P.U. Report No. PUN 22 INTEmATIDNAL BANK FOR RECONSTRUCTION AND Dl3rEzQPMENT ASSOCIATION ENERGY, WATER BND'-TELECOMMUNICATIONS DEPARTMENT PUBLIC UTILITIES NOTES EZECTRICITP. RATE STRUCTURES m-LOAD~MANAGEMENT June 1976 Central P m jects Staff kergy, Water and Telecommunications Department -. This paper ie one of a series issued by the.B'leFgy, Waf= and Telecommunications hparhuent for the infomation and guidance of Bank staff working I n the power, water and wastes, and telecommunications sectors. It m ay not be published or quoted as representing the d e w s of the Bank Group, and the Bank CrIpUp does not accept responsibility for its accuracy and completeness. ABSTRACT Aa part of the Bank's developing emphasis on marginal cost pricing for public u t i l i t i e s PUN No. l.4 was issued in January 1975, sumarizing a decision by the Public Service Comission of Wisconsin requiring use of long-run incremental costs as a basis for structuring electric ratss. Since that time there have been a number of develop- ments i n the Bank approach to t a r i f f structures, while there has also been a considerable amount of change, experimentation and research in rate structure and load aranagment in the United States, essentially moving the electric u t i l i k l e s f r o m a peak-oriented base to average load based systems. These are summarized i n this Note f o r infomational purposes. Prepared by: Robert Smith Department Ehergy. Water and Tel e c ~ c a t i o n s June 21, 1976 ELECTRICITP RATE STRUCTI;IRES AND WAD MANAGEXEZ?T 1. Bank practice in the past has tended to place considerable emphasis on rate levels, normally by means of the rate of return covenant. H o m e r more recamtly this has been combined with a close review of rate struckrre and loadmanagement $echniquea, often accompanied by a require- ment t h a t t a r i f f s be reviewed. In contrast t o the situation t h a t obtained up to about tuo years ago, a review of 1974/75 Power Project Appraisal Reports shows at,w i t h one exception, a l l included discussion of rate structures and *ere such structure was not considered appropriate, changes were required, generally through the requirement f o r execution of a t a r i f f stuw. Tenas of reference f o r such studies require consideration of marginal costs, shadow prices, daily and seasonal demand, customer class characteristics, off -peak pricing, power f actors, metering, existing t a r i f f s , revenue requirements, income redistribution objectives, fuel- adjustment clauses, practicability and cost of implementation. An example . - o u U n e terms of reference with country references deleted is attached as h e x 1 - 2. Such improved tarFff structures are economically beneficial and it therefore is axiomatic t h a t the e a r l i e r such t a r i f f s are made e f f e c t i n , the greater the economic benafits. A t present the improvement of r a t e structures tends to became post-appraisal - Tjith resultant delays in such economic benefits and possible implementation problems. Action to advance such tariff d e w s , where pracacable, would be beneficial possibly by financing tariff stndies, Ff necessary, through the Project Preparation - Facility. It may also be useful, in sane instances, to include r a t e struct*e or r a t e principle clauses in loan documents. 3 In the United States the rate-making phlloaophy incorporating long-nm incremental cost principles, which may perhaps be described a s having been "triggeredn by the Wisconsin decision, has now been adopted in a number of jurisdictbons. Additionally a very large v o h e of research and experimental work i s being carried out i n connection with rate structures and load- managas~ent, including seaaonal rates, time of day rates, on-peak/off -peak pricing, e l a s t i c i t y of demand, inverted rates, cost allo- cation techniques (fully-allocated and incremental), metering, ripple load controls and storage heaters. The end r e s u l t a f these developments w ill see the United States power sector moving from essentially peak-oriented Syssems to average load systems. 4. A summary of these d m l o p a e n t s is contahed fn the following parag.phs, including both the rate structure (or nsoftuarew)aspects and the "hardware" ( o r technical) experiments. Such developaents are of i n t e r e s t to the Bank in its m r k in the e l e c t r i c power f i e l d f o r the need for load management i n its widest sense is even more urgent i n t h e , developing countries. W e much of the work m ay not be directly trans- latable t o developing countries, the principles and many o f the procedures a r e significant, W e the various ongoing studies provide useful reference sources f o r particular aspects of the subject. 