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Texas PUC Consultant Report "Prefers" Movement To Much Higher Fixed Fees Charged to Retail Electric Providers For T&D Charges Under SFV; Change Would Wreak Havoc With Retail Price Comparisons

June 23, 2016

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Copyright 2010-16 EnergyChoiceMatters.com
Reporting by Paul Ring • ring@energychoicematters.com

A report on alternative ratemaking by a consultant retained by the Public Utility Commission of Texas expresses a "preference" for a movement to Straight Fixed-Variable (SFV) rate design for the recovery of transmission and distribution costs, which are paid by retail electric providers who then recover such costs from their customers

While the report by Christensen Associates details the pros and cons on a variety of alternative ratemaking issues and designs, the SFV was unique in that it was the only mechanism for which Christensen Associates expressed a "preference."

Under SFV rate design, fixed T&D costs are recovered through flat rates, while variable T&D costs are recovered through volumetric rates.

In contrast, under the current rate design, for residential and small commercial customers, when excluding riders, about 80% of total bills are recovered through volumetric energy charges. When including riders, the percent of the bill comprised of volumetric energy charges is even higher

For such small volume customers, between 76% and 89% of the fixed costs of the six major ERCOT-based distribution utilities are recovered through energy-based volumetric (per kWh) rates, the consultant's report says

In other words, moving to SFV rates would drastically increase the recovery of T&D costs through flat monthly charges paid by REPs, versus the current volumetric rates.

Any such movement to greater flat charges would create further challenges to retail pricing comparisons in the market, which have already come under fire, in large part, due to the treatment of flat charges (or credits) as they apply to creation of a single, average all-in rate for comparison purposes

Additionally, certain consumer representatives, in seeking drastic changes in REP pricing mechanisms, are not only opposed to the REP usage credits which are designed to create a low volumetric rate at 1,000 kWh, but are opposed to any minimum usage fee, or any monthly flat fee (as contrary to energy efficiency)

However, if the amount of flat fees charged to REPs by TDUs increases, the natural pricing reaction from REPs will be to increase minimum usage fees and/or flat monthly fees (with no usage threshold), which are already being criticized in the market. Customers engaged in conservation to lower their bill will not be able to lower their bills by reducing usage, under "rational" pricing of the TDU charges by REPs

As more costs for REPs become divorced from consumption, so will REP pricing become disconnected from per kWh volumetric rates, making requirements to list an average, all-in per kWh rate increasingly meaningless, if not misleading.

As explained by TXU Energy in 2010 comments on a CenterPoint Energy Houston Electric proposal (which was rejected) to raise the fixed customer charge from $2 to $18 (with a $36 fixed charge needed to recover all fixed customer costs in a flat rate), with a corresponding decrease in volumetric rates, similar to SFV, "Customers who use the least amount of electricity, many of which are low income, will be the ones hit hardest by this change."

"CenterPoint [TDU] makes the same argument, but using reverse logic, saying that this rate design means that at higher usage levels customers are better off with a higher fixed Customer Charge as CenterPoint would not be billing REPs as much as it otherwise would for the customer's increased usage," TXU noted in 2010

"Another argument against creating a significantly higher fixed Customer Charge is that the basis for comparing electric prices in Texas is largely based on the cost per kWh and implementing such a large fixed charge is contrary to this basis. To stay in business, REPs will have to include the $18.18 charge in their cost of goods sold. To help ensure recovery of costs, REPs are likely to include a similar large fixed charge in their rate design. Consequently, customers will likely bear the impact of this significant change in rate design. TXU Energy believes that a large and significant change in rate design, such as going from a residential fixed charge of $1.99 to an $18.18 fixed charge should be avoided," TXU said in 2010

Furthermore, TXU undercut the argument that recovering fixed costs via a flat rate is appropriate based on cost-of-service principles, noting that customers' individual costs of service may be vastly different, with some customers having a much higher fixed cost of service, who will be subsidized by other customers paying the same proposed flat monthly charge.

"Moreover, TXU Energy believes that the cost of providing transmission and distribution services to a single family home is higher than providing such service to an apartment unit. TXU Energy bases this assumption on the fact that single family homes are typically spread out over a larger geographic area than a single apartment and likely require more equipment and maintenance, such as tree trimming, than is required for an apartment unit. Therefore, from a fair cost allocation standpoint, it is reasonable to recover a significant portion of the revenue requirement associated with the $18.18 fixed charge on a per kilowatt hour basis, so that locations with higher usage, such as single family homes, pay more of the cost," TXU said in 2010

The consultant's report said that, to decouple cost recovery from load variations, three alternative ratemaking mechanisms are unavailable: SFV rates, revenue decoupling, and Lost revenue adjustment mechanisms (LRAMs)

