Rate Design
by
Objective
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Bonbright’s Principles (Bonbright, 1961)
1. The related, practical attributes of simplicity, understandability,
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public acceptability, and feasibility of application
Freedom from controversies as to proper interpretation
Effectiveness in yielding total revenue requirements under the fair
return standard
Revenue stability from year to year
Stability of the rates themselves, with a minimum of unexpected
changes seriously adverse to existing customers
Fairness of the specific rates in the approportionment of total costs
of service among the different customers
Avoidance of undue discrimination in rate relationships
Efficiency of the rate classes and rate blocks in discouraging wasteful
use of service while promoting all justified types and amounts of use:
a. In the control of the total amounts of service supplied by the company,
and,
b. In the control of the relative uses of alternative types of service
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Bonbright’s Principles – Summary and PURPA
Additions
Bonbright’s principles are often summarized as three
objectives
♦ Revenue requirement
♦ Fair apportionment of production costs among customers
♦ Optimal efficiency
The Public Utility Regulatory Policy Act of 1978 (PURPA)
added:
♦ Conservation of energy by users
♦ Efficient use of facilities and resources by utilities
♦ Equitable rates to consumers
No doubt the next energy legislation will add to these
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Rate Design by Objective
Rate Design by Objective Process
1. Determine rate design goals or objectives
2. Develop metrics, preferably quantative, for each goal
3. Design the rate, possibly with variants
4. Calculate a scorecard for the rate based on the metrics
5. Tweak the rate(s) and recalculate the scorecard iterating until you're satisfied
Without specifying how the goals are to be measured, the goals are only “Mom and apple pie”
“Far better an approximate answer to the right question, which is often vague, than an exact answer
to the wrong question, which can always be made precise.” John W. Tukey
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Example – Residential Flat Rate
Utility has received indications from the PUC (hint, hint,
wink, wink, nudge, nudge) that it should reconsider its
current flat residential rate.
The utility has decided upon the following objectives
♦ Efficiency in use
♦ Revenue sufficiency
♦ Rate continuity
♦ Equity
There are lots of rate options to consider
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Rate Options – Demand Response
Two basic flavors
♦ Reliability-triggered
• Direct load control (DLC): customer end-uses are directly
controlled by the utility and are shut down or moved to lower
consumption
• Interruptible tariffs: customers agree to reduce consumption to a
pre-specified level, or pre-specified amount, in return for an
incentive payment
♦ Price-triggered
• Time-of-use rate (TOU): The rate is time-varying to correlate to
system peak, but the prices are static and not related to real-time
system needs
• Dynamic pricing: The rate is time-varying and adjusted in (near)
real-time to address current system needs
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The Critical-Peak Pricing (CPP) Rate
Illustrative CPP Rate for Residential Class - Summer
All-In Rates
$1.40
Illustrative CPP Rate for Residential Class - Winter
All-In Rates
$1.40
Critical Peak Rate = 123.4 cents
$1.00
$1.00
All-In Rate ($/kWh)
$1.20
All-In Rate ($/kWh)
$1.20
$0.80
$0.80
$0.60
$0.60
$0.40
$0.40
Off Peak Rate = 11.4 cents
$0.20
Off Peak Rate = 11.4 cents
$0.20
Existing Rate = 12.6 cents
$0.00
Existing Rate = 12.6 cents
$0.00
0
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♦ Customers get a discount on all hours except a few critical hours
of the year
♦ On a few critical days, customers pay a substantially higher price
equal to the cost of capacity plus the average critical peak LMP
♦ Customers are notified of critical days in advance
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A CPP Rate Combined with a Time-of-Use (TOU) Rate
Illustrative CPP/TOU Rate for Residential Class - Summer
All-In Rates
$1.40
Illustrative CPP/TOU Rate for Residential Class - Winter
All-In Rates
$1.40
Critical Peak Rate = 123.4 cents
$1.00
$1.00
All-In Rate ($/kWh)
$1.20
All-In Rate ($/kWh)
$1.20
$0.80
$0.80
$0.60
$0.60
Peak Rate = 20.5 cents
Off Peak Rate = 10.2 cents
$0.40
$0.20
Peak Rate = 20.5 cents
Off Peak Rate = 10.2 cents
$0.40
$0.20
Existing Rate = 12.6 cents
$0.00
Existing Rate = 12.6 cents
$0.00
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♦ Customers are on a mild TOU rate on all non-critical days
♦ On critical days, they pay a much higher price during the
critical hours
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The Peak-Time Rebate (PTR) is a Mirror Image of the
CPP
Illustrative PTR Rate for Residential Class - Summer
All-In Rates
$1.40
$1.00
$1.00
$0.60
$0.60
All-In Rate ($/kWh)
All-In Rate ($/kWh)
$1.40
Existing Rate = 12.6 cents
