The Rate Exchange: October 2024

The Rate Exchange is Brattle’s newsletter on the latest innovations in electricity rate design. Our aim is to deliver concise insights from our recent work in this area as well as our commentary on emerging rate design developments. In this issue, we discuss several approaches to modernizing commercial and industrial (C&I) rates, an introduction to subscription pricing, observations from a recent time-of-use (TOU) rate pilot in Maryland, and recent developments in standby rate design.

Stay tuned for our next issue, which will focus exclusively on one of the hottest topics in ratemaking: rate design for data centers.

Three Keys to Modernizing C&I Rates

By Goksin Kavlak (Senior Energy Associate | Boston)

While the rate design spotlight often is on residential customers, the reality is that about 60% of US utility sales are to the commercial and industrial (C&I) sectors. We’re seeing a lot of utilities begin to focus on modernizing their C&I rate offerings.

C&I customers are seeking new opportunities to reduce their carbon emissions footprint, manage their electricity consumption more flexibly, and – thanks to the emergence of distributed energy technologies – become not only consumers but also producers of electricity. Rates will need to evolve to keep up with these changes. Besides addressing customers’ needs, modernized rates will also help the utilities save money by limiting peak demand growth and encouraging efficient use of utility resources.

So, what are some options to modernize C&I rates? The list is long, but in general, utilities are focused on simplifying tariffs and introducing meaningful choices. Three key themes have emerged from our work with utility clients in this area:

1. Re-think customer classes. This means reviewing and updating class definitions and also potentially reducing the total number of customer classes. Benefits of doing so include (1) simplicity, since the same rate structure will serve many customers, leading to familiarity with the rate design, and (2) bill stability, since customers will not switch back and forth between classes frequently as their electricity consumption fluctuates.
2. Focus on cost reflectivity. As a general matter, C&I customers are better equipped to handle rate complexity than residential customers. This is an opportunity to align C&I rate design elements with underlying cost drivers. Utilities are exploring options such as (1) offering time-varying rates with cost-reflective price signals; (2) enhancing these rates with more dynamic, peak-reducing elements such as critical peak pricing; and (3) modernizing legacy time-varying rates by shortening their long (>5 hours) peak periods to make it easier for customers to shift energy use to off-peak periods.
3. Offer rate choice. While C&I customers often have several rates available to them, those rates don’t always reflect the full breadth of meaningful design options that could be offered. In particular, we’re seeing interest among utilities in offering rates that promote load shifting or curtailment for flexible loads like electric vehicle (EV) fleets and public charging. These rates can be specific to public charging, specific to EV fleet charging, or more generally suitable for flexible loads. Utilities also are exploring alternative rates for green energy supply to help customers achieve their decarbonization goals.

Subscription Pricing: What Is It, and Why Do It?

By Adam Bigelow (Energy Research Associate | Boston)

Subscription pricing has emerged as an innovative tool for offering customers improved simplicity and transparency while also boosting participation in energy efficiency and demand flexibility initiatives. It’s a complex topic, so we’re going to tackle it in a series of articles in future newsletters. We’ll start with an overview and its advantages.

The goal of subscription pricing is simplicity. For a fixed contract period, the customer pays a fixed amount for electricity each month, regardless of how much electricity they use. With no surprises or weather risk, subscription pricing – which is similar to any other subscription, like a phone plan – is a customer-oriented rate that appeals to those willing to pay a premium for a completely predictable bill.

The subscription pricing contract each customer receives is an individualized offer based on the customer’s historical usage. The utility adds a small risk premium to the final bill to account for the additional price and usage risk. Unlike budget billing programs, there are no additional hidden fees or true-ups at the end of the period.

Utilities also benefit. Subscription pricing could improve overall customer satisfaction and reduce high bill complaints. Additionally, the fixed bill serves as a useful weather hedge, offsetting revenue under-collection from customers on a volumetric rate during mild weather (and vice versa). And, in some ways, a fixed bill aligns with the increasingly fixed nature of the cost of serving customers.

A common concern is that subscription pricing will reduce incentives for efficiency and flexibility. To address this, the fixed bill offer can be bundled with other services, such as clean energy guarantees or smart thermostats that are pre-enrolled in demand response programs. That bundled approach can attract customers who otherwise may not participate in efficiency and flexibility programs.

There are a lot of ways to make subscription pricing work for both customers and utilities while facilitating the achievement of decarbonization goals. Brattle’s subscription pricing white paper goes into more detail on this topic, as does our recent testimony supporting Evergy’s subscription pricing proposal.

There’s a lot more to discuss. In future articles, we’ll cover specific rate design decisions, such as methods for using subscription pricing to promote efficiency and flexibility, what current subscription pricing offerings look like across the US, and subscription pricing implementation considerations.

Do Residential Customers Respond to Time-Varying Prices? The Evidence Shows That They Do

By Sai Shetty (Senior Energy Associate | Chicago)

When introducing new time-varying rates, utility stakeholders often ponder, “Will customers really respond to these new rates?” This skepticism is understandable, as most residential customers have paid flat volumetric rates for electric service for decades. Time-varying rates, which fluctuate based on the time of day the energy is used, challenge that norm by reflecting the true cost of providing electric service.