"To decouple cost recovery from load variations, Texas' basic choice is between a ratemaking alternative (SFV) that mimics competition but requires a significant revision of present rates, and ratemaking alternatives (revenue decoupling and LRAMs) that begin with existing rates but are artifacts of regulation that are relatively burdensome to maintain," the consultant's report 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. The cross-subsidies that are implicit in present uneconomic rates will be unsustainable in the face of this competition. The key 'virtue' of revenue decoupling and LRAMs, indeed the 'virtue' that has induced many states to adopt these alternative ratemaking mechanisms, is that they allow continuation of the present cross-subsidies. The extent to which the day of reckoning can be postponed for revenue decoupling and LRAMs depends upon the extent to which competition from distributed generation can be held at bay," Christensen Associates' report said

"SFV rates have the relative merits of: a) providing a close match between retail price components and the ways (i.e., fixed or variable) that costs are incurred, so that changes in sales lead to roughly equal changes in revenues and costs; b) providing rates that do not need to change with load changes; and c) imposing low administrative burdens on regulators and intervenors. The relative shortcoming of SFV rates is they require significant revisions to present rates, with adverse impacts on low-volume customers who are generally perceived to be low-income customers. To address this shortcoming, SFV rate reform needs to be introduced gradually, preferably with a 'sliding scale' mechanism that assigns lower fixed charges to customers who place relatively low demands on T&D systems," the consultant's report said

Christensen Associates' report says that, "To promote energy conservation, SFV rates, revenue decoupling, and LRAMs can be used to remove a key disincentive to utility promotion of energy efficiency. Revenue decoupling, cost trackers, and performance incentives can be used to encourage energy conservation by consumers."

However, the report glosses over the fact that customers lose the primary motivation for energy efficiency when their T&D bill goes from 80% volumetric charges to 80% flat charges (which cannot be avoided through conservation). Moreover, with scarcity pricing in the ERCOT market, there is ample incentive for REPs to promote conservation, and no need to remove ostensible "barriers" to TDU promotion of conservation

Christensen Associates' report claims, "Ironically, a competitive market would tend toward SFV rate structures, not revenue decoupling or LRAM rates. Competitive markets have many examples of pricing structures in which customers pay a fixed fee that covers the provider's fixed costs and a variable fee that covers the provider's variable costs."

Christensen Associates, however, cites no specific examples of such pricing behavior. Competitive markets are not priced based solely on the provider's internal cost structure, but on consumers' willingness to pay.

There are innumerable examples (and indeed, we'd argue it is the far more common outcome) where consumers pay only a volumetric rate which bundles recovery of both variable and fixed costs, and in which low-volume customers therefore pay a lower share of fixed costs (generally in these cases overhead) -- gasoline, airfare, lodging, groceries. Examples can be cited where customers may be charged a fixed cost in exchange for discounted rates on subsequent purchases (wholesale club), but such mechanisms are not the dominant form of market pricing. More common are rebates for high-volume purchasers, in effect repaying an over-collection of fixed costs recovered through volumetric charges, but such a mechanism is materially different than the SFV design.

Mobile phone and internet may be the best example of services with a flat monthly cost; however, we'd note such pricing is typically all-in, reflecting both fixed and variable costs, unlike SFV, and, again, such pricing is driven by consumer demand (for simplicity), rather than a perfect marriage of provider cost-types with retail pricing.

"Any transition to SFV should consider the potential for rate shock and customer confusion due to the transition to a new rate structure, as patterns of intra-class cost recovery may cause lower-usage customers within a class to see relative bill increases while higher-usage customers see relative bill decreases. Such cost shifts may be mitigated by a 'sliding scale' mechanism that assigns lower fixed charges to historically low-volume customers than to historically high-volume customers. It may also be advisable for a transition to SFV to occur gradually over a period of perhaps five years," Christensen Associates' report said

"To assure rate stability, new alternative ratemaking mechanisms could be phased in over a three- to five-year period. To avoid or mitigate rate shock due to automatic rate adjustments, Texas could place caps on the sizes of such adjustments, particularly rate increases. Rate adjustments that exceed the caps could be deferred for future recovery or refund," Christensen Associates' report said

In late July or early August, PUC Staff plans to hold a public hearing to receive stakeholder comments on the Christensen report. Prior to that public hearing, Staff plans to file a final list of questions for comment.

Staff's preliminary list of questions for discussion at the public hearing includes:

1. Is the Christensen report sufficiently comprehensive or are there ratemaking mechanisms not covered in the report that the Commission should consider?

2. In addition to the findings and recommendations contained in the Christensen report, what further recommendations, if any, should the Commission make to the Texas legislature?

Link to consultant's report (Project 46046)

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