$0.20
-$0.20 0
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Illustrative PTR Rate for Residential Class - Winter
All-In Rates
9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24
-$0.20 0
-$0.60
Existing Rate = 12.6 cents
$0.20
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9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24
-$0.60
-$1.00
-$1.00
Peak Rebate = -110.8 cents
-$1.40
-$1.40
♦ Customers pay the default rate for all kWh used; if they make no changes in
their usage they continue to pay the default rate with no extra costs (“carrot
only” approach)
♦ On critical days customers can earn a rebate reductions in usage below an
estimate of what they otherwise would have consumed (their “baseline”)
♦ Baseline calculations are an important component of PTR rates
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ComEd’s VLR Method
ComEd’s Voluntary Load Reduction (VLR) program for C&I
customers uses the following baseline calculation method:
1. Identify five non-event non-holiday weekdays preceding
an event day
2. Calculate a baseline hourly load profile by averaging the
hourly loads on these five identified days
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California Public Utility Commission’s Baseline
Calculation Method
California Public Utility Commission’s (CPUC)
baseline calculation method (10/10 method) is
outlined below:
1. Identify ten non-event non-holiday weekdays preceding
an event day
2. Calculate an interim hourly load profile by averaging the
hourly loads on these ten identified days
3. Multiply the interim profile by 120% to account for
weather adjustment
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The Price Risk-Reward Trade-Off for Electric Rates
Potential
Reward
Reward
(Discount
(Discount
from
from Flat
Flat
Rate)
Rate)
Less Risk,
Lower
Reward
More Risk,
Higher
Reward
Increasing Reward
10%
RTP
5%
VPP
PTR
CPP
Super Peak TOU
TOU
Seasonal Rate
Inclining Block Rate
Flat Rate
0.5
Increasing Risk
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1
Risk
(Variance in
Price)
The Best-Designed Pilots Allow Us to Infer the “Arc
of Price Responsiveness” with Much Clarity
Pilot Results by Peak to Off-Peak Ratio
Price-Only Results
40%
Peak Reduction
35%
30%
Best-Fit Curve
25%
20%
15%
10%
5%
0%
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Peak to Off-Peak Ratio
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In Most Cases, the Inclusion of Enabling Technology
Boosts Price Responsiveness
Pilot Results by Peak to Off-Peak Ratio
Results with Enabling Technology
40%
Technology Curve
Peak Reduction
35%
30%
Price-Only Curve
25%
20%
15%
10%
5%
0%
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Peak to Off-Peak Ratio
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Utility’s Choice – Inclining Block Rate
Utility decides to try an inclining block rate
♦ At this point in time, does not want to make the
investment in meters required for any of the dynamic
pricing rates
♦ Is in process of ‘smartening’ up its distribution system, so
it could consider doing ‘smart meters’ in the future
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Designing an Inclining Block Rate is Both an Art and
a Science
Some aspects of IBR design are more “science” than “art”
♦ Aligning prices with system costs
Other aspects require subjective judgment
♦ Establishing the number of tiers
♦ Determining cutoff points
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There Are Three Critical Decisions to be Made When
Designing an Inclining Block Rate
Illustration of Inclining Block Rate
Critical Decision #1: How many tiers?
Cents/kWh
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Critical Decision #3:
How to set prices?
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5
Critical Decision #2:
Tier cutoff?
0
0
200
400
600
Monthly Usage (kWh)
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800
1000
Decision #1: How Many Tiers?
The simplest IBR has two tiers
♦ Provides simplicity and understandability for the customer
♦ Reduces consumer-related issues for the utility
A three-tiered rate is another approach
♦ Provides customers with a larger conservation incentive
♦ Still fairly easy to explain
Some IBRs include as many as five tiers
♦ Most granular reflection of increasing costs
♦ In theory, the concept could be extended to a “straight
line”
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Decision #2: How to Establish the Cut-off Point
Between Tiers?
Lifeline
♦ First tier represents monthly usage level necessary to satisfy a basic standard
of living
Baseload generation
♦ First tier represents share of class usage that is met through baseload
generation
Average usage
♦ First tier represents average customer’s monthly usage
Even allocation
♦ Cutoffs are set such that class usage is allocated evenly within the tiers
Energy efficiency target
♦ For example, establish cutoff at 80% of previous year’s class usage
Function of individual customer usage
♦ Specify tiers as percentage of usage on an individual customer basis
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Decision #3: How to Set the Prices?
