What is the Right Rate Design?

Pay attention to the debates around electric power system reform, from net metering and rate design to new potential business models for utilities, and sooner or later, someone will begin to talk about fairness.

Enshrined as one of the essentials of good rate design in Bonbright's principles, fairness is a core concept for the provision of electric power through regulated utilities. However, it is also a highly subjective and slippery term, which is why people find it so hard to talk about in the first place.

From the perspective of electricity consumers, fairness questions surround the concept of cost causation. Is it fair that rooftop solar customers are offered net metering, allowing them to use the grid as a battery for free?

Is it fair that utilities offer energy efficiency and demand response programs to different customer classes and sub-classes with different levels of subsidization?

Is it fair that residential customers who live in high density housing pay the same volumetric rate as those located far from other people?

In practice, fairness is the first argument that we hear most. In the past it was presented by industrial consumers, but these days it's mostly from utilities on various customers' behalf.

Third party DER providers discuss fairness in different terms. They often say that utilities unfairly use their incumbency advantage to block access to electricity consumers, customer data, and interconnection to the grid.

We sometimes hear it is only fair that regulated utilities should be blocked from providing services or particular distributed energy technologies, or that utilities need to provide more open access to customer data.

Together, third parties and many consumers worry about fairness concerning the grandfathering tariffs in the face of rate structure changes. Last year's initial decision by the Nevada PUC not to allow existing solar customers to continue to enjoy net metering benefits caused quite a stir until it was reversed. 

Less often articulated, but still clearly felt, we see a related fairness concern about the treatment of sunk costs by utilities themselves. Utilities currently see flat or declining load. The multi-decade investments in resource adequacy, such as central station power plants, may no longer meet the used and useful standard for vertically integrated utilities.

At the very least, capital investments made by customers and third party DER financers take investment and earnings opportunities away from utilities. This seems at odds with the concept of the regulatory compact, that utilities will be allowed a natural monopoly and a regulated rate of return in exchange for providing universal service within their monopoly territories.

Should the utilities be rewarded for ensuring resource adequacy by receiving compensation for stranded assets? Or left to suffer the consequences of not foreseeing and planning around the rise of DER?

In competitive wholesale power markets, traditional generators argue that they are treated unfairly when renewables and demand response suppress market prices for two reasons. First, because they are subsidized by federal and state policies. Second, because they do not provide what they describe as critical baseload power.

And of course many advocates, economists, and scientists remind us that we will never have an entirely fair power sector until we internalize the externalities in the system. Notably, they are concerned about clean air, clean water, and climate change.

If that isn't enough, potential solutions to overcome these fairness issues generate their own fairness complaints. See the reaction from retail customers to mandatory time-of-use rates, or from wholesale customers to introducing capacity markets, or the reaction from others that carbon pricing is a regressive tax. The idea that consumers should pay locational varying rates within a utility service territory seems somewhat accepted in some states but beyond the pale in others.

Whew!

So what is the purpose of inventorying this partial list of seemingly no-win conflicts between these key stakeholders in the power system? Well, actually, we've seen and resolved some of these conflicts before. For example, during wholesale restructuring in the 1990's and 2000's. We may need to expand on those solutions to enable the next transformation of the power sector, at least in many markets.

How?

First, we must recognize that fairness has inherently conflicting meanings for customers, utilities, utility scale power generators, third-party DER providers and other stakeholders, based on the financial and social concerns of each group. These groups are often unaware of, uninterested in, and/or unwilling to recognize the others' concerns. But that does not mean the concerns are insurmountable.

The next step is to commit to a constructive process to reconcile these interests. Attempts to balance these different views and approaches to fairness are complex, involving competing interests and social equity issues.

Over the past two and half years, SEPA, through engagement with a broad group of expert stakeholders, has invested in our 51st State Initiative to offer a framework for engaging stakeholders and regulators to resolve these challenges.

Most recently, we have identified four consensus doctrines that can guide navigation through this thorny issue: design markets for efficiency; clearly define the roles of utilities and third parties; ensure a stable relationship between rights and revenue for grid service providers; and promote electricity customer choice.

The 51st State Initiative doctrines are targeted at helping stakeholders and regulators navigate conflicts around fairness and arrive at some basic, least-regrets strategies.

Fairness, while important, is not the only criteria. Regulators and policymakers must understand their goal should not be the perfect rate design, because a perfect rate design does not exist.

Their best efforts notwithstanding, they will likely create some winners and losers. The goal should be to set a balance that is reasonable for their specific jurisdictions, reflecting the will of the people and balancing everyone's rights.

Ultimately, coming up with a system with no winners or losers may be beyond us. What we can do is have transparency around the decisions we make.

We can approach these different views of fairness in a constructive and democratic way that balances different stakeholders' rights while creating an optimal energy system.

Will that system be optimal because everyone is treated the same, or because it is completely efficient? Those are not decisions that SEPA, utilities or third parties alone should make.

Rather, we need society, through our regulators, to decide. The 51st State Initiative is intended to provide those decision makers with the toolkits and processes to make those decisions we have entrusted them with. We can only do that with help from experts across the electric power sector. We invite you to join that effort.