|
Server : Apache/2.4.62 System : FreeBSD fbsdweb2.web.rcn.net 14.1-RELEASE FreeBSD 14.1-RELEASE releng/14.1-n267679-10e31f0946d8 GENERIC amd64 User : www ( 80) PHP Version : 8.3.8 Disable Function : NONE Directory : /domains/enrgy/articles/ |
Upload File : |
<html>
<head>
<title>Rate Design in a Competitve Environment</title>
</head>
<body style="font-family: Arial" vlink="#808080">
<div align="center"><center>
<table border="0" cellpadding="8" cellspacing="0" width="98%" bgcolor="#000000">
<tr>
<td width="100%" valign="middle"><a name="top"></a><img src="../images/pmamagsm.gif" alt="PMA Online Magazine" border="0" align="right" WIDTH="229" HEIGHT="100"></td>
</tr>
</table>
</center></div><div align="center"><center>
<table border="0" cellpadding="8" width="98%">
<tr>
<td width="25%" valign="top" align="center"><!--webbot bot="ImageMap" rectangle="(14,297) (97,322) http://www.powermarketers.com/adrates.html" rectangle="(11,230) (95,257) http://www.powermarketers.com/pmajobs.htm" rectangle="(12,163) (96,189) http://www.powermarketers.com/main.htm##_parent" rectangle="(12,95) (96,121) http://www.powermarketers.com/power2.htm##_blank" rectangle="(11,29) (96,54) ../pmamag.htm" src="../images/magmenu.gif" alt="PMA OnLine Magazine Menu" border="0" align="center" startspan --><MAP NAME="FrontPageMap"><AREA SHAPE="RECT" COORDS="14, 297, 97, 322" HREF="http://www.powermarketers.com/adrates.html"><AREA SHAPE="RECT" COORDS="11, 230, 95, 257" HREF="http://www.powermarketers.com/pmajobs.htm"><AREA SHAPE="RECT" COORDS="12, 163, 96, 189" HREF="http://www.powermarketers.com/main.htm" TARGET="_parent"><AREA SHAPE="RECT" COORDS="12, 95, 96, 121" HREF="http://www.powermarketers.com/power2.htm" TARGET="_blank"><AREA SHAPE="RECT" COORDS="11, 29, 96, 54" HREF="../pmamag.htm"></MAP><a href="../_vti_bin/shtml.dll/articles/coates.htm/map"><img src="../images/magmenu.gif" alt="PMA OnLine Magazine Menu" border="0" align="center" ismap width="110" height="350" usemap="#FrontPageMap"></a><!--webbot bot="ImageMap" endspan i-checksum="45052" --><p><a href="../searchpma.htm"><img src="../images/archives.gif" alt="Archives Search" border="0" align="center" WIDTH="70" HEIGHT="40"></a></p>
<p> </p>
<p> </p>
<p> </p>
<p> </p>
<p> </p>
<p> </p>
<p> </p>
<p> </p>
<p> </p>
<p> </p>
<p> </p>
<p> </p>
<p> </p>
<p> </p>
<p> </p>
<p> </p>
<p> </p>
<p> </p>
<p> </p>
<p> </p>
<p> </p>
<p> </p>
<p> </p>
<p> </p>
<p> </p>
<p> </p>
<p> </p>
<p> </p>
<p> </p>
<p> </p>
<p> </p>
<p> </p>
<p> </p>
<p> </p>
<p> </p>
<p> </p>
<p> </p>
<p> </p>
<p> </p>
<p> </p>
<p> </p>
<p> </p>
<p> </p>
<p> </p>
<p> </p>
<p> </p>
<p> </p>
<p> </p>
<p> </p>
<p> </p>
<p> </p>
<p> </p>
<p> </p>
<p> </p>
<p><a href="coates.htm#top"><img src="../images/b-t-top.gif" alt="Back To Top" border="0" WIDTH="71" HEIGHT="35"></a></td>
<td width="75%" valign="top"><font SIZE="5"><b><p ALIGN="left"></b></font><strong><big><big>Rate
Design In A Competitive Environment</big><br>
by Donald Coates, CPA</big></strong><i></p>
</i><p ALIGN="left"><big>Senior Consultant,</big><br>
<big>Snavely King Majoros O'Connor & Lee, Inc</big><i>.</i><br>
<small>(<em>originally published by PMA OnLine Magazine: 05/98</em>)</small></p>
<p>Most people have their cars repaired, like me, on a bundled basis (complete job, parts
and labor). However, if the mechanic�s invoice did not itemize parts and labor, many
would wonder "Did I get what I paid for?". The traditional parts and labor
invoice allows the consumer to test the reasonableness of the total charges by providing
an itemized list that can be considered item by item. The option of consumers to consider
what is being paid for is vital, even if there is no call to the parts house to get a
comparable parts price, or a trip to the library to look up the standard labor hours. The
occasional unusually high utility bill will sometimes prompt a consumer meter read, or
some other attempt to investigate the charges from the utility company. However, in the
main, Utility Commissioners have always done the consumer reasonableness test of utility
prices for consumers as part of monopoly regulation. This permitted bundled service with
bundled prices (commodity and delivery combined). As retail wheeling becomes widespread,
the pricing and itemized billing of individual components of electric service will be a
necessary element of the market place. Consumers in the new electric market place will
want the delivery charges stated separately from the commodity charges. This will give
consumers the equivalent of the mechanic�s parts and labor invoice.</p>
<b><u><i><p></i></u><strong>Commodity and Delivery</strong></b></p>