Despite initial skepticism, cumulative industry experience over several decades proves that customers do indeed respond to price. The recent PC44 pilot in Maryland confirmed this observation. The pilot, conducted between June 2019 and May 2021, tested the impact of a time-of-use (TOU) rate.

Three Maryland utilities – Delmarva Power (DPL), Pepco MD, and Baltimore Gas & Electric (BGE) – ran the pilot to analyze customer response to a TOU rate. Customers were subjected to TOU prices in both the summer and non-summer seasons. The peak period lasted from 2 p.m. to 7 p.m. in the summer and from 6 a.m. to 9 a.m. in all other months.

Customer response to TOU prices was overwhelmingly positive. Across the three utilities, participants reduced their summer peak demand by an average of 9.3–13.7%, all of which were statistically significant. Additionally, customers exhibited statistically significant peak reductions in the non-summer season as well.

A novel feature of the PC44 pilot was that it included participation from low-to-moderate income (LMI) customers. With new rate offerings, it is important to be aware of potential adverse customer bill impacts and plan accordingly. This is especially true for LMI customers and is often an area of focus for regulatory commissions and utility stakeholder groups. Importantly, in the pilot, LMI customers were found to respond just as much, statistically, as non-LMI customers. Our report details the full load impact evaluation analysis.

This pilot’s findings are remarkably consistent with the results of almost 400 time-varying rate offerings that have been evaluated across North America and internationally over the past three decades. As evidence of price responsiveness continues to grow, we look forward to contributing to important adjacent areas in need of further research, such as the impact of rate design on technology adoption decisions.

Not Just Standing By

By Megan Diehl (Senior Research Analyst | Boston) and Sanem Sergici (Principal | Boston)

As distributed energy resources (DERs) are adopted by a rapidly growing number of consumers, developing efficient and cost-reflective rates is paramount. This applies not only to residential customers but to large customers, as well. Standby rates are designed for large C&I customers with their own sources of generation (e.g., combined heat and power) to prevent cost shifts and improve economic efficiency. While most legacy standby rates have not been changed for decades, this is starting to shift.

Standby customers primarily rely on their own generation capabilities and use the grid only as a backup. Like any generating unit, the backup generation for these customers experiences downtimes for maintenance or unexpected outages. Additionally, a customer’s self-generation capacity might not cover the entirety of their peak demand, so utilities must be prepared to serve that demand. This leads to some interesting economic and engineering questions. Two of these questions – and our recommendations on how to address them – are outlined below.

1. How should standby rates be structured?
   We recommend that standby rates include a reservation charge and an as-used The reservation charge is designed to recover the cost of building the system to support standby customers. Even if customers rely entirely on their self-generation for one full month, they’re still paying the utility for “reserving” the option to demand energy. This charge is normally based on the size of a customer’s self-generation.
   The “as-used” charge reflects the costs of actually generating and delivering energy to the customer. If a customer does require energy from the utility, they pay for that energy just like any other customer. These charges are normally volumetric or demand-based and may have a seasonal or time-of-use component.
2. What are the costs of serving these customers? 
   We categorize the costs of serving standby customers into local and shared facilities. Local facilities are built out or reserved entirely for the large standby customer and are mainly recovered through local facilities and reservation charges. Shared facilities include the costs of resources used by multiple customers, including the standby customer. A daily distribution demand charge, as well as generation demand and energy charges (peak and off-peak), seek to recover shared facility costs for the class. While it is contentious to decide which costs are local versus shared, there are reliable rules of thumb that can be used to improve the cost-reflectivity of these rates.

Brattle is not “standing by” on this important rate design topic; we’ve recently supported multiple clients, including Interstate Power and Light (IPL) and Pepco, in modernizing their standby rate designs.

Updates from the Team

• Kudos to Adam Bigelow, who was recently promoted to Energy Research Associate (due in part to his critical contributions to our rate design research).
• Cheers to Managing Energy Associate Long Lam, who got hitched this summer in Greensboro, North Carolina! He also moved back to Washington, DC, last month after a year-long stint in the Tar Heel state.
• Principal Ryan Hledik recently returned from Paris, where he participated in an International Energy Agency (IEA) panel on the role that virtual power plants could play in improving Ukraine’s energy security. Learn more here.
• Several members of our team (Ryan Hledik, Akhilesh Ramakrishnan, Long Lam, and Kate Peters) will be at the 50^th Peak Load Management Alliance (PLMA) Conference taking place Nov. 11–13 in Brooklyn, New York. Come find us!
• Brattle’s Electricity practice recently got together in Newport, RI, to catch up, strategize, and – inevitably – nerd out on the latest industry developments (including rate design!).

Brattle’s Ratemaking Capabilities

Over the past 15 years, we have worked with more than 60 clients on over 100 studies on retail ratemaking issues across a range of jurisdictions throughout North America and abroad. During that time, Brattle consultants have testified or submitted regulatory filings on ratemaking issues in more than 15 states or provinces and have appeared before various legislative bodies and regulatory commissions. As a result, we bring on-the-ground experience, perspective, and lessons learned from a broad range of regulatory and market environments.

Our ratemaking services include cost-of-service studies, pilot design, rate design, system impact analysis, bill impact analysis, consumer preference assessment, benchmarking, transition strategy, and regulatory and stakeholder support.

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