Tag Archives: affordability

Equity issues in TOU rate design

I attended the Center for Research into Regulated Industries (CRRI) Western Conference last week, which includes many of the economists working on various energy regulatory issues in California. A persistent theme was the interrelationship of time-varying rates (TVR) and development of distributed generation like rooftop solar. One session was even entitled “optimal rates.” We presented a paper on developing the proper perspectives and criteria in valuing distributed solar resources in another session. (More on that in another post.)

With the pending CPUC decision in the residential ratemaking rulemaking, due July 3, time of use rates (TOU) rates were at the top of everyone’s mind. (With PG&E violations of the ex parte rules, the utilities were cautious about who they were presenting with at least one Commission advisor attending. At least one presentation was scotched for that reason.) Various results were presented, and the need for different design elements urged on efficiency grounds. In the end though I was struck most by two equity issues that seem to have been overlooked.

First, various studies have shown that TOU rates deliver larger savings for customers who have various types of automated response equipment such as smart thermostats (e.g., NEST) or smart appliances. Those customers will see bigger bill savings and may find that doing so is more convenient and comfortable. An underlying premise in these studies is that the customer is the decision maker. But for 45% of California’s residents–renters–that is not the case. As a result tenants, who tend to have lower incomes, are likely to be subsidizing home owners who are better equipped to benefit from TOU rates.

Tenants must rely on landlords to make those necessary investments. Landlords don’t pay the bills or realize the direct savings in what is called the “split incentive” problem. And landlords may be concerned that future tenants might not like the commitments that come with the new smart devices. For example, signing up for PG&E’s SmartAC program can face this barrier.

So in considering residential customer impacts, the CPUC should address the likely differential in opportunities and benefits between owner-customers and tenant-customers. Solutions might include rate design differences, or moving toward a model where energy service providers (ESP or ESCo) take over appliance ownership in multifamily buildings. This split incentive is endemic across many programs such as the solar initiative and energy efficiency.

Second, a fixed charge have been proposed to address the anticipated impact of solar net energy metering. The majority of costs to be covered are for the “customer services” that run from the flnal line transformer to the meter. (I’ve been focused on this segment while representing the Western Manufactured Housing Communities Association (WMA) on master-metering issues.) However, the investments in customer services are not uniform across residences. For older homes, the services or “line extensions” may have already been paid off (e.g., most homes built before 1975), and with inflation, the costs for newer homes can be substantially higher.

The fixed charge would be based on one of two methods. In current rate cases, the new or “marginal” cost for a line extension is the starting point of the calculation, and usually the cost is scaled up from that. However, given the depreciation and inflation, the utilities will receive much more revenue than what they are entitled to under regulated returns. In the second method, the average cost for all services will be applied to all customers. This solves the problem of excess revenues for the utility, but it does not address the subsidies that flow from customers in older homes to those in newer ones. Because the residents of older homes tend to be tenants and have lower incomes, this again is a regressive distribution of costs. Solutions might include no fixed charge at all, differences in rates by house vintage, or discounts in the fixed charge as SMUD has instituted.

Regardless, these types of subsidies flow the wrong direction.

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Guest Post: The importance of engaging electricity consumers

My partner at M.Cubed Steven Moss wrote this editorial for The Potrero View on how we need to engage consumers when developing a vision of how the electricity future might evolve:

Multiple corporate monopolies have emerged, thrived, and withered over the last hundred years. Railroads, telegram and telephone services, air transportation, network television and newspapers all had highly lucrative heydays, but were ultimately cut down to size by a combination of government anti-trust activities and new technologies. Today there’s a plethora of transportation, communication, information, and entertainment services, most offered at lower cost or with greater value than what was on the former cartels’ menu.
The societal conversation continues over how to best manage quasi-monopolies, like cable and Internet services. Water utilities are struggling with how to pay for themselves in an era in which reducing consumption is essential to addressing chronic scarcity. But the monopoly sector most ripe for rapid change is the almost a half-trillion dollar electricity sector.
Throughout the U.S. electricity is provided by a mix of municipal, cooperative, and investor-owned utilities (IOUs), each with a lock on delivering large aspects of the service in their home territories. In California the three large IOUs — San Diego Gas and Electric, Southern California Edison, and Pacific Gas and Electric (PG&E) — have carved up the lion’s share of the state’s monopoly electricity market. All of them face a business model that’s been buffeted by the rapid policy-driven onsite of renewables and the emergence of other technologies that aren’t as dependent on a large, capital-intensive spoke — fossil fuel or nuclear power plant — and wheels — transmission and distribution — system to operate.
Today, a home or business can install devices to capture sunshine or wind and cope with intermittent power flows by managing the timing of their energy consumption and installing a storage device, which could include harnessing the battery in the electric vehicle parked in the garage. These types of systems may work best when they’re combined at the multiple-neighborhood level, to create a portfolio of resources that can reduce the risk that the failure of one device will have catastrophic outage consequences. The optimal size for a next generation grid may be roughly half the size of San Francisco, a back-to-the-future system that mirrors the more than 100 small service providers that combined more than a century ago to create PG&E.
Institutional change is tricky, though, when it comes to electricity. Although rates are high in California, outside the Central Valley in the summer, household bills are generally modest as a result of the state’s mild climate. There’s solid service reliability, with the IOUs generally doing a fine job restoring post-storm outages. And, thanks to public policies, low-income families are provided substantial subsidies, while the grid has grown increasingly green. Outside San Francisco — and post natural gas-disaster San Bruno — where tilting at PG&E is an ideological battle rather than an economic one, these characteristics serve to mute the potential for widespread ratepayer revolt, and encourage consumer advocacy groups to protect the existing monopoly system.
Yet without change, electricity service is poised to get much more expensive, and probably less green. Renewable intermittency — production drops when the sun doesn’t shine — doesn’t match with the current system, creating gaps that could be plugged by costly and polluting fossil fuel power plants, eroding much of the environmental gains achieved over the past decade. Despite substantial technological innovation which should spur price competition, utility rates are consistently rising, in part because two competing paradigms — New Age renewables, and Industrial Age fossil fuels — are being simultaneously pursued for political reasons.
The seeds of a solution are in creating more knowledge. Consumers are almost entirely ignorant of how the timing of their electricity use influences costs. Electricity rates don’t reflect the underlying expense — to the environment or grid — of providing service in a given time and place. Since price-based feedback to the IOUs is significantly muted, the monopolies operate as if demand is largely immune to change, and must be met by increasing amounts of generation to ensure reliability.
The pathways we take as the grid wobbles in the face of renewable disruption will determine how much we pay, out of our pockets, and through dirtier air, for the next few decades. Fortunately, there’s a ready way to remold the monopoly electric utility industry: get the prices right. If rates reflected the true costs of service — including greenhouse gas and polluting air emissions — consumers and businesses would take action to change their consumption patterns, aided by high technology companies eager to solve profitable problems. The Internet of Things would become the Energy System of Things, with renewables, storage, and a host of communicating devices connected to optimize energy use in an environmental sustainable way.
Offering transparent electricity prices won’t solve all of the grid’s challenges. But not doing so walls off essential innovation. Renewables and emerging technologies, combined with clever tariffs, could help ensure that California never builds another fossil fuel power plant. The state can protect low-income households from onerous electricity bills, by directly paying for energy efficiency investments, or providing bill credits. A small is beautiful ethos can emerge to rival the large, reliable, monopolies in providing high-quality services. If we get the prices right.

