1. EE379K/EE394V Smart Grids: Rates and Pricing
Ingmar Sterzing,
VP, Power Supply and Energy Services, PEC
Ross Baldick, Department of Electrical and Computer Engineering
Spring 2017
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2. Outline Overview Background Cost of Service Rate Design Rate Options
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3. Introduction
Technology and economics are creating new options for consumers to manage how they use electricity.
Consumers can now produce their own electricity, charge their electric vehicle, store electricity in battery systems, or defer or reduce their usage with smart thermostats and home energy devices.
New and lower cost Distributed Energy Resources provide utilities, businesses, and homes with new options for supplying their energy needs
New communication and metering systems are available in today’s distribution system that provide the opportunity to better utilize and incent these new devices and behaviors.
Utilities are increasingly being challenged to design and implement new rates and pricing structures to support these new technologies and services.
Some technologies and behaviors are putting pressure on traditional technologies, utilities, policies, and rates.
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4. Course Objectives
How do utilities charge for their services and recover their costs and investment?
What are the different options available to utilities?
How do utilities continue to earn sufficient revenue to maintain reliable, low cost, and profitable service while also expanding options to incent and capture the beneficial use of new, smart grid technologies?
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5. Rates Are Always Relevant
“Lawmakers give Austin Energy a verbal beating” – Austin American Statesman, April 15, 2015
“Bill could give Austin Energy customers other options” – KXAN, April 15, 2015
“Big industrial customers play hardball on Austin Energy rates” – Austin American Statesman , November 13, 2015
“Businesses, semiconductor plants press Austin Energy for rate cuts” – Austin Business Journal, June 21, 2016
“Suburban Austin Energy customers may get legislative help outside of city limits” – Community Impact Newspaper, March 14, 2017

6. Rates and Pricing Rate Price
A set amount of money collected over time or relative to a volume or number of items
The rate for service is $25/hour
Energy rate $0.05/kWh
Price
Fixed amount of money
The price for service is $50
Service connection charge $10/Month
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7. Not All Utilities Are Equal
Regulated vs Non-Regulated
Regulators
Federal Energy Regulatory Commission (FERC)
State level Public Utility/Service Commissions (PUC or PSC)
Public Utilities
Regulated Monopoly with Regulated Rate of Return
Rates and Pricing Determined by Rate Case
Non-Regulated, Competitive Companies (“Utilities”)
Rules and oversight but no rate cases,
At Risk Rate of Return and Cost Recovery
Restructured ISOs (ERCOT and PJM)
Wholesale Power and Retail Services
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8. 5 Rate Making Steps
Determine Revenue Requirement or Cost of Service to be Recovered by Rates
Separate Costs into Different Functions (“Functionalize”)
Classify the Different Functional Costs By Customer, Demand and Commodity Components
Allocate Costs to Different Services (“Cost Allocation”)
Design Rates
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9. Utility Revenue Requirement
Revenue Requirement (Cost of Service) = Operating Expense + (Capital Value − Depreciation) x Rate Of Return
Revenue Requirement is the utility's total revenue requirement
Op Ex is the utility's operating expenses.
Capital is the gross value of the utility's tangible and intangible property
Depreciation is the utility's accrued depreciation.
Capital Value – Depreciation combined is the rate base or capital investment
Rate of Return is the return a utility is allowed to earn on its capital investment or on its rate base
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10. Functionalize the Costs/Revenue Requirements
Example
Power Supply
Energy and Fuel
Capacity
Delivery
Transmission Delivery
Transmission
Transformation
Distribution Delivery
Substation
Backbone
Metering
Customer
Line Extension
Meter Reading
Records & Billing
Customer Services
Marketing
Total service is made up of multiple functions
Different customers use different levels of the service
Unbundled costs need to be assigned to each of the component services or functions
Unbundling of costs facilitates implementation of separate pricing of individual services
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11. Cost Functionalization
Transmission
Transformation
Line Extension
Power
Supply
Distribution
Demand
Power
Transmission
Energy
Delivery
Substation
Backbone
Metering &
Billing
Capacity

12. Classify Costs Energy Delivery Capacity $/MWh $/MWh $/MW-Year
Power
Supply
Functionalized costs are classified as either fixed or variable
Fixed costs are costs which remain constant regardless of the volume of throughput and are predominately associated with capital investment
Variable costs are costs which vary with the volume of throughput.
Fixed and variable costs are classified as reservation (demand) or usage (commodity)
Energy
Delivery
Capacity
$/MWh
$/MWh
$/MW-Year
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13. Allocation of Classified Costs
Costs allocated to different customer classes – residential, commercial, industrial
Allocation of the total company cost of service to the individual customer classes can provide a revenue requirement target for each customer class, so that each class of customers pays the costs that the utility incurs to serve that class.
