Residential Real-time Pricing in Illinois in 2007 and Beyond

In April the Illinois legislature passed legislation (and in June Governor Blagojevich signed it) requiring electric utilities to consider and evaluate the use of dynamic pricing to enable customer demand response. This legislation also directed the Illinois Commerce Commission to use benefit-cost analysis to evaluate whether such pricing and metering would lead to net benefits. In a current proceeding in front of the Illinois Commerce Commission [06-0617], the Commission Staff has found that Commonwealth Edison’s hourly residential real-time price meets that net benefit test, even after Commonwealth Edison charges customers a long-term monthly rate for updated meters, and has recommended that the Commission approve the residential real-time rate.

Commonwealth Edison had proposed continuing and expanding its residential hourly real-time price as part of its rate proposal for 2007, when the decade-long discounted retail rate cap is eliminated. This proceeding solicited testimony to demonstrate the net benefits of hourly real-time pricing, both to those customers who choose it and to other customers on the network. These benefits to other customers could include a reduction in average wholesale prices because of the disciplining effect that demand response has in double-sided markets, a reduction in price volatility as some customers shift their use intertemporally, and an increase in reliability as customers shift use away from peak hours and take strain off of generation, transmission, and distribution resources.

I submitted testimony in this proceeding on behalf of the Citizen’s Utility Board (as did CUB President Chris Thomas and Utilipoint’s Bernie Neenan). The point of our combined testimony was to communicate that the combination of dynamic pricing and enabling technology is good for consumers. My testimony focused on the economic argument for dynamic pricing (and its enabling technology) and on the evidence of more than 30 years that when faced with choice, residential electricity consumers can and do respond to dynamic pricing, and that when it is well designed they like it.

After surveying evidence from dynamic pricing programs (including the California Statewide Pricing Pilot, Commonwealth Edison’s Energy Smart Pricing Plan, and Gulf Power’s GoodCents Select program) and from an experiment in process in the Pacific Northwest, I conclude that

Retail electric choice puts more control in the hands of consumers and empowers them to make intelligent energy choices, including the choice to use digital technology to automate their behavior in response to dynamic pricing. Consumers could choose anything from a fixed price that incorporates an insurance premium to full real-time pricing, in which the customer bears the financial risk of price volatility, but could see electricity bills fall by shifting or reducing use.

The negative consequences of fixing retail rates have been hidden for decades by other aspects of regulation, such as the control of wholesale prices and excess supply in generation, but the problems arising from fixed retail rates have become more obvious in the era of restructuring. In particular, the liberalization of wholesale prices has disconnected the wholesale and retail markets, with unintended negative effects for customers and firms. The transformation of the electric power network requires reconnecting those markets through price signals, and one of the most effective means of accomplishing that goal is by harnessing the symbiotic relationship of dynamic pricing and enabling technology.

Other testimony in this proceeding is available at ICC’s eDocket, with docket number 06-0617.