2015 ElectriCities Advanced Meter School

Rate Design Goals The two primary goals of rate design are to (a)provide rates that lead to utility revenues matching the revenue requirement and (b) allocate both fixed and variable costs to responsible customers.

Effective Rate Design Goals 1.Minimize complexity, recognizing differing degrees of customer sophistication; 2.Maximize cost predictability and stability for customers and revenue certainty for utilities; 3.Incent utilities to minimize costs; and 4.Incent customers to consume electricity efficiently by minimizing peak demand and/or total consumption.

What Does the Utility Try to Accomplish With Rates? 1.Improve electricity affordability for poor or vulnerable populations (“lifeline rates”); 2.Promote economic development, often by providing lower rates for industrial customers; and 3.Maximize customer choice.

5 Annual Revenue Requirements For an Electric Utility Component Cost Customer Billing $100,000 Power Supply $15,000,000 Oper. & Maint. $6,000,000 _________ Total $21,100,000

6 Annual Revenue Requirements How do you get the money necessary to meet the annual revenue requirements to operate the electric utility? Who do you bill? How much do you bill? What is it based on? You need to perform a Cost of Service Study!

7 Cost of Service Study A Cost of Service Study is performed by an electric utility to ensure that each customer class pays their fair and equitable share of the electric utility’s revenue requirements.

8 Cost of Service Study Customer Categories Residential Customer – A house, condominium, or an apartment. Commercial Customer – Any commercial establishment (store, office, restaurant, warehouse, municipal building, etc.) engaged in a business operation. Industrial Customer – Large energy user which is an industrial facility (factory, processing plant, cold storage, etc.) with a two or three shift operation.

9 Cost of Service Study Allocate, Allocate, Allocate! Each customer class causes a certain amount of cost for the utility. You have to allocate your annual revenue requirements to the customer classes to ensure that each customer class is paying their fair and equitable share of the annual revenue requirement.

10 Cost of Service Study Allocation of Customer Costs Based on Number of Customers Customer Customer Class Customers % Billing Rev. Req. ============ ======== ==== ======= ======== Residential 10, % $100,000$66,200 Commercial 5, % $100,000$33,100 Industrial % $100,000 $700 ______ ______ _______ Total 15, % $100,000

11 Cost of Service Study Allocation of Power Supply Costs Based on Peak Demand Use Peak Demand Pow. Sup. Alloc. Rev. Req. Customer Class (kW) % ($) ($) ============ ======== ==== ========= ======== Residential 17, % $15,000,000 $5,250,000 Commercial 15, % $15,000,000 $4,500,000 Industrial 17, % $15,000,000 $5,250,000 _____ _____ _________ Total 50, % $15,000,000 Note: Peak demand is the highest demand of the year.

12 Cost of Service Study Allocation of Oper. & Maint. Costs Based on Energy Use Energy Use O&M Costs. Rev. Req. Customer Class (kWh) % ($) ($) ============ ========= ==== ========= ========= Residential 61,320,000 30% $6,000,000 $1,800,000 Commercial 59,130,000 29% $6,000,000 $1,740,000 Industrial 84,315,000 41% $6,000,000 $2,460,000 ___________ ____ _________ Total 204,765, % $6,000,000 Note: Energy use is the kWh used annually by each customer class.

13 Cost of Service Study Total Allocation of Customer, Power Supply and Oper. & Maint. Costs Customer Class Ann. Rev. Req. % ($) ============ ========= ====== Residential $7,116, Commercial $6,273, Industrial $7,710, __________ ____ Total $21,100,

14 Cost of Service Study Total Allocated Costs and Unit Cost Tot. Cost Ann. Sales Unit Cost Customer Class ($) (kWh) ($/kWh) ============ ======== ======== ======= Residential $7,116,200 61,320,000 $.116 Commercial $6,273,100 59,130,000 $.106 Industrial $7,710,700 84,315,000 $.091 _________ __________ _____ $21,100, ,765,000 $.103* * Unit Cost is Total Cost divided by Annual Sales.