Set based on system costs
♦ Final tier as peak marginal energy cost
♦ First tier as off-peak marginal cost
Set based on policy goals
♦ Reverse-engineer the target level of customer response
and price accordingly
♦ Build rate increase only into outer tiers
♦ Satisfy mandated rate caps (e.g., California)
♦ Constrain price range to limit distribution of bill changes
The prices could be based on a combination of these options
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There Are Other Important Decisions as Well
Other decisions for consideration include
♦ Seasonality
♦ Which charges to vary by usage
♦ Which customer classes should be eligible
♦ How to define revenue neutrality
Ultimately, all of the rate design considerations are
interrelated and dependent upon each other
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Final Design
Two alternatives – two and three tiered IBR
Two-tiered
♦ Maintains same customer charge
♦ Sets upper tier at 80% of marginal costs, but reduces first
tier so as to maintain same revenue requirement
collection
Three tiered
♦ Reduces customer charge by $2.00/month
♦ Highest tier at full peak marginal costs, remaining tiers set
at decreasing percentage of marginal costs
As utility is in an RTO, uses both current and forward curve
LMPs (two years) as basis for marginal costs
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Alternative Rate Options
Alternatives
Tier II
Existing
Customer charge ($/month)
Energy charge (cents/kWh)
0-800 kWh
801 - 1600 kWh
1601+
Tier III
$7.00
$7.00
$5.00
7.0
6
8
6.0
7.5
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Class Billing Data
Usage Block
Billing Units
Customers
MWh
0 - 800 kWh/month
801 - 1,600 kWh/month
1,601+
300,000
200,000
100,000
525,000
350,000
175,000
TOTAL
600,000
1,050,000
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Example – Measuring Efficiency
Rate was based on marginal costs, so that is its first metric
♦ Tier rate expressed as a %-age of marginal costs
Cost-effectiveness of a customer efficiency option
♦ Compare the cost-effectiveness of an efficiency option for the
customer that is cost-effective for the utility
♦ Option is cost-effective in that the energy or demand savings exceeds
the cost of option
Leave it to you to decide the appropriate cost-effectiveness
test.
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Example – Efficiency
Energy Efficiency Program Payback Assumptions
Efficiency Incentive
Tail Block as % Marginal Cost
Reduction in Payback Period
800 kWh or less Customer
800-1600 kWh Customer
1600 + kWh Customer
Inclining Rate - Two Tiers
Inclining Rate - Three Tiers
80%
100%
-10%
4%
12%
-32%
1%
28%
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Example – Revenue Sufficiency
Apply class billing determinants to the rate change to
derive total class revenues
♦ The initial calculation on the next slide is performed
assuming no change in use
• Could use long run price elasticity estimate used previously
• Alternatively, could also look at shorter run impacts by using a
short-run price elasticity
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Example – Revenue Sufficiency, No Usage Change
Rate
Tier II
Tier III
$4,200
$3,000
Below 800 kWh/month
$31,500
$31,500
800 - 1,600 kWh/month
$28,000
$26,250
Above 1,600 kWh/month
$14,000
$17,500
$77,700
$78,250
14%
42%
Annual revenues ($000s)
Customer charge
TOTAL
Change in percent revenue
recovered in tail block
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Example – Rate Continuity
Calculate the percentage change in bills at various usage
levels
♦ One issue that may need to be accounted for is the
distribution of bills by number of customers
♦ This assessment may also need to account for weather
variations through the year
• Air conditioning and space heating loads
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Example – Rate Continuity – Monthly Bill Charge
Use
(kWh/month)
400
800
1,200
1,600
2,000
2,400
2,800
3,200
Tier II
-13%
-3%
3%
6%
8%
9%
9%
10%
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Tier III
-44%
-37%
-22%
-15%
25%
28%
30%
32%
Rate Scorecard
Rate Scorecard
Inclining Rate - Two Tiers
Inclining Rate - Three Tiers
80%
100%
-10%
4%
12%
-32%
1%
28%
14%
42%
-13%
-3%
3%
6%
8%
9%
9%
10%
-44%
-37%
-22%
-15%
25%
28%
30%
32%
1%
11%
Goal 1 - Efficiency Incentive
Tail Block as % Marginal Cost
Reduction in Payback Period
800 kWh or less Customer
800-1600 kWh Customer
1600 + kWh Customer
Goal 2 - Revenue Sufficiency
Change in percent revenue
recovered in tail block
Goal 3 - Rate Continuity
Percentage change in bill by use level
Monthly usage (kWh)
400
800
1200
1600
2000
2400
2800
3200
Goal 4 - Equity
Percentage change in average bill
for customers on bill assistance
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