Recovery of Utility Fixed Costs: Utility, Consumer, Environmental and Economist Perspectives

Publication Type

Report

Date Published

06/2016

Series Editor

LBNL Report Number

LBNL-1005742

Abstract

Utilities recover costs for providing electric service to retail customers through a combination of rate components that together comprise customers’ monthly electric bills. Rates and rate designs are set by state regulators and vary by jurisdiction, utility and customer class. In addition to the fundamental tenet of setting fair and reasonable rates, rate design balances economic efficiency, equity and fairness, customer satisfaction, utility revenue stability, and customer price and bill stability. 

At the most basic level, retail electricity bills in the United States typically include a fixed monthly customer charge — a set dollar amount regardless of energy usage — and a volumetric energy charge for each kilowatt-hour consumed. The energy charge may be flat across all hours, vary by usage level (for example, higher rates at higher levels of usage), or vary based on time of consumption.

While some utility costs, such as fuel costs, clearly vary according to electricity usage, other costs are “fixed” over the short run — generally, those that do not vary over the course of a year. Depending on your point of view, and whether the state’s electricity industry has been restructured or remains vertically integrated, the set of costs that are “fixed” may be quite limited. Or the set may extend to all capacity costs for generation, transmission and distribution. In the long run, all costs are variable.

In the context of flat or declining loads in some regions, utilities are proposing a variety of changes to retail rate designs, particularly for residential customers, to recover fixed costs.

In this report, authors representing utility (Chapter 1), consumer (Chapter 2), environmentalist (Chapter 3) and economist (Chapter 4) perspectives discuss fixed costs for electric utilities and set out their principles for recovering those costs. The table on the next page summarizes each author’s relative preferences for various options for fixed cost recovery, some of which may be used in combination.  The specific design of any ratemaking option matters crucially, so a general preference for a given option does not indicate support for any particular application.

A literature review at the end of the report (Chapter 5) defines each of these options and highlights current practices, potential pros and cons, and the diversity of views held by a wide range of energy experts.

Series Title

Future Electric Utility Regulation Report Series

Volume

FEUR Report No. 5

Year of Publication

2016

Custom 1

FEUR Report No. 5 authored by: Lisa Wood (Institute for Electric Innovation) and Ross Hemphill (RCHemphill Solutions), John Howat (National Consumer Law Center), Ralph Cavanagh (Natural Resources Defense Council) and Severin Borenstein (UC-Berkeley). Click the publication title above to see all documents related to this publication and for a link to the related webinar.

Notes

Lawrence Berkeley National Laboratory hosted a webinar on July 8, 2016 entitled "Recovery of Utility Fixed Costs: Utility, Customer, Environmental, and Economist Perspectives." To view a recording of the webinar, click here.
 
The National Electricity Delivery Division of the U.S. Department of Energy's Office of Electricity Delivery and Energy Reliability provides funding for the Future Electric Utility Regulation series. Lisa Schwartz, in Berkeley Lab's Electricity Markets and Policy Group, is the project manager and technical editor. 
 
To see more information on this report series, click here.
 
The attached article, "Rethinking Rate Design", is posted with permission from Public Utilities Fortnightly

To hear Greentech Media's podcast "How Should We Pay for the Grid?" with authors Lisa Wood and Ralph Cavanagh click here

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