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OPUC: SFV Rate Design Favored By TX Consultant Would Stifle Innovation, Not a "Competitive" Design
August 09,2016 A straight-fixed variable (SFV) rate design preferred by a consultant's report to the Public Utility Commission of Texas on alternative ratemaking would stifle innovation by removing incentives for energy efficiency, and is not a "competitive market solution" as claimed in the report, the Texas Office of Public Utility Counsel said in comments to the PUCT. As first reported by EnergyChoiceMatters.com in June, the SFV design was unique in that it was the only mechanism among several discussed in the consultant's report for which the consultant expressed a "preference." Under SFV rate design, fixed T&D costs are recovered through flat rates, while variable T&D costs are recovered through volumetric rates. In contrast, under the current Texas rate design, for residential and small commercial customers, when excluding riders, about 80% of total bills are recovered through volumetric energy charges. When including riders, the percent of the bill comprised of volumetric energy charges is even higher. In other words, moving to SFV rates would drastically increase the recovery of T&D costs through flat monthly charges paid by REPs, versus the current volumetric rates. OPUC criticized the consultant's report, "which seems to focus on reducing the risk of utilities without due consideration of ratepayers." "In particular, the report claims that it is important to remove disincentives for utilities to offer energy efficiency programs and considers that the SFV method will do that, but the report gives little mention of the disincentives to ratepayers to invest in energy efficiency that are imposed by SFV," OPUC said OPUC blasted an SFV rate design by saying such a design also: • Would reduce the ability of customers to control their bills by controlling their usage. • Would disproportionately harm residential customers with lower incomes. • Does not reflect cost. Most distribution costs are caused by demand, and are greater for larger users. • Knowingly would cause small users to subsidize large users within both the residential and small commercial classes. "In contrast, the current rate design of collecting demand-related distribution costs in energy rates for residential and small commercial customers is fair and cost-based and should not be changed," OPUC said. OPUC attacked the fallacy that SFV should be favored because it is imputatively a "competitive" market rate design. "Fixed charges are a product of regulation, just as are decoupling and LRAM [Lost Revenue Adjustment Mechanisms]. We do note that some organizations have voluntary fixed charges in exchange for lower costs of goods (e.g., membership stores like Costco and Sam's Club). But customers do not have to choose them; the market provides alternatives that allow access to goods without the fixed charge. Other industries that have very low costs of providing additional units of service may bundle all or most of their costs into a single bill that includes both access and service provided within limits (e.g., cell phones, basic cable). However, most competitive industries with significant fixed costs such as oil refineries, airlines and hotels do not collect them through fixed charges; instead they collect the fixed costs volumetrically on a unit-by-unit as goods are sold," OPUC said OPUC also said that SFV rates would stifle innovation, as rates that dilute the incentives for investments in efficiency effectively increase the costs and/or reduce the impact of energy efficiency programs, by making it less cost-effective for customers. "SFV has all these deleterious effects, and is not even cost-based," OPUC added "At their core, demand charges are not cost-based for the residential class or for low-load factor small- and medium-commercial customers. The issue is coincidence. Coincidence is the relationship between the customer's own maximum demand and the system or class peak demand (or the peak demand of a piece of distribution equipment like a substation). This relationship is weak for residential customers as compared for larger commercial and industrial customers," OPUC noted "Charging demand costs as part of the customer charge -- the definition of SFV -- results in extreme intra-class subsidies, with the subsidies flowing to larger customers," OPUC said "In addition to subsidization resulting from collecting demand costs in customer charges, SFV has other problems when translating a class's allocated costs into rates. The cost of hooking up customers (transformers, services, and associated primary distribution) varies greatly among residential customers. There are strong economies of scale in serving residential customers at higher levels of density. Dozens of customers in an apartment building often share transformers and would have extremely short service drops and a limited amount of primary distribution equipment. By contrast, customers in large single-family houses on large lots would be served with fewer transformers per customer, longer service drops, and longer primary distribution connections per customer. Those density-related cost differences are to a significant degree correlated with load, because customers in individually metered apartments tend to use considerably less energy than customers in single-family houses due to both smaller square footage and attached walls with other units that reduce space conditioning use," OPUC said What do you think of the OPUC's comments and SFV rates? How would SFV rates impact REP pricing? Let us know in the comments below Docket 46046
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