Repost: Californians Can Handle the Truth About Gas Prices

Sev Borenstein writes about the two sides of the argument on whether transportation fuels should be rolled into the cap-and-trade program in January 2015.

I have an observation that that has only been alluded to indirectly in the debate. The main point of the legislators’ letter calling for a delay in implementation is that low income groups may be particularly hit. The counter argument that we need the inclusion of transportation fuels under the cap to incent innovation seems to pit the plight of the poor against the investment risk of wealthy entrepreneurs. We haven’t really done a good job of addressing affordability of the transformative policies that can change GHG emissions. The proposal to use carbon tax revenues to rebate to low income taxpayers has been floated at the national level, but of course that died with the rest of the national cap and trade proposal. A similar proposal was made to mitigate electricity price impacts.

Our state legislators are rightfully concerned about the impacts on those among us who have the least. Nevertheless, that problem is easily addresses with the tools and resources that are already available to the state. Those families and households who now qualify for the CARE and FERA electric and natural gas utilities rate discounts can be made eligible for an annual rebate equal to the average annual gasoline consumption multiplied by the amount of the GHG allowance cost embedded in the gasoline price. This rebate could be funded out of the state’s allowance revenue fund. For example, if the price is increased by 15 cents per gallon and the average automobile uses 650 gallons per year, an eligible household could receive $97.50 for each car.

About 30% of households are currently eligible for CARE or FERA. On a statewide basis, the program would cost about $650 million, which is comparable to the cost for CARE for a single utility like PG&E or Southern California Edison. Those legislators who are most concerned can coauthor legislation to put this program in place.

(BTW, I think the DOE fuel use calculator is outdated–on my many trips to LA I haven’t seen these types of fuel economy changes. My average MPG is pretty much the same no matter how much traffic there is on I-5.  But that’s just a fun fact aside…)

Energy Institute Blog

A few weeks ago, Jim blogged about the concerns that cap-and-trade will drive up gas prices in California.   In late June, those concerns resulted in a letter from Assemblymember Perea and 15 other Democrats asking the California Air Resources Board to delay this expansion of the cap-and-trade program to include transportation fuels from January 1, 2015 to January 1, 2018.  And a couple weeks ago, the ARB Chair, Mary Nichols, sent a reply explaining why ARB was not going to do that.

Meanwhile, the oil industry and some other groups opposed to fuels in the cap-and-trade program have been making inaccurate statements that the change will cause huge increases in gasoline prices.  The ARB and some other supporters of fuels under the cap have responded with their own inaccuracies, saying that including fuels in the program needn’t raise gas prices at all and suggesting that any increase is the fault…

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Not talking past each other on California’s transportation fuels cap & trade implementation

Last week, 16 Democratic legislators sent a letter to ARB Chair Mary Nichols asking for a delay in adding transportation fuels to the AB 32 cap and trade program starting January 1, 2015. The legislators raise concerns about how a 15 cent per gallon increase could impact the state’s poor.

I was asked by EDF to sign on to a letter in response. That letter focuses on how much of the anticipated innovation arising from AB 32 is dependent on implementing this phase of cap and trade. However, I think the proposed letter misses an important point by the legislators.

Our state legislators are rightfully concerned about the impacts on those among us who have the least.  Nevertheless, that problem is easily addressed with the tools and resources that are already available to the state. Those families and households who now qualify for the CARE and FERA electric and natural gas utilities rate discounts can be made eligible for an annual rebate equal to the average annual gasoline consumption multiplied by the amount of the GHG allowance cost embedded in the gasoline price.  This rebate could be funded out of the state’s allowance revenue fund. For example, if the price is increased by 15 cents per gallon and the average automobile uses 650 gallons per year, an eligible household could receive $97.50 for each car.

About 30% of households are currently eligible for CARE or FERA. On a statewide basis, the program would cost about $650 million, which is comparable to the cost for CARE for a single utility like PG&E or Southern California Edison. Those legislators who are most concerned can coauthor legislation to put this program in place.