5. Edrlson Electric I n s t i t u t e Possibly the b e s t s t a r t i n g place is to record the summarized views of t h e Edison R e c t r i c I n s t i t u t e (EEI) on pricing aspects. The I n s t i t u t e i s the p r i n c i p a l association of investor-omed e l e c t r i c u t i l i t y companies. I t a Committee on Economic Growth, Pricing and Energy Use issued a report in mid-1975 which included pricing comments; excerpts from which a r e ,given below: (a) The primary goal i n f i x i n g r a t e s should be t o approximate the cost to serve a s closely as is feasible, while main- taining a reasonable balance with metering and b i l l i n g costs, and public undershnding. L.r same cases, e f f o r t s to improve load f a c t o r may warrant c e r t a i n deviations from cost to serve. (b) Attention should be given to long-run incremental costs in designing rates. Long-run incremental cost r e f e r s to the cost of additional production, and includes a l l cate- gories of costs. (c) Rates should move toward equalizing r a t e s of return from a l l classes (of s e d c e ) . (d) Block structuring of energy and demand charges f o r large customers should be continued only t o the extent t h a t such blocks a r e j u s t i f i e d by cost considerations such as load factors, coincidence f a c t o r s and customer costs. Rate blocking f o r r e s i d e n t i a l customers should continue as long a s it remains the b e s t p r a c t i c a l means f o r approld- mating costs to serve. It should be noted t h a t r a t e blocking does not preclude f l a t t e n i n g o f r a t e s where cost considerations so suggest. High f u e l costs have, a t l e a s t temporarily, made energy costs a higher f r a c t i o n of t o t a l costs than was true in the past. This tends to j u s t i f y a more nearly "flatffrate, b u t not an inverted r a t e . (e) Rate structures should move toward more accurate reflec- t i o n of dirferences i n t h e costs of serving on-peak and off-peak customers. (f) Judicious incorporation of measurable s o c i a l costs i n t o the pricing of a l l goods and services throughout the economy would be beneficial. Incorporation of these costs into only one sector of an industry o r one sector of the economy may severely distort resource allocations. (g) Using energy pricing t o reallocate income among various groups would be both improper and impractical. (h) In-depth s W e s are needed t o examine the technological and econmuic f e a s i b i l i t y of time-of-day metering and associated on-pewoff-peak pricing to a l l customer classes. W a r afforta are needed to determine price elasticitiem and cmss-elasticities of users demands f o r energy. Ehpirical studies should also be aimed a t deter- mining the impact on rates of true long-run incremen%al cost pricing, and assessing the s h i f t a in resource allo- cation If other parts of the energy industry do not sW t a n e o u s l y revise t h e i r pricing structures. Although w i t h a measure of qualification, these statements do emphasize the use of such items as long-run incremental costs, flattening of rate blocks, time-of -day metering and on-peak/off -peak pricing. Such statements r a f l e c t a substantial change from the previously held philosophy baaed on d h b i s h i n g u n i t costs resulting i n economies of scale, leading t o pmmtional rates, with increased dmand being met by increased plant capacity; and r e f l e c t s the change to the future load-managed, average-load oriented systaaa . 6. National Association of R e d a t o m Utility Cammissioners The second major i t e m is the stance of the National Association of Regulatorg U t i l i t y Cosamlsaioners (NARuc) . A t its General Meeting i n December 1974 the NBRUC adopted a r e s o l u t b n requiring that an extensive six* be made in connection w i t h e l e c t r i c u t i l i t y rate-making. h e resolution contained sn "Outline of Topics1' which is, i n effect, an o u W e tenns of reference f o r the study. A s these form an excellent sum~laargof the nature of the problems associated with r a t e structures, and of the questions which need to be answered, they are repeated below: Outline of Topics Topic 1 Analysis of Various Pricinn Approaches 1.1 A revleu of U.S. theory and pracsice. 1.2 An analysis of foreign (primarily, British and French) theorg and practice, with special reference t o peak-load pricing. 