Want to sustain utilities? Decouple profits from revenues, assign costs where they belong and enable customers to make smarter energy choices

The tally of utilities and governments around the world imposing or boosting fixed charges for grid-supplied electricity is rising to make up for the decline in traditional, rate-based revenue.  In the U.S. this has been due primarily to ever-improving energy efficiency and the end of year-to-year increases in electricity usage. Now, the demand curve looks to stay flat or even head south due to distributed generation, particularly rooftop solar.

Think about it. Effectively penalize customers by slapping them with a charge that has little, if anything, to do with how much of a product they use.  If regulators, energy utilities and policy experts today were designing rules for the first time, would anyone want to reward increased energy consumption that puts a heavier burden on, and grows the risks to, civil society and national economies?  I think we can all agree the answer would be no.

The overarching issue here is not new. Debates have raged for decades over how to enable utilities to earn money from energy efficiency programs. A growing number of states, led by California, have made significant strides and there are many lessons to share. I’m on a constant outlook for fresh ideas that deal with the realities of how energy utilities are regulated and the reliance on the status quo by consumer advocates and much of the industry relying on a 100+ year-old business model.

From the earliest confrontations that reached full stride in 2013 in Arizona and California and are emerging in Nevada and Minnesota, we can see how rooftop solar and other form sof distributed generation, microgrids and active energy management are upping the ante. The challenge, and opportunity, to craft rules that can stop any utility ‘death spiral’ (although I don’t believe that scenario) while enabling users to control their energy costs AND clean up our air and water is staring us straight in the face.  It’s only going to get more challenging â€" and more compelling â€" with each passing year. Solar is getting more economical. And new technologies and smarter applications all but demand that rules catch up with modern day realities.

The knee-jerk reaction to impose fixed charges is a cop out.  The biggest problems with fixed charges, even modest levies in the $10 to $20-per-month range, are that they:

1) Set a terrible precedent, making it easier for utilities to ask for and get higher charges in the future;

2) dilute the incentive to conserve energy, especially when supplies are stretched due to abnormally hot or cold weather; and

3) ignore how technologies are rapidly enabling energy efficiency and offering many consumers an even greater ability to control their consumption and generate their own power.

Now there are challenges that utilities need to be compensated for in all rate structures.  I’m talking about the need for cleaner generation portfolios, infrastructure improvements and defenses against cyber security threats.  But they can be dealt with prudently while maintaining incentives to use less energy and reduce dependence on the grid. The means to think proactively are all around us if regulators and stakeholders commit to it. There are several examples to draw from to illuminate what’s working and what’s not.

At this week’s winter meetings of the National Association of Regulatory Utility Commissioners (NARUC) in Washington, the Committee on Consumer Affairs is searching for “real solutions to real challenges”. They’re grappling with questions such as, “Will consumers dictate what services they are provided in the future?” Fixed charges were not overtly on this agenda although distributed generation is considered a "critical issue" a NARUC committee is studying.

Thus far, about half the U.S. states have decoupled utility profits from revenues in ways that don’t rely too heavily on fixed charges. See adjacent map. The onus is on the remaining half â€" especially in the electricity sector â€" to follow suit.

In the interest of time and this space, I’ll highlight what I think is the most compelling and efficient decoupling rate order to date which concluded last summer at the Washington Utilities and Transportation Commission and applies to Puget Sound Energy (PSE). The rate order supports ambitious but doable energy efficiency measures that could lead to significant reductions not just in pollution but also consumer bills. PSE serves more than 1 million electric customers and almost 750,000 natural gas customers.

Ralph Cavanagh, co-director of the energy program at the Natural Resources Defense Council, a widely-acknowledged expert on decoupling and who worked on the order, called it “a victory for everyone who cares about reliable, affordable and clean energy service in the PSE territory.” He said it “establishes an important rate model for the rest of the state, region, and nation on how to end longstanding conflicts of interest between utility shareholders and customers over energy efficiency â€" our cheapest and cleanest way to do more with the same amount of energy.”

Forging the needed consensus which led to this rate order was the result of conversations spanning three decades. A concerted effort began in earnest in October 2012. In addition to the PSE, the Commission’s staff and the NRDC, it involved the Northwest Energy Coalition and Earth Justice: no slouches in reaching a compromise. So this was no overnight success. The state’s goal of achieving “all cost-effective energy efficiency” now has a roadmap. The process is something the other half of the U.S. utilities not under decoupling can learn from.

Going forward, the new rate structure for PSE will involve small upward or downward annual rate adjustments not to exceed 3 percent. It will ensure that PSE and its shareholders neither gain nor lose from changes in its retail sales. This modest adjustment is a centerpiece of most other decoupling mechanisms.

What makes the PSE order, (starting on p. 36 of the formal order) stand out is how it applies to virtually all sales of electricity and natural gas. It also accelerates progress the state was making for more energy efficiency with rebates for high efficiency appliances, insulation and lighting. At the same time, PSE is to increase low-income bill assistance funding by $1.5 million. 

Some of the most creative thinking on advancing decoupling comes from other experts such as Ron Binz, who for a while last year was nominated to be the next chair of the U.S. Federal Energy Regulation Commission until conservative opposition compelled him to withdraw. After an illuminating seminar on the future of energy utilities last week at the Brookings Institution in Washington, DC moderated by Binz, he offered an interesting alternative to fixed charges in concert with decoupling.

“I’m very suspicious of straight or fixed charges. Time-of-use rates won’t produce any windfalls in either direction if done properly,” Binz said. Rather than apply time-of-use rates to all customers, he proposed applying them only to the 20% of the largest residential customers and doing so on a revenue-neutral basis.

“That’s a politically acceptable group to do that with,” Binz asserted.  “About 40% of them will have bills that will be lower (than they otherwise would be) and 60 percent of them will have bills that are higher. You can mitigate how high the highest ones go. Most importantly, you can provide a foothold for smart grid benefits and create a market for companies to serve that market.”  Binz goes into some detail here.

A few participants at NARUC's Sunday session called for a relatively simply approach that could fit just about any rate structure because it’s already happening with mobile phone and bundled cable-internet-telephone packages. It includes three elements: 1) Fixed costs to cover investments all parties benefit from; 2) energy charges to cover the cost of fuels; and 3) demand charges to account for the amount of energy used.

David Sparby, CEO of Northern States Power, which operates in the first state with a formal process to value rooftop solar, told the NARUC Committee on Consumer Affairs: "Unlike the 80's, we don't have the luxury of time. We don't have the ability to test solutions. Just drilling down on the costs puts us ahead."

Janet Besser, Vice President of Policy and Government Relations for the New England Clean Energy Council, agreed. She said efforts to get it exactly right are "an impossible task." Instead, she said, the focus should be on getting customers into the "categories of cost" that serve them.

Philip Dion, Senior Vice President of Public Policy and Customer Solutions at Tucson Electric Power, where fixed charges have been a hot topic throughout Arizona, cautioned meeting participants "You're going to have to adapt and change the way you do things. You have to enable people to make smart choices."  He urged utilities and their stakeholders to develop an integrated distributed energy plan.

Please share your ideas and what you think, or have read, that can help bring the other half of the nation’s utilities into the modern era of decoupling rates, assign costs where they belong and maybe even motivate ratepayers to make smarter energy choices.