Residential
Small Commercial
Large Commercial
Industrial
Includes private households that utilize energy for such needs as heating, cooling, cooking, lighting and small appliances.
Includes businesses whose peak electric demand during any twelve-month period is less than 50 kilowatt (“kW”).
Includes businesses such as retail stores, restaurants and educational institutions with a peak demand of 50 kW or more during any twelve month period.
Includes factories or manufacturing plants and typically have the highest demand for electricity.
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14. Allocation Energy Capacity Demand Energy Demand Fee Power Power
Supply
Distribution
Demand
Power
Transmission
Energy
Capacity
Demand
Energy
Demand
Fee
Residential
Small Commercial
Large Commercial
Industrial
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15. Allocation Factors Fixed Fees Energy Factor Charge ($/MWh or $/kWh)
A fixed charge applied to a specific customer to recover fixed costs associated with their service (connection charge)
A charge to recover a specific cost caused by the customer (paper billing)
Energy Factor Charge ($/MWh or $/kWh)
Unit rate used to recover costs related to energy usage levels
Typically used to recover variable costs
Energy usage can vary widely with season and weather causing fluctuations and variability in revenue
Demand Factor Charges ($/MW or $/kW)
Unit rate used to recover costs based on customers demand or usage of the total system
Typically used to recover fixed costs
Demand can vary by season but is less variable than energy usage
Many different methods can be used to measure demand
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16. Rate Design Options Bundled (one rate) Unbundled (multiple rates)
Energy Charges
Demand Charges
Fixed vs Variable
Cost Based, Pass-Through
Seasonal and Non-Seasonal
Tiered
Time of Use
Fees
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17. Rate Design Principles
Regulated
Equity/fairness to both the utility and the ratepayer
Minimize subsidy and avoid discrimination between customers
Costs should be allocated to the customer causing the cost
Cost based rates
Non-Regulated
Competitive market driven
Buyer Beware
Incentives
Customers respond to rates and prices
Rates and prices can be used to influence behavior
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18. Electric System Value Flow
Power
Supply
Distribution
Demand
Power
Transmission
10,752 GWh
752 GWh
(System Use and Losses)
10,000 GWh
600 $ MM
54 %
120 $ MM
10%
400 $ MM
36%
1,120 $ MM
100%
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19. (System Use and Losses)
Bundled, Energy Rate
Power
Supply
Distribution
Demand
Power
Transmission
10,752 GWh
752 GWh
(System Use and Losses)
10,000 GWh
600 $ MM
120 $ MM
400 $ MM
1,120 $ MM
60 $/MWh
0.06 $/kWh
12 $/MWh
0.012 $/kWh
40 $/MWh
0.04 $/kWh
112 $/MWh
0.112 $/kWh
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20. Bundled, Energy Rate Single Rate Pros Cons $1,120 MM total revenue
10,000 GWh sales
$112/MWh
0.112 $/kWh
Pros
Simple to understand and use
Cons
Does not reflect the underlying costs or cost causation
All customers treated the same, likely to cause subsidy
Revenue highly dependent on energy
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21. Bundled Rate, Total Revenue
Total Usage
Total Revenue
Difference
9,500 GWh
$1,064 MM
($56 MM)
10,000 GWh
$1,120 MM -
10,500 GWh
$1,176 MM
$56 MM
Usage variability can lead to significant fluctuations in total revenue
Low load makes it difficult to collect enough revenue
High load collects too much revenue
Investors and Lenders prefer greater certainty
Customers prefer not to pay too much
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22. Un-Bundled Rates, Energy, and Fixed Fee
Power
Supply
Distribution
Demand
Power
Transmission
10,752 GWh
752 GWh
(System Use and Losses)
10,000 GWh
600 $ MM
120 $ MM
400 $ MM
1,120 $ MM
$20/ Mo. Fee
20 $/MWh
0.02 $/kWh
60 $/MWh
0.06 $/kWh
12 $/MWh
0.012 $/kWh
112 $/MWh
0.112 $/kWh
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23. Un-Bundled, Rates Multiple Rates Power Rate: $0.06/kWh
Transmission: $0.012/kWh
Distribution:
$33.3/Mo. Fee
$0.0333/kWh
Pros
Simple to understand and use
All customers share equally in the fixed costs
Helps collect fixed costs regardless of usage
Cons
Low usage customers pay a higher effective rate than high usage customers
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24. Un-Bundled Rate, Total Revenue, Energy and Fixed Fee
Total Usage
Bundled Energy Only
Fixed Fee
500,000 Accounts
Energy Charges
Un-Bundled Total
9,500 GWh
$1,064 MM
$200 MM
$874 MM
$1,074 MM
10,000 GWh
$1,120 MM
$920 MM
10,500 GWh
$1,176 MM
$966 MM
$1,166 MM
Fixed fee charge of $33.3/Mo. Improves revenue certainty across varying total usage levels
$200 MM is collected regardless of energy served
Customers typically do not like a fixed fee… nothing they can do to control or manage the cost
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25. Demand Charges Highest Demand Level
Demand charges are based on the MW or kW measurement at certain defined times or criteria
Example: Monthly highest demand, Coincident Peak (CP), 12 Mo. Rolling Average highest demand, 4CP, 12CP
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26. Example: PEC Rates
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27. Example: Revenue %
