Utilities, higher fixed charges not cure for declining revenues, says ACEEE

Increasing fixed monthly charges is not the solution to avoiding the ‘utility death spiral’ says a senior analyst at the American Council for an Energy Efficient EconUtilities losing profit due to self-generationomy (ACEEE).
In a recent blog posting, Seth Nowak highlighted a “disturbing trend” among US utilities to raise flat customer fees from US$5-10 per month to as much as US$20 in a bid to offset declining sales due to the increasing use of home off-grid generation.

Penalizing energy efficiency

Mr Nowak said increasing fixed charges would impact on customer motivation to be more energy efficient as they would see less impact on their bill. Customers who have already invested in PV panels will also feel penalized; and those households that use small amounts of electricity will end up paying more per month.

He said: “Simply raising fixed charges would be a huge shift in energy policy—there are already two dozen proposals from utilities to regulators around the country—and a change of this magnitude calls for careful analysis.

“Utilities shouldn’t take away customers’ ability to control their electricity bills or dilute the benefits that energy efficiency brings to the nation.

How can utilities recoup costs?

Nowak agrees this is an important issue but says “cost recovery and rate design should be based on comprehensive analysis to maintain strong price signals to encourage efficient use of energy”.

The senior analyst at ACEEE suggests that revenue decoupling, where utility profits are no longer tied to the quantity of energy sales, is an important regulatory foundation that encourages energy efficiency.

Frequent rate cases and financial reserves are additional ways to address revenue stability, as outlined in a recent policy brief by the Regulatory Assistance Project.

Alternatives to higher fixed charges

Increase utility revenues time of use tariffIf rate design changes are still needed in addition to decoupling and frequent rate cases, there are better alternatives to higher fixed charges for all customers. For example, there are demand charges, time-of-use rates, or minimum bills:

  • Demand charges are based on each customer’s contribution to the peak demand, such as on a hot summer day when lots of us are running our air conditioners at the same time (these are well-established for business customers and more recently have been explored as options for certain residential customers).
  • Time-of-use rates are those that make the usage rate we pay for electricity lower during times of low demand, such as in the middle of the night, and higher when there is more demand.
  • Minimum bills apply to the small number of customers below a certain low threshold of usage and guarantees the utility a minimum annual revenue from these customers.

Debunking the death of the utility

Nowak also discards the ‘utility death spiral’ notion as exaggerated.

He said: “ACEEE took a look at three different scenarios and found that even in the most extreme case, which includes levels of energy efficiency now being achieved in only a few states, plus the use of solar electric power that eventually uses nearly all available roof space, national electricity sales decline about only 10% by 2040 (not enough, in our opinion, to cause a death spiral).

He concludes: “In a more likely scenario, sales are essentially flat, and utilities that have relied on rising sales to fuel profits will need to pursue new business models if they want to see profit growth.”