illinois-ComEd’s just-announced non-specific residential customer fixed charge
- Baltimore Gas & Electric’s proposed fixed charge increases for residential and general service customers
- the recently approved NV Energy residential fixed charge increase of 50%
- residential customer fixed charge increases filed in August for four subsidiaries of FirstEnergy, including Pennsylvania Power
- Rocky Mountain Power’s proposed monthly minimum bill and monthly charge increases for residential customers and fixed charge for PV owners recently rejected by Utah’s commission
- Pacific Power’s nearly doubled fixed charge for residential customers just proposed to Washington’s commission
“This trend is exactly what utility regulation was created to prevent—the exercise of monopoly pricing power,” said Regulatory Assistance Project Sr. Advisor Jim Lazar. “What makes it compelling for utilities now is competition from the sun.”
The threat to energy efficiency and clean energy
Based on his calculation, using conservative assumptions and data from the 3,300 U.S. utilities, Lazar considers fixed rate charges “the biggest threat to energy efficiency and clean energy the U.S. faces.”
The extreme MG&E proposal, Lazar said, “will cause about a 14% increase in consumption and wipe out an entire decade of energy efficiency.”
Utilities use economic and fairness rationales for the higher fixed charges, Klein said. They say it is more economically efficient to recover fixed costs, anything that doesn’t vary by usage, through a fixed charge because it sends clearer price signals, which allows customers to make better choices.
The fairness argument comes from the cost shift assumption, Klein said. Utilities argue that when customers offset energy consumption through energy efficiency or distributed generation, they don’t pay enough to cover fixed service costs and force utilities to collect from other customers.
The first rationale reduces utility investor risk by shifting cost burdens to customers, Klein said, and especially to customers with lower electricity usage and lower incomes.
Infrastructure investments that change over time are not really fixed, he added. “In the long term, everything is a variable cost. If the customer base uses a lot less energy, over the long term, the utility needs to build fewer power plants and can build fewer transmission and distribution lines.”
The cost shift concept may seem to justify the fairness rationale, Klein said. But it is often not supported by data. “In Wisconsin, even with the most conservative assumptions, the cost shift is something like one-third of one penny per customer per month.”
In rejecting the Rocky Mountain Power proposal, Klein explained, “the Utah Public Service Commission said there just wasn’t enough data to rule on the cost shift question.”
“In the real world, purchasing gasoline does not include separate charges for the oil well, the pipeline, the refinery, and the trucking,” Lazar said. “And nobody pays a fixed monthly charge to the gas station. The billions of dollars in oil infrastructure fixed costs are recovered one gallon at a time. That is how it works with competition.”
The purpose of regulation is to enforce on monopolies the pricing discipline of competitive businesses, Lazar explained. “People should be able to connect to the grid for no more than the cost of connecting to the grid and they should pay for the use of the grid in proportion to how much they use the grid.”
A solution or a backlash
“We need to engage in a fundamental conversation about the future of the electric utility,” Klein said. “We don’t disagree that policies and regulations and utility rate structures may need to change. But that needs to be done in a thoughtful and comprehensive way and not by acting quickly and without data.”
Distributed generation and energy efficiency advocates do not yet have a proposal, Klein said. That needs to emerge on a state by state, commission by commission basis. In the MG&E case, Public Service Commission of Wisconsin Staff witness Corey Singletary testified that “there does not appear to be an urgent need” for the new rate structure and recommended “a more measured approach, guided by deliberate and thoughtful policy decisions on the part of the Commission…”
Former Texas PUC Commissioner and Austin Energy exec Karl Rabago called the Wisconsin Energies DG fixed charge proposal an “astounding failure of basic ratemaking.”
In places like California and New England, where the per kilowatt-hour electricity price is already high, Lazar said, modest fixed cost initiatives may succeed. But in places like the Midwest, the Pacific Northwest, and the South, where variable charges are still low, they could produce a backlash.
“In Hawaii, 1,000 customers have left the grid in the last two years because it is cost effective for any customer to have solar and batteries and disconnect from the utility,” Lazar said. “Only those without roofs or good enough credit to lease become victims of monopoly pricing.”
The MG&E proposal also produced a backlash, Klein said. “The utility narrative was about fairness. That’s how it started,” he explained. But it was quickly apparent the proposal would most affect low income and low volume electricity consumers.
“The cure was worse than the disease. Soon, AARP was robo-calling all its members to oppose the proposals. The NAACP was officially opposed. The City of Milwaukee, the City of Madison, and a number of other municipalities passed unanimous resolutions.” MG&E finally withdrew much of its proposal.
“These proposals are being advanced without the analysis needed for long term solutions,” Klein said. “They are defensive or reactionary and meant to shield utilities from energy efficiency and distributed generation losses. But this technology isn’t going to go away. Over the long term, cost effective solar and storage will push customers away from the utility. People that can are going to disconnect.”