1.3 The developnent of a framework f o r a peak-load pricing program appropriate to the U.S. Topic 2 Considerations of Demand E l a s t i c i t y f o r Electricity ' A comprehensive statement of the role of price e l a s t i c i t y in pricing. A n exploration of data available f o r a s s e s s h g e l a s t i c i t i e s f o r demand, both on average and a t the peak-- and the making of such assessment a s the data permit. The developnent of a monitoring system to yfeld more defin- i t i v e information wtth respect t o peak demand e l a s t i c i t i e s and consideratdon of a planned program of load research f o r collection of such data. Topic 3 Rate Experiments Involving Smaller Customers An overview of what e ~ e r i m e n t s can (and cannot) accom- plish. I n conjunction with Topic 5.3 (below) evolve a s e r i e s of potential r a t e patterns to serve a s the basis of e 4 p e r i - ments; and structure a possible experimental program. Pattern a t y p i c a l experiment consisBent therewith. Consider the cost-benefit relationship of such an expa%mental program. Consider a l t e r n a t i v e s t o a purely experimencdl s t r a t e g y (in conjunction with Topic 5.4 1. ~opfc4 Costing f o r Peak-Load Pricing Select a group o f U.S. companies f o r cost analysis. Apply the basic theories evolved i n Topic 1.3 to these companies. Review r e s u l t s and make necessary modifications to the theoretically-derived program. Prepare a proposed costing manual, incorporating neces- sary changes. Topic 5 Rate-making An analysis of how r a t e format can accomplish rate-making objectives. Design peak-load pricing r a t e forms which would be con- sonant w i t h e x i s t i n g regulatory constraints. Specification of r a t e forms of metering systems required f o r such forms (c.f. Topic 7). Adjushent of the peak-load pricing concept to existing metering constraints. Topic 6 Measuring the Potential Gost Advantages of Peak-had A*iclng An inventory of the princi9al categories of peaking s i t u - a u o n s with which t o be concerned. I Development of methodology by which companies may determine the advantages of load s h i f t i n g which could be attendant upon peak-load pricing. Application of methodo logy in representative situations. Topic 7 - Meterbg Inventory existing metering equipment as needed f o r peak-load pricing, including what may r e a d i l y be adapted (in relaticon t o Topic 5.3 ) . Appraise present position and potential of electronic metering, and (if indicated) prepare proposal f o r an electronic mstering e q e r b e n t . Topic 8 Technology f o r Utilization 8.1 Review equipnent now available which can use peak-lead pricing to advantage. 8.2 Develop a proposal f o r research into-promising areas. 8 .3 Review l o a d - s W t i a g p o t e n u a l f o r l a r g e r customers. Topic 9 Hechanical Contmls and Penal* Pricinq 9.1 An evaluation of t h e use of mechanical controls on customer premises. 9.2 An evaluation of the use of penalty pricing. Topic 10 O v e r d e w and Assessment of Findings - This sin* under t h e t i t l e " R e c t r i c U t i l i t y Rate Deai- Study a j o i n t e f f o r t by EPRI and EEI f o r NAZWC" i s now in progress and i s being carried out a t t h e 'Electric Power Research I n s t i t u t e in Falo Alto, California. A preliminary overview report i s expected to be available i n September 1976. ' 7. State Regulatollg Conmissions Equally i n t e r e s t i n g are the actions of t h e various S t a t e Regulatory Ccnmnissions. These a r e summarized i n t h e following pages, together wlth some applicable counuents. Arkansas Public Service Conmission The Caawission has approved experimental lttime-of-dayn and nseasonz&mr a t e s and, together w i t h a Jurisdictional u t i l i t y , is cafiglng out research on e l a s t i c i t y of consumer demand related to three pricing vari- ations. Arizona Corporation Conrniseion The c d s s i o n has approved the use of W.feMnen- r a t e s . California Public U t i l i t i e s Conmission The Calif'omb Commission is involved in hearings of both generic and specific natums dealing w i t h r a t e structures and r a t e design, including , the e f f e c t s of changes in t a r i f f s on energy consumption, price e l a s t i c i t y , and "1FfelAnem m t e s . These, and other f a c t o r s such a s long-range incre- mental costs, discount prices, placement of future increases, inverbed rates, daily peak pricing, and seasonal peak pricing are extensively d e a l t with i n the Staff Report o f March 28, 1975 (Rate Structure Case 980k), while the terms of reference of this generic hearing have been expanded to include the " I l f e l h e w concept which was adopted by the California Legislature in a B i U . uMch became effective on January 1 , 1976. In summary this ltlFfelineltconcept requires the Commission t o designate a l i f e l i n e volume of gas and a W e l i n e quantity of e l e c t r i c i t y necessary t o supply the m i n h u m energy needs of the average r e s i d e n t i a l user f o r space and water heating, lighting, cooking and food refrigerating. In determining these volumes the Conrmission must take into account d i f f e r - e n t i a l s between gas and energy