EE379K/EE394V Smart Grids:
Rates and Pricing
Ingmar Sterzing,
VP, Power Supply and
Energy Services, PEC
Ross Baldick,
Department of
Electrical and
Computer
Engineering
Spring 2017
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Outline

Overview

Background

Cost of Service

Rate Design

Rate Options
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Introduction


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Technology and economics are creating new options for consumers to
manage how they use electricity.
Consumers can now produce their own electricity, charge their electric
vehicle, store electricity in battery systems, or defer or reduce their
usage with smart thermostats and home energy devices.
New and lower cost Distributed Energy Resources provide utilities,
businesses, and homes with new options for supplying their energy
needs
New communication and metering systems are available in today’s
distribution system that provide the opportunity to better utilize and
incent these new devices and behaviors.
Utilities are increasingly being challenged to design and implement new
rates and pricing structures to support these new technologies and
services.
Some technologies and behaviors are putting pressure on traditional
technologies, utilities, policies, and rates.
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Course Objectives



How do utilities charge for their services and recover
their costs and investment?
What are the different options available to utilities?
How do utilities continue to earn sufficient revenue to
maintain reliable, low cost, and profitable service
while also expanding options to incent and capture
the beneficial use of new, smart grid technologies?
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Rates Are Always Relevant
“Lawmakers give Austin Energy a verbal
beating” – Austin American Statesman, April 15, 2015
“Bill could give Austin Energy customers other
options” – KXAN, April 15, 2015
“Big industrial customers play hardball on Austin
Energy rates” – Austin American Statesman , November 13, 2015
“Businesses, semiconductor plants press Austin Energy for
rate cuts” – Austin Business Journal, June 21, 2016
“Suburban Austin Energy customers may get legislative help
outside of city limits” – Community Impact Newspaper, March 14, 2017
Rates and Pricing

Rate




A set amount of money collected over time or relative
to a volume or number of items
The rate for service is $25/hour
Energy rate $0.05/kWh
Price



Fixed amount of money
The price for service is $50
Service connection charge $10/Month
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Not All Utilities Are Equal


Regulated vs Non-Regulated
Regulators

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
Public Utilities



Federal Energy Regulatory Commission (FERC)
State level Public Utility/Service Commissions (PUC or PSC)
Regulated Monopoly with Regulated Rate of Return
Rates and Pricing Determined by Rate Case
Non-Regulated, Competitive Companies (“Utilities”)




Rules and oversight but no rate cases,
At Risk Rate of Return and Cost Recovery
Restructured ISOs (ERCOT and PJM)
Wholesale Power and Retail Services
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5 Rate Making Steps

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Determine Revenue Requirement or Cost of Service to
be Recovered by Rates
Separate Costs into Different Functions (“Functionalize”)
Classify the Different Functional Costs By Customer,
Demand and Commodity Components

Allocate Costs to Different Services (“Cost Allocation”)

Design Rates
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Utility Revenue Requirement
Revenue Requirement (Cost of Service) = Operating
Expense + (Capital Value − Depreciation) x Rate Of
Return
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Revenue Requirement is the utility's total revenue requirement
Op Ex is the utility's operating expenses.
Capital is the gross value of the utility's tangible and intangible
property
Depreciation is the utility's accrued depreciation.
Capital Value – Depreciation combined is the rate base or capital
investment
Rate of Return is the return a utility is allowed to earn on its capital
investment or on its rate base
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Functionalize the
Costs/Revenue Requirements


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Total service is made up of
multiple functions
Different customers use
different levels of the
service
Unbundled costs need to be
assigned to each of the
component services or
functions
Unbundling of costs
facilitates implementation of
separate pricing of
individual services

Example
Power Supply
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Transmission Delivery
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Transmission
Transformation
Distribution Delivery

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Energy and Fuel
Capacity
Delivery
Substation
Backbone
Metering
Customer
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Line Extension
Meter Reading
Records & Billing
Customer Services
Marketing
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Cost Functionalization
Transmission
Transformation
Line Extension
Power
Power
Transmission
Supply
Energy
Delivery
Capacity
Distribution
Substation
Backbone
Demand
Metering &
Billing
Classify Costs

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Functionalized costs are
classified as either fixed or
variable
Fixed costs are costs which
remain constant regardless of
the volume of throughput and
are predominately associated
with capital investment
Variable costs are costs which
vary with the volume of
throughput.
Fixed and variable costs are
classified as reservation
(demand) or usage
(commodity)
Power
Supply
Energy
Delivery
Capacity
$/MWh
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$/MWh
$/MW-Year
12
Allocation of Classified Costs


