The Rate Exchange: June 2024

Welcome to the inaugural issue of The Rate Exchange. Brattle’s team of experts is constantly engaging with our diverse client base on innovative electricity ratemaking matters, and we want to share insights from those engagements with you to advance the industry’s knowledge in this space.

In this newsletter, we plan to regularly share observations from recent projects, reactions to new industry developments, conversations with industry leaders, and more – all with a specific focus on ratemaking. Each issue will conclude with a few personal notes of interest.

This inaugural issue covers:

• A creative solution to combining time-of-use (TOU) rates with inclining block rates
• An approach to modernizing a prevalent legacy commercial and industrial (C&I) rate construct
• The relationship between rate design and heat pump economics

Can Inclining Block and TOU Rates Get Along?

By Ryan Hledik (Principal | San Francisco)

Whether you love ’em or hate ’em, there’s one thing most people can agree on when it comes to inclining block rates: Once they’re in place, they’re hard to move away from.

The problem is that moving away from an inclining block rate almost guarantees a bill increase for the majority of the utility’s customers who are subject to the rate change. Mathematically, removing the pricing tiers means a number of small users of electricity will experience a bill increase, and a number of large users will experience an offsetting bill decrease. Those optics can be hard to overcome.

This challenge is preventing utilities from moving to other beneficial rate designs, such as time-of-use (TOU) rates. However, BC Hydro recently rolled out an elegant solution to the problem. The Canadian electric utility has found a way to preserve the block rate while still giving customers easy-to-understand time-varying price signals.

BC Hydro’s approach is to provide a -5 cents/kWh discount on all usage during off-peak hours and impose a +5 cents/kWh surcharge on all usage during peak hours. The result: The underlying inclining block rate is preserved, the TOU pricing is symmetrical and easy to understand, and the definition of the peak and off-peak periods allows the surcharge and discount to be revenue neutral.

An added benefit of this approach is that it can be a first step toward gradually moving away from an inclining block rate (e.g., to facilitate electrification goals). The price differential between the blocks can be reduced incrementally over time without impacting the time-varying price signals.

Brattle had the privilege of working with the BC Hydro team to develop this approach, and we think it could catch on in other jurisdictions that are considering default TOU rates. Evergy has a similar rate offering in Missouri, and the California IOUs offer a variation as well.

The British Columbia Utilities Commission approved BC Hydro’s rate design in December 2023. You can find more information about the rate here.

Can the Wright Rates Be Wrong for the System?

By Long Lam (Managing Energy Associate | Washington, DC)

When Arthur Wright, an early utility rates engineer, introduced a “duration-based tariff” in the late 19th century, horse-drawn carriages were among the most common modes of transportation. Alexander Bell won the first US patent for the telephone some years prior, around the same time Thomas Edison invented the phonograph. You get the idea – duration-based tariffs, also known as hours-use tariffs, have been around for a while.

When coming up with the idea of duration-based tariffs, the problem as Wright saw it – and his proposed solution – was straightforward. It costs money to build energy infrastructure and acquire fuel to generate electricity. To encourage high and efficient utilization of the power system, Wright’s rate charges a customer by the number of “hours use,” which is calculated by dividing the customer’s total monthly kWh energy consumption by their maximum kW demand in that month. A customer with a high number of hours use (i.e., high load factor) pays a lower rate relative to one with a low number of hours use. As evidence of its allure and durability, this hours-use tariff is still in place today as the default for many commercial and industrial (C&I) customers across the country.

But the times they are a-changin’. As more renewable energy resources are being added to the grid, when a customer draws power from the system is as important as how much power that customer consumes. For example, at times when solar or wind energy resources generate more electricity than the system can absorb, efficient price signals should encourage customers to use more energy during those periods.

Recognizing the need to modernize C&I rates, Evergy recently embarked on a journey to unlock demand-side resources while providing customers in the Midwest with rate options to manage their energy usage according to their preferences. Late last year, Kansas regulators approved the utility’s plan to transition its C&I customers away from hours-use rates toward TOU rates, where clear and actionable price signals also reflect system costs. Mindful of potential adverse bill impacts and bill volatility, Brattle supported Evergy in developing a plan to facilitate a smooth transition for all C&I customers.