needs and climatic and geographical vari- ations. I n i t i a l l y the l i f e l i n e r a t e i s not to be greater than r a t e s in e f f e c t on Januarg 1 , 1976 and s h a l l not be increased u n t i l the average system r a t e i n cents per kwh ( o r t h e m ) has increased by 25% o r more over the Januarg 1 , 1976 level. Colorado Public U t i l i t i e s Comission The Commission in a decision dealing with the r a t e application of the Public Service Company of Colorado, considered t h a t large volume users were not e n t i t l e d t o the same bargain r a t e s as in t h s past and ordered the amendment of the f i l e d application t o r e f l e c t increases in several of the t r a i l i n g and penultimate r a t e blocks. Subsequently the Commission has also' approved the use of " l i f e l i n e w rates. Connecticut Public U t i l i t i e s Commission The Commission, in cooperation w i t h a j u r i s d i c t i o n a l u t i l i t y and the Connecticut Ehergy Agency, i s carrging out f i e l d t e s t s of peak-load pricing f o r r e s i d e n t i a l consumers .* D i s t r i c t of Columbia Public Service Commission A generic hearing on e l e c t r i c r a t e design is planned. Pending this hearing the Conrmission has f l a t t e n e d r a t e s generally and required t h a t l a r g e customers be put on peak-load, time-of-day, pricing, with appropriate metering. Florida Public Service Commission A generic hearing on e l e c t r i c r a t e structures has been held and the staff i s currently i n the process of developing an econometric model of the r e s i d e n t i a l demand f o r e l e c t r i c i t y fn Florida. The Commission has required u t i l i t i e s under its jurisdiction to i n i t i a t e studies r e l a t i n g t o long-run i n c r m e n t a l costs, to develop techniques f o r measuring and pricing peak consumption; and t o demonstrate the f e a s i b i l i t y of controlled usage applicances. The Conmission s t a f f has recommended, i n t e r a l i a , .hplementation of winter/sunnner d i f f e r e n t i a l s as a f i r s t s t e p t o peak-load pricing and elimlnation of " a l l elec t r i c f t r a t e schedules. Georgia Public Service Commission The Commission has i n s t i t u t e d f?lFfelinelf rates. The l e v e l i s 250 kwh i n t h e case of Savannah Electric and 350 M f o r Georgia Tower. -- - - . -- - - *The Commission i s also holding a "generic" hearing on the economics of future nuclear e l e c t r i c generation i n the State. Rates f o r these consumption levels w ill be held constant. The difference i n kwh l e v e l s reflects dif'f erences in consumption patterns in the respective serPice areas. Hawaii Public U t i l i t i e s Commission While the Commission has not authorbed any substantial changes i n r a t e structure i t does record t h a t recent positions expressed by inter- ested p a r t i e s have pmposed changes in pricing approaches with the view of c o n t r a l l h g demand. Iowa S t a t e Caramerce Conmission The Commission i s undertaking a canprehensive analysis of the e f f e c t of r a t e design upon energy consumption. Elixdnation of a l l pro- motional, non-compensatory r a t e s has been ordered and preliminary approval given to sunwer/winter r a t e diff e r e n t i a l s. Idaho Public U t i l i t i e s Commission Companies within the Commission's jurisdiction have pmposed new r a t e structures which provide economlc incentive to conserve energy. In the one instance the t r a d i t i o n a l declining block r a t e has been converted t o a base charge plus a f l a t rate f o r energy consumed, while in the second instance a slmPaer load surcharge is pmposed. The Commission i s cazqdng out two studies in connection with r e s i d e n t i a l energy consumption patterns. In cooperation with Camonwealth Edison a study of consumption and use patterns i s i n progress, while Central nl+lais Public Service Company and I l l i n o i s Power Cutupany a r e conducting studies on the relationship between income and energy usage. In recent r a t e actions the Connnission has tended t o f l a t t e n r a t e blocks, b u t with caution; pointing out t h a t extreme care is needed in view of the uncertainty a s t o the effect of r a t e structure changes. The Conmission points out t h a t a f l a t t e n i n g of existing declining r a t e blocks, approved in another jurisdiction, resulted in such a serious deterioration of u t i l i t y earnings t h a t some p a r t i a l reversal of the decision became necessary. (haddition t o supporting the need f o r caution this may also be considered as something of an indicator of demand e l a s t i c i t y . ) Rate s t r u c t u r e actions approved include: - W o n (197&) approval of a r a t e structure which moves away fmm