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28. Large Power Commercial, With/Without DG
Delivered Energy
Received Energy
Delivered Energy is the total energy delivered to a Member from PEC during the billing cycle (Member is billed based on Delivered Energy)
Received Energy is the total energy received by PEC during the billing cycle from the surplus over-production of the DG system (Member receives credit for Received Energy)
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29. Large Power Commercial, With/Without DG
Demand Charge
Energy Charges
Production Credit
Net metering of behind the meter, distributed generation may reduce the utilities revenue without reducing the service level/requirements to the customer
Utilities may be required to purchase energy from FERC Qualified Facilities at the utilities avoided cost
Variations can be applied to Net Metering such as banking with monthly or yearly true-ups or value of solar
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30. Time of Use Rates
0.0698
0.0698
0.0677
0.0586
0.0677
0.0586
0.0536
0.0536
0.0426
0.0376
0.0436
0.0390
TOU rates are designed to match exposure to market prices and to send a rate signal to customers allowing customers the option to control and manage their energy use and associated cost
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31. Billing
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32. Transmission Cost of Service TCOS
TCOS is the cost incurred for using the state ERCOT transmission system to deliver power
ERCOT TCOS is based on the average of PEC’s 4 Summer Months Coincident Peak Demands (4CP)
PEC’s official 2016 ERCOT 4CP is 1, MW (1.92% of ERCOT)
TCOS charges in 2017 will be approximately $ M
A 7-13% increase compared with 2016 costs of $64.4 M
PEC passes the ERCOT TCOS cost directly to members through PEC’s TCOS rate currently set at $ per kWh
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33. Transmission Cost of Service TCOS
TCOS rate is $4.44/kW-Mo.
1,303,550 x $4.44 =
$5.78 MM/Mo
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34. Competitive Retail Rates
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35. Pennywise Rate Option
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36. Pennywise TDSP Charges
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37. Penny Wise Rate Option
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38. Homework Exercise:
Rep. Paul Workman (R – District 47), a longtime critic of Austin Energy, filed four bills – (HB1458, HB1459,HB1460, and HB1523) – last week that would target the public utility’s electric rates, downsize its service area, cap its payments to Austin’s city government, overhaul its governance, and allow commercial and industrial customers to shop for a better deal, according to a February 2 report by the Austin American-Statesman.
The four new measures would:
Require the Austin City Council to appoint an independent board to run the utility;
Limit the amount of revenue the utility can provide for the city’s general budget to just 12 percent of utility revenues, which equates to $108 million, roughly the amount provided now;
Transfer Austin Energy’s service area east of the city limits to the Bluebonnet Electric Cooperative; and those west to the Pedernales Electric Cooperative; and
Allow major commercial and industrial customers to ask the Public Utility Commission for permission to buy electricity from other providers if they are cheaper than Austin Energy.
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39. Homework Exercises: 3
As an analyst for the Public Utility Commission of Texas (PUCT) you are asked by a commissioner to evaluate the proposed legislation to transfer Austin Energy (AE) customers to Pedernales Electric Cooperative (PEC)
You are asked to compare the impact to bills of customers in the proposed transfer areas.
Compare the monthly charges for residential customers across various usage levels from 0 kWh to 3,000 kWh using the outside city limits AE residential rate, the PEC residential rate, and the PennyWise residential rate.
For the PennyWise rate assume the follow AE TDSP rate since it is a pass through $10.00 monthly fixed fee and $/kWh energy rate, the power charge is the same as listed in the Pennywise fact Sheet
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40. Homework Exercises: Questions4
Create a table for the three rates showing the total monthly cost ($) and effective rate ($/kWh) for varying monthly usage levels from 0 kWh to 3,000 kWh
Identify the significant differences and potential impacts to customers between the three different rates.
Which residential customers will be better off by switching away from Austin Energy and which residential customers will be better off by staying with Austin Energy? (Hint: think in terms of size and usage)
Identify a potential behavior that would be incentivized by the rate design for each of the three rates.
Which rate option would provide the highest incentive for installing roof top solar? Battery storage? Programmable thermostat?
Do any of the rate options motivate customers to reduce usage during the potential ERCOT TCOS 4 CP events (June-September)?
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41. Outside Austin City Limits AE Residential Rate
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42. PEC Residential Rate Power Cost Adjustment (PCA): -0.014 $/kWh
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