Costs allocated to different customer classes – residential,
commercial, industrial
Allocation of the total company cost of service to the individual
customer classes can provide a revenue requirement target for each
customer class, so that each class of customers pays the costs that
the utility incurs to serve that class.
Residential

Includes private
households that
utilize energy for
such needs as
heating, cooling,
cooking, lighting and
small appliances.
Small Commercial

Includes businesses
whose peak electric
demand during any
twelve-month period
is less than 50
kilowatt (“kW”).
Large Commercial

Includes businesses
such as retail stores,
restaurants and
educational
institutions with a
peak demand of 50
kW or more during
any twelve month
period.
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Industrial

Includes factories or
manufacturing plants
and typically have
the highest demand
for electricity.
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Allocation
Power
Power
Supply
Energy
Capacity
Residential
Transmission
Demand
Small Commercial
Distribution
Energy Demand
Large Commercial
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Demand
Fee
Industrial
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Allocation Factors

Fixed Fees

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Energy Factor Charge ($/MWh or $/kWh)

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
A fixed charge applied to a specific customer to recover fixed costs associated
with their service (connection charge)
A charge to recover a specific cost caused by the customer (paper billing)
Unit rate used to recover costs related to energy usage levels
Typically used to recover variable costs
Energy usage can vary widely with season and weather causing fluctuations and
variability in revenue
Demand Factor Charges ($/MW or $/kW)




Unit rate used to recover costs based on customers demand or usage of the total
system
Typically used to recover fixed costs
Demand can vary by season but is less variable than energy usage
Many different methods can be used to measure demand
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Rate Design Options
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Bundled (one rate)
Unbundled (multiple rates)
Energy Charges
Demand Charges
Fixed vs Variable
Cost Based, Pass-Through
Seasonal and Non-Seasonal
Tiered
Time of Use
Fees
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Rate Design Principles



Regulated

Equity/fairness to both the utility and the ratepayer

Minimize subsidy and avoid discrimination between customers

Costs should be allocated to the customer causing the cost

Cost based rates
Non-Regulated

Competitive market driven

Buyer Beware
Incentives

Customers respond to rates and prices

Rates and prices can be used to influence behavior
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Electric System Value Flow
Power
Power
Supply
10,752 GWh
600 $ MM
54 %
Transmission
Distribution
752 GWh
(System Use and Losses)
120 $ MM
10%
400 $ MM
36%
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Demand
10,000 GWh
1,120 $ MM
100%
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Bundled, Energy Rate
Power
Power
Supply
10,752 GWh
Transmission
Distribution
752 GWh
(System Use and Losses)
Demand
10,000 GWh
600 $ MM
120 $ MM
400 $ MM
1,120 $ MM
60 $/MWh
0.06 $/kWh
12 $/MWh
0.012 $/kWh
40 $/MWh
0.04 $/kWh
112 $/MWh
0.112 $/kWh
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Bundled, Energy Rate

Single Rate



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
Pros


$1,120 MM total revenue
10,000 GWh sales
$112/MWh
0.112 $/kWh
Simple to understand and
use
Cons



Does not reflect the
underlying costs or cost
causation
All customers treated the
same, likely to cause subsidy
Revenue highly dependent
on energy
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Bundled Rate, Total Revenue





Total Usage
Total Revenue
Difference
9,500 GWh
$1,064 MM
($56 MM)
10,000 GWh
$1,120 MM
-
10,500 GWh
$1,176 MM
$56 MM
Usage variability can lead to significant fluctuations in total revenue
Low load makes it difficult to collect enough revenue
High load collects too much revenue
Investors and Lenders prefer greater certainty
Customers prefer not to pay too much
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Un-Bundled Rates, Energy,
and Fixed Fee
Power
Power
Supply
10,752 GWh
Distribution
Transmission
752 GWh
(System Use and Losses)
Demand
10,000 GWh
600 $ MM
120 $ MM
400 $ MM
1,120 $ MM
60 $/MWh
0.06 $/kWh
12 $/MWh
0.012 $/kWh
$20/ Mo. Fee
20 $/MWh
0.02 $/kWh
112 $/MWh
0.112 $/kWh
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Un-Bundled, Rates




Multiple Rates
Power Rate: $0.06/kWh
Transmission: $0.012/kWh
Distribution:



Pros




$33.3/Mo. Fee
$0.0333/kWh
Simple to understand and
use
All customers share equally
in the fixed costs
Helps collect fixed costs
regardless of usage
Cons

Low usage customers pay a
higher effective rate than
high usage customers
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Un-Bundled Rate, Total Revenue,
Energy and Fixed Fee



