Fixed Charge Proposals Warrant Reasoned and Reasonable Approach
Nationally, a lot of attention has recently focused on whether net metering is fair to residential customers that do not participate in the program. The crux of these concerns is whether residential net metering customers continue to pay a fair portion for the upkeep of the grid that they rely on to net meter. If utilities collect some portion of the grid costs through kilowatt-hour sales, and net metering allows customers to avoid those sales to some degree, then utilities tend to argue that they fail to collect sufficient revenue to cover their fixed costs of operating and owning the grid and must eventually pass those costs on to all ratepayers in a future rate case. Owing to the manner in which utilities collect distribution-related costs from residential customers—typically without use of demand charges—these issues of equitable use of the grid often boil down to a matter of rate design.
Accordingly, residential rate design—the manner in which utilities collect the costs that are attributable to the residential class—has taken center stage in this discussion. Most prominently, the California Public Utilities Commission commenced a comprehensive investigation into the future of rate design in the state, including a consideration of how the future rate structure might impact net metering customers. Currently, residential rate design tends to consist of just two structural components: a monthly, per customer fixed charge (if any) and a charge for each unit (kWh) of electricity purchased, i.e., the volumetric electricity rate. While a third component is used in some instances, a charge that applies to the maximum demand (kW) for each customer, demand-related costs are typically recovered from residential customers through some combination of fixed monthly charges and the volumetric rate. In many cases, imposing a demand rate component could require extensive rollout of metering infrastructure to measure residential customers’ individual demands.
Though every utility will differ, the monthly fixed charge is typically designed to collect a small portion of the fixed costs of serving that customer, with the rest of the required revenue spread out among the total number of kWh sales the utility expects to make to the entire residential class. At a basic level, the more revenue that is collected through the fixed charge, the less revenue that has to be collected through volumetric rates (i.e., kWh charges). For net metering, this means that the greater the fixed charge, the lesser the value that will be realized by avoided kWh purchases from the utility. In this way, increasing reliance on fixed charges is also somewhat of a worst practice for energy conservation, as it reduces the price signal to avoid the purchase of the next kWh and creates additional costs that cannot be avoided by customers.
Another aspect of this trend is that utilities have been seeking to expand the types of costs that are collected through fixed charges. Traditionally, customer charges have more or less been reserved to collecting the costs defined as “customer costs”, or those costs that are specific to the individual customer such as the meter, line drop, and billing costs. As utilities seek to recover a greater portion of their fixed costs of the grid through fixed customer charges, the types of costs proposed to be included will expand. For example, in testimony in an ongoing rate case of Appalachian Power Company (APCo) in Virginia, the utility has stated its intention to seek to eventually collect all fixed distribution costs through fixed, monthly recurring charges.
Whether or not this trend is in response to net metering or to correct undercollection of these costs from low-usage customers generally, utilities around the country have begun asking for greater assurances from regulators that they will be able to recover their customer and other demand-related costs of providing grid service. For example, in Utah, Rocky Mountain Power recently sought approval to increase its $5 monthly customer charge to $8, while asking to double its minimum bill—the minimum amount a customer must pay each month, even with zero kWh usage—from $7 to $15. In Virginia, APCo is proposing to double its residential customer charge from $8.35 to $16, with the caveat that it would eventually seek to recover 100% of its fixed distribution system costs (approximately $25) through a fixed monthly charge. In California, as part of compromise legislation that firmly establishes a large net metering cap and calls for further net metering reforms, utilities will be able to seek up to $10 in monthly fixed charges from residential customers.
As these charges impact net metering at a basic level, just as they affect all customers, it is significant that several utilities have begun to seek to augment these fixed monthly charges—which only recover a portion of fixed, distribution costs—with additional charges that only apply to net metering customers. For example, Arizona Public Service currently imposes a per kW monthly charge for all new net metered systems, though that charge was arrived at through a compromise process (i.e., without a fully litigated consideration of costs and benefits) and will be revisited on a more quantitative basis in a future rate case. In Utah, Rocky Mountain Power sought authority to impose an addition charge of $4.65 (above and beyond the approved customer charge amount) to collect a greater portion of its fixed costs from net metering customers than it does for other residential customers. It was denied based upon insufficient evidence. Virginia’s APCo is seeking authority to impose a substantial per kW “standby” charge on residential net metering customers over 10 kW.
Charges like this tend to rest on the assumption that net metering customers are not purchasing sufficient kWh to cover fixed costs (less than class average) and that an additional measure is needed to prevent a cost shift from occurring. Underneath that assumption, however, is a deeper question of whether the benefits of net metering customers covers that purported under-recovered amount of revenue, which would leave other customers indifferent. In other words, the net metering customers would be contributing their costs to the grid by partially paying for it through their utility bills and partially by improving the grid by virtue of operating their distributed net metering systems.
Best practices call for a thorough evaluation of the benefits that net metering customers create, not just whether they consume less kWhs than the average customer in their class. To be consistent with sound ratemaking practices, any costs directed specifically to net metering customers—and not charged to all customers—should be based on solid analysis of whether net metering customers differ significantly from other members of their respective class in how they cause the utility to incur costs to provide service. Absent robust information and analysis on the costs and benefits of customer-sited distributed generation, specific charges targeting net metering customers are unwarranted and constitute discriminatory ratemaking practices.