the declining r a t e block structure b u t stops , short of a flat r a t e block structure. W s o n (1975) - rejection of any increase i n the mFnimum charge and the first tK, r e s i d e n t i a l r a t e blocks, w i t h the deficiency to be recovered f r o m the l a s t three r a t e blocks. Union E l e c t r i c - approval of a percentage increase in the f i r s t r e s i d e n t i a l block uhich i s 3 u b s t a n t i a l l y l e s s than the o w r a l l average increase. Central U U n o i s - approval of modFfications designed to discourage on-peak use, to standardize r a t e s and eliminate certain promotional features - subject to Comission adjustment where such changes would r e s u l t in excessive increases to certain customers. The Edison 197k decision also contained a reference to cost studies which i s of considerable i n t e r e s t . In response to Commission requirements Edison submitted cost studies, including an incremental cost study and four full cost allocation studies based on four d i f f e r e n t methods of allocation. The Commission stated, Fn i t s Order, "The determination of j u s t and reasonable r a t e s i s admittedly not an exact science but embodies managerial discretion, innovative regulation, and general acceptance by the public and the customer served. Cost of service studies u t i l i z e the f a c t u a l infomation of the past and cannot incorporate matters of public policy, social, i n d u s t r i a l o r p o l i t i c a l changes which w i l l occur in the future. Cost analysis cannot establish the value of a utility service t o a customer o r c l a s s of customers. Regardless of the method used, c o s t o f service studies should be considered only as a guide". This statement i s considered to be significant and is recorded because of the tendency i n some quarters to refer t o "cost-based r a t e s r r a s i f these were some form of non-debatable absolute. Indiana Public Service Commission The Conrmission favors r a t e design which f o s t e r s energy conservation and off-peak energy usage. ( I t i s also i n t e r e s t i n g to note t h a t the Indiana General Assembly has approved a property tax exemption of up to $2,000 of assessed properky value in cases where property owners haw i n s t a l l e d a s o l a r energy heating o r cooling sgstem.) Louisiana Public Service Commission The Cornmission plans t o establish a Rate Research and Analysis Mvision to carry out projects r e l a t e d t o t a r i f f structures and r e l a t e d effects . Maine Public U t i l i t i e s Commission A generic rate-structure p m c e e d b g i s currently ongoing. Mawland F'ubUc Service Coannission The Ccmnuisaion is currently conducting a generic hearing on r a t e structures and has generally deferred specFfic r a t e structum action until conclusions have been reached in the Statm-wide proceeding. Massachusetts Department of Public U t i l i t i e s A generic hearing on e l e c t r i c r a t e structures is being held. Michigan Public Service Commission The C d s s i o n has altered most of i t s residential and small comaercial rates so t h a t each contains a basic monthly service charge, plus a flat energy charge f o r a l l consumption. AddiUo- studies are underway in connection with (a) time-of -day pricing, particularly f o r industrial customers; (b) in the area of e l a s t i c i t y of demand f o r electricity; and (c) remote controlled water heating. SpecificaSy the Commission has stated that ttPmmtional rate structures are out of date. Today, the r a t e structure must be designed t o enhance basic public policy objectives in the areas of mnsmerism, enrlmn- mental protection, public health and safety and con- servatitm of natural resourcesn. Mirmesota Department of Arblic Service Gaa and e l e c t r i c u t i l i t y regulation commenced in Januarg 1975. The f i r s t r a t e case, currently i n progress, contains considerable testimony on r a t e structures, w i t h particular reference to consemtion and assistance f o r low income groups. Mississippi Public Service Caamrission The C d s s i o n i s currently engaged in research regarding restruc- turSng of rates, load demand e l a s t i c i t y and load management. Missouri Public Service Commission The Connuiskion has adopted r a t e policies which lessen the impact of r a t e increases on low kilowatt hour consumers, e.g. in the case of Union Electric Company ( ~ u u e 197&) conamption up t o 100 kwh was increased 10.2% while the 2,000 M block was increased U.69 in the summer period and 18-9% in the winter period. I n addltion, in its June 1975 decision i n the case of Missouri Public Service Capany, the Coxnission ordered the Company to: (a) supply a long-run c o s t stu* including a long-range forecast of expected loads and