Total
Usage
Bundled
Energy
Only
Fixed Fee
500,000
Accounts
Energy
Charges
UnBundled
Total
9,500 GWh
$1,064 MM
$200 MM
$874 MM
$1,074 MM
10,000 GWh
$1,120 MM
$200 MM
$920 MM
$1,120 MM
10,500 GWh
$1,176 MM
$200 MM
$966 MM
$1,166 MM
Fixed fee charge of $33.3/Mo. Improves revenue certainty across
varying total usage levels
$200 MM is collected regardless of energy served
Customers typically do not like a fixed fee… nothing they can do to
control or manage the cost
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Demand Charges
Highest Demand Level


Demand charges are based on the MW or kW measurement at
certain defined times or criteria
Example: Monthly highest demand, Coincident Peak (CP), 12 Mo.
Rolling Average highest demand, 4CP, 12CP
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Example: PEC Rates
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Example: Revenue %
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Large Power Commercial,
With/Without DG
Delivered Energy
Received Energy
•
•
Delivered Energy is the total energy delivered to a Member from PEC during the billing cycle
(Member is billed based on Delivered Energy)
Received Energy is the total energy received by PEC during the billing cycle from the surplus
over-production of the DG system (Member receives credit for Received Energy)
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Large Power Commercial,
With/Without DG
Billing Elements
Demand
Energy
Delivered Energy
Received Energy
Service Availability Charge*
Capacity Demand Charge
Delivery Charge
Transmission Cost of Service
Base Power Cost
Power Cost Adjustment
Rate Factors
$150/$175
$3.38000
$0.00885
$0.01158
$0.06050
($0.0140)
Units
kW
155.0
150.0
kWh
kWh
62,000.0
-
45,000.0
10,000.0
mo.
/kW
/kWh
/kWh
/kWh
/kWh
$150.00
$523.74
$548.70
$717.96
$3,751.00
($868.00)
$175.00
$507.00
$398.25
$521.10
$2,722.50
($630.00)
$4,823.40
$3,693.85
Total
Net Power Cost and Power Cost Adj.
Wholesale Credit Rate Adjustment (%)*
Wholesale Energy Credit Rate ($/kWh)
Total
Difference
•
•
•
($0.04650)
85.00%
($0.03953)
Without DG
Proposed
Model with DG
>50 kW
Demand Charge
Energy Charges
$/kWh
$/kWh
$0.00
$4,823.40
($395.25)
$3,298.60
Production Credit
$1,524.80
Net metering of behind the meter, distributed generation may reduce the utilities revenue
without reducing the service level/requirements to the customer
Utilities may be required to purchase energy from FERC Qualified Facilities at the utilities
avoided cost
Variations can be applied to Net Metering such as banking with monthly or yearly true-ups or
value of solar
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Time of Use Rates
$0.1200
$0.1100
$0.1000
$0.0900
$0.0800
$0.0700
$0.0600
$0.0500
$0.0400
$0.0300
$0.0200
$0.0100
$-
Summer Season (Jun-Sept)
$0.1200
$0.1100
0.0677
0.0586
0.0677
0.0586
0.0426
0.0376
Power Cost Rate ($ per kWh)
Power Cost Rate ($ per kWh)
Non-Summer Season (Jan-May, Oct-Dec)
$0.1000
0..1026
$0.0900
$0.0800
$0.0700
0.0698
0.0698
$0.0600
$0.0500
$0.0400
0.0536
0.0536
0.0436
0.0390
$0.0300
$0.0200
$0.0100
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24
$1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24
TOU Options
Fixed Base Power Cost Rate
Market HR X Forward Gas Price
TOU Options
Fixed Base Power Cost Rate
Market HR X Forward Gas Price
TOU rates are designed to match exposure to market prices and to send a
rate signal to customers allowing customers the option to control and
manage their energy use and associated cost
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Billing
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Transmission Cost of Service
TCOS