15 Cost of Service Study “Electric rate design is as much art as it is science.”

Parts of an Electric Bill 1.Service Charge: Constant regardless of electrical energy use. Typically between $5 and $500 per month 2.Energy Charge: charge based on amount of energy (kWh) used 3.Demand Charge: charge based on highest power required during interval 4.Power Factor Charge 5.Taxes, Rebates, and Other Charges

Residential Bill  Small service charge: for High Point = $12.92  Energy Charge: about $0.109/kWh for energy used in the summer and $0.103 /kWh for winter.  Demand Charge: does not apply since household is small user  Taxes, Rebates: varies with user

Commercial / Industrial Billing  Industrial plants can use 1,000 kW or more of power.  Power company must build capacity to meet the maximum load, even if it is used only a few hours per day  air conditioners in the summer.  Peak loads occur infrequently and must be met with expensive generation equipment (i.e., gas turbines), which increases cost to generate power.

Billing Demand 1. The demand interval is usually 15, 30, or 60 minutes (see rate schedule). 2. The maximum value of the power for all intervals in a month is the peak demand. 3. Billing demand = peak demand, unless it is well below historical peaks or contract demand.

Demand Ratchet  Some rate schedules specify that the billing demand is the maximum actual demand for the last 12 months.  It can also be either the current month’s peak demand or 50% of the contract demand.  This is so power companies can recoup investment in power generators

Demand in the rate schedule Note: If you do not specify a ratchet, you will need to specify a minimum load factor over 3 to 4 months of the year!!

Efficiency-Inducing Rate Options  Inclining block rates: Rates that increase at higher levels of electricity consumption  Seasonal rates: Rates that vary by season  Time-of-use rates: Rates that vary by time of day and day of the week  Critical peak pricing: Programs allowing the utility to dramatically increase rates on short notice a predetermined number of times per year  Real-time pricing: Rates that adjust in real-time based on wholesale electricity costs

Other Rate Options  Declining Block – Rates decrease as usage increases.  Load Factor Rates  Double tiered schedule based on ratio of kWh/kW demand, then sub-tiered based on energy usage within kWh/kW tier.  These rates are difficult to compute, but generally reward companies that operate more hours and have flatter power profiles.

Inclining block rates

Seasonal rates

Time of day (use) rates

Time of day (use) rates-notes  Time of use benefits companies that work seven days per week and manufacture at night.  Costs can be reduced by scheduling operations around peak periods – load shifting.  Costs can be reduced by utilizing thermal storage for HVAC system and operating equipment during off-peak periods.

Critical peak pricing

In/declining block

Load factor rate

Common Misconceptions  High Load Factor Customers are Good Customers/Low Load Factor Customers are Bad  No customers are Bad Customers if rates are set properly Load Factor is a ratio between peak demand (kW) created during the month by customer and the total kWh’s used by the customer in the month

Load Factor  Load factor is average fraction of peak electrical demand used by a facility.  LF is ratio of average power consumption to maximum power consumption.  LF = (kWh/period) / (peak kW x hours/period)  Load factor can be used to predict of how many shifts per day a plant is running or to gauge the occupancy of a building.

How Load Factor Affects a Bill Percent Load Factor Cost per kWh

Economic Development Rates  Can operate at a loss in early years.  Should have a sunset clause in them.  Contractual obligations if either party does not live up to their promises.

ED Rate

Power Factor  Some utilities will charge for power factor.  Power factor is the phenomenon of peak current draw being out of phase with peak voltage draw.  This causes the power company to have to supply more power than is registered on the meter.  Major causes  electric motors that draw current for magnetizing the windings (inductive loads)

Summing Up: Path of Rates and Rate-Related Programs

Electricity Costs Source: U.S. Dept. of Energy, Annual Energy Review 2008, Report No. DOE/EIA-0384(2008)

Economic Development Site Selection Factors 1. Labor Costs 2. Highway Accessibility 3. Availability of Skilled Labor 4. Availability of Advanced ICT Services 5. Occupancy or Construction Costs 6. Energy Availability and Costs 7. Corporate Tax Rate 8. Availability of Buildings 9. Tax Exemptions 10. Low Union Profile From 2014 EC Annual Meeting, Presentation by Mark Williams, Strategic Development Group; His Source, Area Development: 2013

Generally, a customer will want the cheapest rate they can get with or without the least amount of change in their normal business practices.