a demonstration t h a t i t s plant program i s optimal; (b) develop costs of generating an additional kwh f o r d i f f e r e n t times-of-day and year; (c ) d m b p a plan f o r i n s t i t u t i n g time-of -day metering; (d) estimate the cost of time-of-day metering; and (e) d e t a i l how other a l t e r n a t i v e s f o r employing peak respons- i b i l i t y pricing can o r cannot be used by the Cornany. Montana Public Service Commission The Commission lntends t o structure and adopt r a t e s which will appropriately a f f e c t demand. I n i t i a l steps have been taken by s i g n i f i c a n t l y moderating the t r a d i t i o n a l declining block r a t e structures, while f u r t h e r study and review of e l e c t r i c r a t e structures i s in progress. In the f i e l d of gas conservation t h e Commission has taken inno- vative action by issue of an emergency gas conservation r u l e which requires the gas u t i l i t i e s and t h e i r major i n d u s t r i a l customers t o prepare energy conservation plans t o lhpmve the efficiency of energy usage. Failure t o comply may r e s u l t in a penalty involving a supply curtailment of up t o 10% of previously delivered volumes. Nevada Public Service Commission Over the past two years the Commission has generally f l a t t e n e d r a t e structures, while monitoring and analyzing the effects. New Hampshim Public U t i l i t i e s Commission The Commission has commenced a generic hearing to investigage e l e c t r i c u t i l i t y r a t e l e v e l s and r a t e structures. New York Public Service Conrmission The Conrmission i s presently conducting a "generic" hearing on the subject of e l e c t r i c u t i l i t y r a t e structures. In connection with this hearing (but not as p a r t of an a c t u a l r a t e case) i t i s p a r t i c u l a r l y i n t e r e s t i n g t o note t h a t the Long Island Lighting Company has introduced a q u i t e r a d i c a l r a t e design f o r its "Large General and I n d u s t r i a l SerPicel', based on a marginal cost study. Neither t h e nor space would permit a detailed review of the submission but i t s significance can perhaps be judged from the proposed end r e s u l t tariff which i s a s follows: -I . , Rate Period Z - O f f Peak On Peak June to September Hidnight Inclusive, except All to Sunday: 10 a.m. remaining 7 a.m. to 10 p.m. hours Demand Charge Secondary - Per kw None - Per kw $12.56 Per kw $1.64 PrimsFy None $U.W $1.46 Ransmission None $09 923 $1.22 h e r = Charge Per kwh Per kwh Per kwh Secondary $0.0224 $0.0366 $0.0313 -rs $0.0217 $0.0357 $0.0305 Transmission $O.O2U $0 .0349 $0.0300 Customer Charge 1/12 each month of the annual charge of $360.00 This schedule, a p a r t from its very considerable time-of-day pricing variations, also c l e a r l y indicates t h a t off-peak prices do not include a capacity charge. This concept is also advocated by NERA, in connection with its mork in Wisconsin, where it suggests t h a t hours which . have zero probability of curtailment ( i . s of being a peak hour) should haw no c a p i t a l costs assigned. Again, without debating t h i s , i t i s i n t e r e s t i n g to consider the same f a c t o r as it a r i s e s in the case of gas transmission companies, and in p a r t i c u l a r the deliberate t r a n s f e r of capacity costs to the c o m d i t y function a s carried out by the Federal Power Collmnission i n Atlantic Seaboard and subsequent cases. Also as p a r t of the submissions t o the N ew York Commission there i s interesting testimony by Thomas Laaspere of the Thayer School of Engineering. Dartmouth College, Hanover, N.H., i n which he describes various methods of load control such a s t h e switch devices and ripple controls, including references to the experience in E&rope. This i s the technical aspect of "load managementrr as d i s t b c t from "rate b u t the two go hand in hand i n practice and Professor Laaapere describes the r a t e structure a s the rtsoftware" and the control equipnent a s the "hardware". The necessary control equipnent i s available, although some of the U.S. designs are s t i l l i n the experimental stage. A s a conclusion , Dr. Laaspere s t a t e s t h a t t h e European experience indicates t h a t the additional costs of implementing time-dependent r a t e s are outweighed by the accompany-ing benefits. A s these cosV'benef it relationships a r e e s e e n t i a l l y b a s e d on f i g u r e s which were "pre-energy crisisn prices it i s reasonable t o assume t h a t the benefit r a t i o is now substantially greater. North Carolina U t i l i t i e s Commission The commission has conducted a generic hearing and a l s o approved wlFfelinenrates. Ohio Public U t i l i t y Commission The Commission is a c t i v e l y involved