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A New Trend
[Papers & Pubs] [A New Trend]

A New Trend:
Utilities are Raising Small Customers’ Regulated Distribution Rates after Deregulation

William B. Marcus
Principal Economist
JBS Energy, Inc.

A new trend has emerged – increases in regulated distribution rates for small customers after deregulation.

A number of utilities in areas where JBS is active are proposing greater allocations of distribution costs to small customers and higher customer charges, often to levels thought to be extreme a few years ago.

JBS has received new rate proposals of utilities in Alberta, Nevada, and California in the last three months.

All of them show significant increases in customer charges:

  • Nevada Power proposes to collect 100% of distribution rates and 100% of stranded costs in customer charges, with illustrative rates as high as $40 for apartment dwellers and $55 for single-family homeowners, depending on the adopted revenue requirements.  Users of 500 kWh per month could see 50% rate increases under these proposals.
  • Sierra Pacific Power proposes more than doubling the residential customer charge to between $10 and $20.
  • Atco Electric in Alberta proposes a residential customer charge of $21.
  • Even Pacific Gas and Electric, which eliminated its residential customer charge in 1981 and opposed re-imposition of residential customer charges for nearly 20 years, is now proposing a $5 residential customer charge.

The increases in customer charges are accompanied by shifts in cost allocation.  Utilities are now proposing to modify cost allocation to change larger portions of the primary distribution system, which had been treated as demand costs in the past, into customer costs.  This increases residential rates and reduces large commercial and industrial rates.

Some utilities are even ignoring known cost differences across customer classes.  Atco Electric proposes to charge the same amount for meter reading and billing for farm customers whose meters are read once a year and who are billed quarterly) as for industrial customers (with monthly meter reads and billing and complex time-of-use rate options).

Utilities are also shifting costs from transmission to distribution under new FERC guidelines – all 69 kV transmission is now treated as distribution by Southern California Edison, as is all of Sierra Pacific’s radial (largely rural) 60 kV and 120 kV system.   Without highly arcane and technical review of cost allocation methods,  these costs are also likely to be allocated more heavily to small customers after the change, and the potential for higher rural rates than urban rates could rear its ugly head.

Many marketers, who are targeting large customers, are happy to see their customers’ rates decline.  Some are even speculating on future rate design by offering long-term fixed-price deals.  If big customers’ rates decline because costs are shifted onto residential customers, marketers with fixed price deals can put the rate decreases into their own pockets. 

The end result is another hidden cost of deregulation: small customers pay more for the service that remains under regulation.  It happened in natural gas, and it’s coming in electricity.

The tilt of rates toward customer charges has other impacts. 

  1. It insulates the distribution utility from competition from energy conservation as well as photovoltaics and other forms of distributed generation.   Policymakers must consider whether they want to adopt rates deliberately designed to be unfriendly to efficiency and new technologies.
  2. It reduces the demand risk faced by distribution utilities and should therefore result in a significant reduction in the rate of return on distribution wires, particularly when coupled with proposals like Nevada Power’s claim that prepayment should be required.  If regulators were to systematically decrease the return on common equity every time they increased the percentage of revenue received from customer charges, perhaps utilities would be less quick to embrace this trend.

Contact JBS Energy, Inc. if your utilities are making similar proposals and you need help responding to them.


AquaCalc LLC. telephone +1.916.372.0534 e-mail: sales@aquacalc.com

[A New Trend]