Can regulated rates be designed to mimic competition?

Rather than attempting to “mimic competition,” Giberson suggested simply “to allow competition.”

Cost-of-service rate regulation cannot be designed to mimic competition. If you want competitive results, then allow competition. At least that was my claim reported in a Megawatt Daily story, “Texas wires rate study draws mixed reactions.” (From Monday, June 27, 2106; articles are not free online, but you can subscribe to Megawatt Daily here.)

My remark was in response to a handful of claims in the rate study that a Straight Fixed Variable (SFV) rate design for transmission and distribution utility (TDU) services serves to “mimic competition.” SFV might be a good way to do regulated cost recovery, but it simply does not capture the wide variety of ways in which a competitive firm might manage to recover costs in an open marketplace.

Extended excerpts from the article:

A consultant’s report to Texas utility regulators about alternative ratemaking approaches for the state’s transmission-and-distribution utilities on Friday drew mixed reviews from stakeholders and industry observers.

Christensen Associates Energy Consulting on Wednesday filed a report, “Alternative electricity ratemaking mechanisms adopted by other states,” at the Public Utility Commission of Texas, Project No. 46046. The PUC ordered the study to comply with a recent state law requiring analysis of alternative approaches, reflecting “concerns that electric transmission and distribution costs are increasing substantially over time,” the report states.

Christensen said regulators around the US have experimented with different approaches for several reasons…. State leaders have also expressed concern about cross-subsidies between different classes of customers, and the extent to which the state’s utility rate design creates incentives for such cross-subsidies.

Under Texas’ Public Utility Regulatory Act, TDUs today recover costs through fixed monthly charges and energy charges, with the latter making up about 80% of most residential and small commercial customers’ bills, excluding riders, which may increase that percentage….

“Because T&D costs are largely fixed, energy usage changes result in revenue changes that are larger than the associated cost changes,” Christensen said. “The energy usage-related variability in cost recovery is more significant for the smaller customer classes than for the larger customer classes because energy consumption tends to be more variable than peak loads.”

Aligning rates with costs is authors’ “preference”

One way to tie the rates more closely to each cost causation category, Christensen said, would be to adopt a “straight fixed-variable” (SFV) rate structure, in which the TDU recovers all fixed costs through fixed monthly charges or peak demand charges “that are independent of the volumes of electrical energy consumed.”

“By better aligning rates with costs, SFV rates improve utility recovery of fixed costs, provide customers with energy prices that are relatively efficient, mitigate or avoid the need to adjust rates in response to load changes, remove a disincentive to utility promotion of energy efficiency, encourage lower peak demands and higher load factors, and have more stable rates and lower administrative burdens than certain other ratemaking mechanisms,” Christensen said….

“Our preference is to gradually move rates from their uneconomic initial levels toward those implied by SFV, not merely based on the theory that SFV is the only one of the three alternatives that mimics competition but also based on the fact that competition is coming — and is indeed already here — in the form of distributed generation,” Christensen said. “The cross-subsidies that are implicit in present uneconomic rates will be unsustainable in the face of this competition.”

But Michael Giberson, a Texas Tech University associate professor focusing on energy, economics and law, said, “It is not possible to both decouple cost recovery from load variations and mimic the competitive market.”

In competitive markets, businesses set prices to recover both fixed and variable costs, typically in ways that link to demand, Giberson said in an email Friday.

“Beachfront hotels charge higher prices during the summer when demand is high and lower prices off season,” Giberson said.

Open up rules to allow competition: Giberson

Rather than attempting to “mimic competition,” Giberson suggested simply “to allow competition.”

“What this means in electric transmission and distribution is to open up rules for bypassing the transmission and distribution systems by customers that wish to do so,” Giberson said. “If a large industrial customer wanted to pay for a direct connection to a generator a few miles away, it should be legally possible to do it. … On a smaller scale, if a residential customer with a solar system wanted to sell excess generation to a neighbor rather than export it to the grid, this too should be possible.”

Nat Treadway, managing partner of DEFG, a consultancy focused on retail energy consumers, said the Christensen study is “seriously flawed,” partly because the state legislature’s directive to look at other states’ rate structure ignores the fact that most other states have more heavily regulated electricity markets.

Also, the study “does not look at any particularly innovative approaches that could improve the competitive retail electricity market in Texas or prepare it for innovation in the future,” Treadway said in an email Friday.

“The report looks at 11 ratemaking approaches, but each of these would represent a step backward for Texas,” Treadway said….

Advertisements