<p>The current trend is for separated delivery and commodity charges to be isolated into
four functional categories; generation, transmission, distribution and services. Consumers
in some jurisdictions may see charges for other items, like transition charge or DSM
programs charge. These are creations of regulation and not part of the coming competitive
market. For most consumers, between 65 and 90 cents of every electric service dollar will
be spent on the commodity, relegating the delivery and services charges to footnotes on
their commodity billing. Services were included as a separate function to reflect advances
in metering technology and the entry of some competitive commodity providers, like Enron,
into the meter read and bill market.</p>
<p>The U.S. Department of Energy�s Energy Information Administration publishes Financial
Statistics of Investor-Owned Electric Utilities as reported on FERC Form 1. Prices per kWh
for each of the four functions were developed from the December 1995 issue and are shown
for all reporting IOU�s in Figure 1. The 1995 data was selected to minimize the
possibility that reclassification of costs from generation to distribution and
transmission had occurred.<img src="../images/coates1.gif" alt="coates1.gif (4880 bytes)" border="0" WIDTH="446" HEIGHT="340"></p>
<p>The data amply illustrates why moving generation to a competitive market will provide
an opportunity for consumer savings <u><i>if rate unbundling remains true to the cost of
service.</i></u> With less than 30% of current IOU rates belonging to non-generation
functions, consumers have the opportunity to benefit from a competitive market in
generation. Commissions and Legislatures must be cautious of attempts by utilities to
shift generation costs to distribution rates.</p>
<b><u><i><p></i></u>A Case Study: Rhode Island and Newport Electric in Compliance with the
first new legislation</b></p>
<p align="center"><font face="Arial" color="#0000FF"><b>Figure 2</b></font></p>
<p><img src="../images/coates.gif" alt="coates.gif (7510 bytes)" border="0" WIDTH="500" HEIGHT="334"></p>
<p>In Rhode Island, Utilities were required to file restructuring plans by January 1,
1997. Newport Electric Corporation offered an unbundled tariff by simply adding a
generation charge to the existing tariffs by splitting the bundled kWh rate. The Navy and
other intervenors protested that the tariffs in the January 1, 1997 filing did not meet
the unbundling requirements of the new law (see inset summary by J. Campbell). The Navy�s
consultant proposed a revenue neutral rate design that mirrored the Company�s unaltered
class cost of service study. The Commission found that the Company needed to identify the
conservation and transition charge components of the unbundled rates. The Company
responded with a compliance filing that would charge the Navy $2.14 million annually for
distribution services. However, the cost of service study indicated the Navy�s
distribution system cost at the usage level consistent with the compliance filing is $0.74
million annually. </p>
<p>Figure 2 depicts the rate design comparisons graphically. The Commission Order in
Docket File No. 2514 accepted a <u>compromise</u> offered by the company to comply with
the new legislation. As the chart clearly shows, the true cost of service was compromised
by taking half of what was needed for transition and conservation charges from
transmission and distribution and half from generation. Because transition and
conservation are costs related to generation and the competitive market, taking half of
the revenues needed for these from generation charges has the effect of increasing the
transmission and distribution charges above costs and subsidizing the generation portion
of the utility. </p>
<p>Compromises that worked well in a fully regulated environment, by balancing the needs
of all parties, do not work as well in emerging competitive markets. All of the transition
and conservation charges should have come from transmission and distribution to foster a
competitive market. Any reduction of the generation costs below the 3.528 cents per kWh
originally proposed by Newport will create cross subsidies from the distribution system to
generation, thus inhibiting an emerging competitive market. By reducing generation rates
below full costs and keeping transmission and distribution rates above true economic
costs, the utility has an advantage over any potential competitor.</p>
<p>A similar change occurred with the residential unbundled tariff. Figure 3 illustrates