Only 11% of C&I customers in the US were enrolled in time-varying rates of any kind as of 2022, but we expect these rates to play a growing role in utility initiatives to modernize C&I rate offerings. As the electricity system continues to evolve, the load flexibility enabled by TOU rates can play a pivotal role in encouraging optimal customer consumption and delivering customer benefits.

Can Heat Pump Economics Be Improved Through Rate Design?

By Akhilesh Ramakrishnan (Managing Energy Associate | Toronto) and Rohan Janakiraman (Senior Energy Analyst | Washington, DC)

It turns out rate design can play an important role in improving the economics of heat pump ownership – without introducing a subsidy or a technology-specific rate. The solution we’re talking about is time-varying rates that are more reflective of the underlying costs of the electric system.

In most of the Northeast, where several states are hoping to spur building electrification, electric grids are currently summer peaking. This means that many regions have spare T&D grid capacity in the winter. However, many T&D electricity rates do not vary seasonally. As a result, heat pump customers – who consume a lot of their energy in the winter  – could be overpaying.

There’s more. Grid capacity is typically sized to meet peak evening cooling loads. This means there is a lot of spare capacity – and a low cost – to add overnight load. Heat pumps do a lot of their work at night and early in the morning. Again, the result is that heat pump customers may currently be stuck paying more than they should for their heating.

Fortunately, regulators and utilities are starting to address this issue. One particularly promising fix is to design a time-varying rate that appropriately reflects seasonal and intra-day variations in marginal electricity costs, thereby allowing heat pump customers to pay a smaller (and more appropriate) share of total electric system costs.

We recently helped two of our utility clients in New York implement this solution. For one utility, we designed a new, seasonal TOU rate and showed that appropriately reflecting the seasonality of costs could make a large enough impact to make heat pumps cheaper than natural gas heating for an additional 24% of their customer base.

The second utility already had several time-varying rate options and wanted to know which option would be most beneficial for heat pump customers. We helped them analyze the usage characteristics of their heat pump customers and found that, while any of their time-varying rates would be beneficial, their demand-based seasonal rate would be particularly beneficial for heat pump customers. We described the findings of this analysis in a white paper we wrote for the Energy Systems Integration Group (ESIG) last year.

As states work toward their electrification and decarbonization goals, figuring out how to make heat pump economics work for customers will grow in importance. While modernizing electricity rate design is only one of several necessary ingredients to facilitate beneficial electrification, it is a meaningful – and fair – step in the right direction.

Updates from the Team

• Congratulations to Sanem Sergici (Principal, Boston) for receiving a 2024 ESIG  Excellence Award from the Energy Systems Integrations Group for her work to align customer pricing with grid needs.
• Of note, Adam Bigelow (Energy Specialist, Boston) recently used his three-month sabbatical to bike across the entire US, starting in Oregon and ending in Virginia. Adam’s (often hilarious) Instagram posts documenting the adventure can be found here – he had over 20,000 followers by the end of the trip!
• Rohan Janakiraman (Senior Research Analyst, Washington, DC) will be attending the NYU Stern School of Business in the fall. We have no doubt he will do phenomenally in the Big Apple.

Over the past 15 years, we have worked with more than 60 clients on over 100 studies on retail ratemaking issues across a range of jurisdictions throughout North America and abroad. During that time, Brattle consultants have testified or submitted regulatory filings on ratemaking issues in more than 15 states or provinces and have appeared before various legislative bodies and regulatory commissions. As a result, we bring on-the-ground experience, perspective, and lessons learned from a broad range of regulatory and market environments.

Our ratemaking services include cost-of-service studies, pilot design, rate design, system impact analysis, bill impact analysis, consumer preference assessment, benchmarking, transition strategy, and regulatory and stakeholder support.