in a number of experimental programs to develop :.nd t e s t several aspects of load management, in coop- eration with FEA, FPC and the National Bureau of Standards. This involvement includes the Experimental Technological Innovation Program (ETIP) designed to develop tools f o r improved r a t e and f i n a n c i a l analysis a t the S t a t e level. Oregon Public U t i l i t y Commissioner Recent decisions by the Conrmissioner incorporate consideration of l o n g - m incremental costs a s the relevant cost standard f o r r a t e spread and r a t e design. On t h i s basis, r e s i d e n t i a l r a t e s a r e inverted. Rates f o r Portland General Electric Company a r e $l.U f o r 100 kwh i n the lower ranges, with $1.67 f o r each 100 kwh in excess of 900 kwh per month ( a s a t July 19751, while Pacific Power and Light a l s o has a similar type of t a r i f f w i t h the u n i t charge higher f o r usage in excess of 800 kwh per month. These t a r s f s t r u c t u r e s a r e based on L R I C l s and take into con- sideration the low-load fac-tor aspects of e l e c t r i c space heating. Pennsylvania Public U t i l i t y Cormnission The Commission has participated i n preparation of load research projects to determine demand-price relationships and possible e f f e c t s of peak-load pricing on r e s i d e n t i a l consumption, w i t h such projects being submitted to the Federal Energy Administration f o r funding. However funds have not been made available a t this time. The Conrmission has a l s o ordered one of i t s j u r i s d i c t i o n a l companies to conduct a survey to d e t e h e the relationship, i fany, between r e s i d e n t i a l e l e c t r i c consumption and the u s e r ' s income l e v e l and/or s o c i a l status. Reservations are held regarding special metering unless a positive c o s t b e n e f i t r a t i o can be established. Rhode Island-Division of Public U t i l i t i e s and Carriers The Commission has approved r a t e structures incorporating summer/ u i n t e r d i f f e r e n t i a l s a s a f i r s t step toward peak-load pricing, together with time-controlled domestic water heating and a night-use clause in commercial and i n d u s t r i a l r a t e s . In essence the C o ~ s s i o n considers t h a t r a t e structures should reduce peak demand, provide correct price signais t o consumers regarding costs involved in producing e l e c t r i c i t y a t different times of the day and year, and provide consumers with the opportunity t o make b e t t e r economic choices about energy use. Research projects are being developed in this area. Utah PubUc Service Commission While the CaDwission has not y e t ruled on r a t e design, the Division of Public U t i l i t i e s is on record a s supporting the incremental cost concept. Vermont Public Service Board The Board has approved r a t e s based upon peals responsibility pricing, and optional r a t e s whereby a residential customer may request a demand meter. More particularly the Board has carried out studies related to load characteristics. W i t h t h i s s t u e as a control, f u r t h e r studies have been i n i t i a t e d to study load management techniques, involving time-cost pricing storage heat and ripple control (with an N SF grant) ; and a f u r t h e r study (with an FEIL &-ant) of the use of non-traditdonal r a t e foms. Addi- - t i o n a l d e t a i l is given in Section 8 ( i ) Federal Agencies and in Annex 3 - N S F projects . Virginia State Corpora tion Commission Ih specific rate decisions the Commission has given consideration to long-run incremental costs and tended to f l a t t e n residential r a t e blocks. It i s planned to review a l l e l e c t r i c r a t e struchuces i n Virginia and the Commission has so advised all jurisdictional u t i l i t i e s , with specFfic reference to e l a s t i c i t y of demand and consumption, peak-load control and metering, and r a t e patterns which w i l l improve load f a c t o r s and encourage conservation. Washington U t i U t i e s and 7kansportation Connnission The Connalssionls policy is t o level the declining block structure. West Virninia Public Service Connnission The Commission has under review a l l f u e l adjustment clauses and has flwther determined t h a t future r a t e applications must establish an adequate evidentiary record on r a t e design. A report on e l e c t r i c r a t e structures has been prepared a s required by the State Legislature. Wisconsin Public Service Commission A s previously referred to a t the beg- of t h i s Note, one of the most significant decisions regarding marginal cost pricing was the Wisconsin Public Service Connnissionts decision of August 8, 1974 in the Madison Gas and Electric case. This introduce&both seasonal and peak-load