the four functional categories for Newport using data extracted for Newport from the same
data used in figure 2. Compare the ratio of generation to distribution before competition
to the ratio shown for the current residential tariff. The tariff provides 2.3 mills per
kWh for conservation and 2.8 cents per kWh for transition charge. These charges were
included with distribution for purposes of this illustration, because they are charged to
all distribution customers.</p>
<b><u><i><p></i></u>Distribution Rate Design</b></p>
<p>Another element of the Newport tariffs that should be questioned, is usage sensitive
distribution rate design. There is no significant variation in operating costs when usage
varies for a given size of transformer, wire and meter. Usage sensitivity made sense in
bundled rates that tracked generation costs, which were the overwhelming majority of costs
to be recovered. However, in the new unbundled environment the distribution system
requires more revenue stability to cover the continuous cost of the distribution system
that does not vary with usage. The only usage sensitive element of the distribution system
costs is line loss. The multiple sources of line loss vary among utilities on such factors
as customer density, load curves, weather, system design, transformer type, vegetation
density, and system condition. The factors having the most influence on the marginal level
of line loss are directly controlled by management and thus represent legitimate business
risk and opportunity. </p>
<p>Newport's 1998 annual adjustment to rates under the 1996 restructuring act requirements
produced a refund to ratepayers. A possible explanation for the 'excess earnings' that
created the need for the refund is the usage sensitive rate design for distribution costs.
If usage sensitive rates for distribution are sufficient to cover the fixed distribution
system costs during low usage periods, then rates are excessive during high usage periods.
Newport's <strong>UNBUNDLED SMALL SECONDARY VOLTAGE GENERAL SERVICE RATE G-1</strong> is
an example. This tariff provides for 5.647 cent per kWh distribution energy charge. This
is in a tariff that also provides usage sensitive rates for conservation (0.23 cents per
kWh), transition charges (2.8 cents per kWh) and generation (3.987 cents per kWh). What is
the rationale for a kWh usage sensitive rate for delivery costs that are not usage
sensitive? </p>
<p><strong><b>How can marketers be sure competition will be possible?</b></strong></p>
<p>If unbundled rates reflect the true cost of service for the unbundled functions then
competition can develop. New and creative ways of generating and delivering electricity
will emerge. Consumers and businesses will see their energy costs lowered and the economy
will be stimulated. These benefits depend on the development of competition for all types
of energy services not just generation. This competition will make <u><i>adaptive </i></u>incumbent
utilities more profitable than ever as the demand for new services grow and the hindrances
of regulation are lifted. </p>
<p>Historical FERC form 1 data and previously filed Cost of Service Studies can provide a
solid basis for establishing the ratio of costs between Generation, Transmission and
Distribution. Commissioners and Legislators should be alerted to guard against incumbent
utilities shifting generation costs to transmission and distribution costs when generation
is opened to competition. Marketers need to actively participate in unbundling proceedings
to assure they have access to Consumers on a basis comparable to the incumbent utility. </p>
<p>Deregulation and competition are good - <u><b>if</b></u> competitive markets are
created. Marketers are a key players in competitive markets and should play a role in
developing the competitive environment. The importance of the billing to the consumer can
not be underestimated. One of the fastest growing Cellular Telephone resellers uses a
unique billing system as their competitive edge. The success of the transition from
regulation to competition depends on many factors, one of them is unbundling of costs and
rates consistent with legitimate cost of service.</p>
<b><p align="center">Synopsis of Unbundling Provisions in <br>
Rhode Island Retail Wheeling Law<big><br>
</big>By James Campbell</p>
</b><p>On August 7, 1996, Rhode Island became the first state to legislate retail access
for electricity. When the <i>Utility Restructuring Act of 1996</i> became law (<b>Chapter
316, 96-H8124B</b>), unbundling of services and rates were seen as an integral part of a