TCOS is the cost incurred for using the state
ERCOT transmission system to deliver power
ERCOT TCOS is based on the average of PEC’s 4
Summer Months Coincident Peak Demands (4CP)
PEC’s official 2016 ERCOT 4CP is 1,303.55 MW
(1.92% of ERCOT)
TCOS charges in 2017 will be approximately $6973 M
A 7-13% increase compared with 2016 costs of
$64.4 M
PEC passes the ERCOT TCOS cost directly to
members through PEC’s TCOS rate currently set
at $0.01158 per kWh
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Transmission Cost of Service
TCOS
TCOS rate is
$4.44/kW-Mo.
1,303,550 x $4.44 =
$5.78 MM/Mo
DUNS
NUMBER
PEC Total
ERCOT Total
June
July
6/15/2016
7/14/2016
17:00
16:00
1,234.9639
1,299.3231
65,006.4280 67,798.6088
August
September
Average 4CP Load Ratio
8/11/2016
9/19/2016
Load
Share
16:30
16:15
1,387.8316
1,292.0815
1,303.5500
1.9237%
71,146.5912 67,099.0487 67,762.6692 100.00%
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Competitive Retail Rates
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Pennywise Rate Option
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Pennywise TDSP Charges
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Penny Wise Rate Option
TDSP
Usage
(kWh)
0
100
200
300
400
500
600
700
800
900
1000
1100
1200
1300
1400
1500
1600
1700
1800
1900
2000
Per Month
Flat Fee
5.47
5.47
5.47
5.47
5.47
5.47
5.47
5.47
5.47
5.47
5.47
5.47
5.47
5.47
5.47
5.47
5.47
5.47
5.47
5.47
5.47
Energy
Unit Rate
($/kWh)
0.035686
0.035686
0.035686
0.035686
0.035686
0.035686
0.035686
0.035686
0.035686
0.035686
0.035686
0.035686
0.035686
0.035686
0.035686
0.035686
0.035686
0.035686
0.035686
0.035686
0.035686
Unit Rate
($/kWh)
0.014
0.014
0.014
0.014
0.014
0.014
0.000
0.000
0.000
0.000
0.000
0.119
0.119
0.119
0.119
0.119
0.119
0.119
0.119
0.119
0.119
Cost ($)
5.47
10.44
15.41
20.38
25.34
30.31
33.88
37.45
41.02
44.59
48.16
182.62
198.09
213.56
229.03
244.50
259.97
275.44
290.90
306.37
321.84
Effective
Rate
($/kWh)
0.0000
0.1044
0.0770
0.0679
0.0634
0.0606
0.0565
0.0535
0.0513
0.0495
0.0482
0.1660
0.1651
0.1643
0.1636
0.1630
0.1625
0.1620
0.1616
0.1612
0.1609
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Homework Exercise:
Rep. Paul Workman (R – District 47), a longtime critic of Austin Energy, filed four
bills – (HB1458, HB1459,HB1460, and HB1523) – last week that would target the
public utility’s electric rates, downsize its service area, cap its payments to Austin’s
city government, overhaul its governance, and allow commercial and industrial
customers to shop for a better deal, according to a February 2 report by
the Austin American-Statesman.
The four new measures would:
• Require the Austin City Council to appoint an independent board to run the
utility;
• Limit the amount of revenue the utility can provide for the city’s general
budget to just 12 percent of utility revenues, which equates to $108 million,
roughly the amount provided now;
• Transfer Austin Energy’s service area east of the city limits to the
Bluebonnet Electric Cooperative; and those west to the Pedernales
Electric Cooperative; and
• Allow major commercial and industrial customers to ask the Public Utility
Commission for permission to buy electricity from other providers if they are
cheaper than Austin Energy.
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Homework Exercises:
3
A.
B.
C.
D.
As an analyst for the Public Utility Commission of Texas (PUCT) you
are asked by a commissioner to evaluate the proposed legislation to
transfer Austin Energy (AE) customers to Pedernales Electric
Cooperative (PEC)
You are asked to compare the impact to bills of customers in the
proposed transfer areas.
Compare the monthly charges for residential customers across
various usage levels from 0 kWh to 3,000 kWh using the outside city
limits AE residential rate, the PEC residential rate, and the PennyWise
residential rate.
For the PennyWise rate assume the follow AE TDSP rate since it is a
pass through $10.00 monthly fixed fee and 0.0357 $/kWh energy
rate, the power charge is the same as listed in the Pennywise fact
Sheet
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Homework Exercises:
Questions
4
A.
B.
C.
D.
E.
F.
Create a table for the three rates showing the total monthly cost ($)
and effective rate ($/kWh) for varying monthly usage levels from 0
kWh to 3,000 kWh
Identify the significant differences and potential impacts to customers
between the three different rates.
Which residential customers will be better off by switching away from
Austin Energy and which residential customers will be better off by
staying with Austin Energy? (Hint: think in terms of size and usage)
Identify a potential behavior that would be incentivized by the rate
design for each of the three rates.
Which rate option would provide the highest incentive for installing
roof top solar? Battery storage? Programmable thermostat?
Do any of the rate options motivate customers to reduce usage
during the potential ERCOT TCOS 4 CP events (June-September)?
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Outside Austin City Limits
AE Residential Rate
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PEC Residential Rate
Power Cost
Adjustment
(PCA): 0.014 $/kWh
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