Unfortunately, it hasn’t often been the case recently that I get to write about things that I’m excited about that are happening at the Public Utilities Commission (PUC). But when progress happens, it’s important to call it out.
As such, the goal of this blog post is to call attention to a pending Settlement Agreement that has been proposed in Unitil’s rate case. A rate case is generally where an electric distribution utility officially asks the PUC for permission to increase how much it charges customers to pay for the lower voltage poles and wires that carry electricity from the transmission system to homes and businesses. These are important dockets where a lot of state energy policy is interpreted, though they often fly under the radar, since all of the arcana of PUC ratemaking can be difficult for the lay public to follow.
But there’s no reason that these rate cases *need* to be confusing, and so let’s pull back the veil a bit, shall we? Most of the rate cases are focused on the utilities recovering costs for system upgrades and maintenance that they have incurred since the last case. But sometimes forward thinking changes are made as well. Here’s what’s in the rate case that we’re excited about.
You don’t have to hang out in Energy Policy Land very long to hear people complain about what many consider to be the central flaw in the electric utilities’ business model: “throughput incentive.” This is the idea that utilities only make more money when they sell more electricity, and so even though it might be in society’s best interest to use energy efficiently, utilities profit motive entices them ultimately to do whatever they can to sell more KWhs.
However, it need not be so. Let me introduce you to a little idea called “Decoupling.” If you want to dive very, very deeply into this idea you can read all about the various methods in this exhaustive report by the Regulatory Assistance Project, but at its core the idea is fairly simple.
Regulated utilities have something called a revenue requirement--the amount of money they need in order to provide their public good and a “reasonable return” for their shareholders. Regulators set that revenue requirement, but then in normal ratemaking, they divide the revenue requirement by the number of KWh a utility is expected to sell to set your electric rates.
In revenue decoupling, the regulator simply says: “we set the revenue requirement…and then that’s what you get.” There’s a lot of ways to go about it, but all of them amount to “if you collect too much revenue you give some back, but if you collect too little we let you collect a little more later.” Under decoupling, utilities now no longer have an incentive to sell extra electricity just to earn a little extra profit. When combined with other policy tools like performance incentives for hitting energy efficiency goals, their business model becomes better aligned with what’s good for the economy, society, and environment.
Liberty Utilities was the first to undergo decoupling in NH. If the settlement is accepted Unitil will decouple as well. That’s a good thing.
All House TOU Rates
Very little electricity is stored. The vast majority of electricity is generated and consumed simultaneously, and the grid must always be kept in balance. This enormous balancing act means that grid operators need to deploy a huge variety of resources with staggeringly different costs in order to match demand with supply. On one end of the spectrum wind, solar and hydropower have no fuel cost, and on the other end of the spectrum are power plants that burn ultra-refined jet fuel. The higher cost resources, which tend to be used only during the periods of high electrical demand, also tend to have much larger climate and environmental impacts. Reducing the high cost, highly polluting resources will have benefits across society. These high cost resources, when dispatched also tend to set the electric rates that we are charged.
Despite the impact of these high cost resources, most NH ratepayers spend the exact same amount for every kilowatt-hour they purchase. This means that a million plus NH residents have absolutely no incentive to modify their behavior in very simple ways that have the potential to massively ease the stress on our electricity infrastructure.
A very simple solution to this is to create an electric rate that provides households with a “price signal” that encourages them to shift their energy consumption to those times of day when electric prices are lowest. This can be done by charging people different amounts for electricity at different times of day. (Even more exciting is the idea of a “transactive energy rate” but we’ll leave that discussion for another blog post.) We have been debating the merits of these Time of Use (TOU) rates for decades now, but finally the utilities seem to be willing to give them a try and Unitil includes such an option in their rate case.
The basic take-away from the earliest pilots of TOU rates is that the bigger the price difference between “on peak” and “off peak” hours, the more effective they are at driving consumer behavior. The biggest changes in behavior come when the cost of electricity during peak hours is at least five times more expensive than off peak hours.
And sure enough, Unitil’s TOU rate is right on target. The “illustrative” rate example they included in their filings has a ratio of 5.22 : 1 between on and off peak. For homeowners that opt in to this rate (it’s not mandatory), this means that they will have an opportunity to use electricity during some periods of the day that are deeply discounted compared to current default electric rates. As more people adopt these rates and respond to price signals, less of the expensive dirty generation will be called into service, providing economic, public health, and environmental benefits.