properly functioning competitive market. Electric utility distribution companies were
required to file restructuring plans by January 1, 1997. The following elements were
essential:</p>
<blockquote>
<ul>
<li>Plans to transfer the ownership of generation, transmission and distribution facilities
into separate affiliates of the regulated distribution company.<br>
</li>
<li>The transfers would take place at a price equal to the book value'net of depreciation
and deferred taxes' on the date of the transfer.<br>
</li>
<li>Any wholesale supplier (generation affiliate) wishing to collect stranded costs through
the transition fees or contract termination fees must divest itself of 15 percent (or
greater if required by an adjoining state) of its non-nuclear generation capacity through
lease, sale, spin-off or some other method. <b>H6288</b>, passed in July 1997,<b> </b>increased
that requirement to 100 percent.</li>
</ul>
</blockquote>
<p>A performance based regulation (PBR) rate plan for each regulated distribution company
that would hold rate increases to the level of inflation from January 1, 1997 to December
31, 1998. No increases from purchase power adjustment clauses would be allowed during this
period.</p>
<p align="left">The Act also laid the groundwork for reporting this information to the
consumer. Each bill must contain (Section 39-3-37.3):</p>
<ul>
<li>The total number of kilowatt hours consumed<br>
</li>
<li>The total cost of distributing the consumer power to the customer.<br>
</li>
<li>Transition charges<br>
</li>
<li>Conservation Costs<br>
</li>
<li>The total cost of transmitting the consumed power to the appropriate distribution site.<br>
</li>
<li>All applicable credits<br>
</li>
<li>Applicable street light rental costs<br>
</li>
<li>Applicable taxes<br>
</li>
<li>The cost of power delivered</li>
</ul>
<p>All other costs charges or fees added to the bill or statement</p>
<blockquote>
<hr width="98%" color="#FFFF00" size="1">
<b><p align="center"><font face="Arial">About Donald Coates and <br>
Snavely King Majoros O'Connor & Lee, Inc.</font></b></p>
<p><font face="Arial"><small>Donald Coates came to Snavely King from the Navy Department
where he worked in the Rate Intervention Department of the Naval Facilities Engineering
Command. There Mr. Coates administered Navy Department consultant�s testimonies filed in
California, Pennsylvania and Rhode Island electric restructuring proceedings. He also
participated as principal analyst in negotiation of utility contracts not subject to state
utility commission regulation. Prior to the Navy department, Mr. Coates spent five years
as Chief of Finance and Accounting at the Delaware Public Service Commission and five
years as a CPA Auditor for the Oklahoma Corporation Commission. </small></font></p>
<p ALIGN="JUSTIFY"><font face="Arial"><small>Snavely King Majoros O'Connor & Lee, Inc.
(SK) is an economic and management consulting firm formed in 1970 to perform economic
analysis of the costs, revenue, services and rates of regulated enterprises. Today, SK
provides technical and management advisory services in the transportation and fixed
utilities industries to clients ranging from AT&T and Norfolk & Western Railway to
Public Service Commissions and Consumer Advocates. The SK team building process brings
analytical and audit results to policy and decision makers, in clear concise terms, making
SK's services valuable to the client and all stakeholders in the matter. The Snavely King
client list shows performance based on reasoned analysis since we have represented diverse
interests, such as AT&T, MCI, Industry, Commissions and consumer advocates, with the
same fundamental positions on technical issues.</small></font></p>
<blockquote>
<p ALIGN="JUSTIFY"><font face="Arial"><small>Snavely, King, Majoros, O'Connor & Lee,
Inc.</small><br>
<small>1220 L Street NW, Suite 410</small><br>
<small>Washington, DC 20005</small><br>
<small>(202) 371-1111 Tel</small> | <small>(202) 842-4966 Fax</small></font></p>
<p ALIGN="JUSTIFY"><font face="Arial"><small>Michael J. Majoros: (202) 371-9153 </small></font></p>
<p ALIGN="JUSTIFY"><font face="Arial"><a href="mailto:[email protected]"><small>[email protected]</small></a></font>
<font color="#000080">|</font> <a href="http://www.snavely-king.com"><font face="Arial"><small>http://www.snavely-king.com</small></font></a></p>
</blockquote>
</blockquote>
</td>
</tr>
</table>
</center></div>
<p align="center"><a href="coates.htm#top"><img src="../images/b-t-top.gif" alt="Back To Top" border="0" WIDTH="71" HEIGHT="35"></a></p>
</body>
</html>