The California Public Utilities Commission (CPUC) held a two-day workshop on rate design principles for commercial and industrial customers. To the the extent possible, rates are designed in California to reflect the temporal changes in underlying costs–the “marginal costs” of power production and delivery.

Professor Severin Borenstein’s opening presentation doesn’t discuss a very important aspect of marginal costs that we have too long ignored in rate making. That’s the issue of “putty/clay” differences. This is an issue of temporal consistency in marginal cost calculation. The “putty” costs are those short term costs of operating the existing infrastructure. The “clay” costs are those of adding infrastructure which are longer term costs. Sometimes the operational costs can be substitutes for infrastructure. However we are now adding infrastructure (clay) in renewables have have negligible operating (putty) costs. The issue we now face is how to transition from focusing on putty to clay costs as the appropriate marginal cost signals.

Carl Linvill from the Regulatory Assistance Project (RAP) made a contrasting presentation that incorporated those differences in temporal perspectives for marginal costs.

Another issue raised by Doug Ledbetter of Opterra is that customers require certainty as well as expected returns to invest in energy-saving projects. We can have certainty for customers if the utilities vintage/grandfather rates and/or structures at the time they make the investment. Then rates / structures for other customers can vary and reflect the benefits that were created by those customers making investments.

Jamie Fine of EDF emphasized that rate design needs to focus on what is actionable by customers more so than on a best reflection of underlying costs. As an intervenor group representative, we are constantly having this discussion with utilities. Often when we make a suggestion about easing customer acceptance, they say “we didn’t think of that,” but then just move along with their original plan. The rise of DERs and CCAs are in part a response to that tone-deaf approach by the incumbent utilities.