pricing, based upon long-run incrsmental costs. Subsequently, Chairman Richard D. Cudahy i s on record as con- firming t h a t B e Commission intends to develop its work i n the r a t e area in ntranslating the consemation ethic from a mere catchword to an effective and far-reaching policym, going on to r e f e r to the "further, stronger and unyielding posture of t h e Wisconsin Public Service Connnission in support of t h e adoption of rate-making methods and r a t e s t r u c t u r e s fundamentally d i f f e r e n t from most of those t r a d i t i o n a l l y employed i n this countryv. A s evidence of this i n t e n t the Conrmission i s c u r r e n t l y working with the Wisconsin Public Senrice Corporation i n an experimental r a t e design p r o j e c t incorporating both seasonal and tims-of-day pricing, while incre- mental c o s t studies a r e being c a r r i e d out by National Economic Research Associates Inc. (NERA) f o r Wisconsin Electric Power Company. A workshop on Peak-Load Costing has a l s o been organized by the Commission. Wg0zni.n~ Public SerPice Commission The Commission has ruled t h a t promotional consideration i n r a t e s t r u c t u r i n g is no longer v a l i d o r proper since, because of power s h o r h g e and conservation considerations, there i s prospectively no b e n e f i t t o o f f s e t inherent r a t e discrimination. Certain rates, established on a p-ornotional basis, have been increased in g r e a t e r proportion than other rates. General The usual regulatory procedure, up u n t i l a s recent3y a s twa/three years ago, w as to require a u t i l i t y t o f i l e such t a r i f f s Ifas would produce revenues which would earn the approved r a t e of r e t u r n f t . Consideration of pricing, r a t e s t r u c t u r e and load management was generally very limited. the l i g h t of the foregoing the preceding record of current State Regulatory Commission a c t i v i t y , i s remarkable. 8. Federal Agencies Also currently a c t i v e i n t h i s area a r e a number of Federal Agencies; p r i n c i p a l l y the Federal Ehergy Adnbistration, the Federal Power Commission, the General Services Administration - Electrical U t i l i t y Section, the National Science Foundation and t h e Energy Research and Develop- ment Administration. ( i ) The Federal Ehergy Administration (FEA), through i t s Office of U t i l i t i e s Programs, i s responsible f o r developing, managing and coordinating a l l energy conservation. pmgrams r e l a t i n g to e l e c t r i c and gas u t i l i t i e s . Its a c t i v i t i e s in t h i s area may be broadly subdivided under three headings : (a) U t i l i t y Conservation Action (now) (UCAN ); (b) Federal P a r t i c i p a t i o r F in S t a t e Regulatory Hearings; and (c) R e c t r i c Rate Demonstration Programs. *Such 2 a r t i c i p a t i o n is a s a "friend of t h e court". UCBN i s essentially a voluntary Fn~polviagthe parti- cipation of u t i l i t i e s , s t a t e and l o c a l regulatory agencies, and public i n t e r e s t groups i n achieving conservation and efficiency goals in pro- duction, generation and use of energy by electric and natural gas u t i l i t i e s . A t present about 150 gas and electric u t i u t i e s , 40 s t a t e regulatory agencies, 30 s t a t e energy offices and many public i n t e r e s t groups are involved. Participation in regulatory hearings has included both generic and specific r a t e cases and is directed toward implementation of appro- priate r a t e structures. Such presentations have, f o r example, been made before the CaUfornia PUC, Colorado Public U t i l i t i e s Cotmission, Massachusetts Department of Public Utilities, Minnesota Department of Public Service, N ew York Public Serpice Commission, North CaroUna U t i l i t y Conmission, Wisconsin Public Service commission and the Virginia S t a t e .- Corporation CoPaaisBion. The Demonstration Programs are designed to assess consumer response to innovative r a t e structures, including peak-load pricing, l i f e l i n e and inverted rate structures, r a t e s based on long-nul incremental costs, together witb w e of load-control techniques. Considerable enthusiasm has been shown f o r this program and 34 applications have been submitted, of which 10 have so f a r been selected f o r funding. Details of these, and a summary of the remaining proposals, are contained i n Annex 2. To date only the Vermont project i s f a r enough advanced to have produced significant results and even these must ba regarded a s being of a preliminary nature. This project involves testing s i x non-traditional residential e l e c t r i c rates and space and water heating control devices. Tentative conclusions are t h a t the t a r i f f s featuzdng off-peak rates or an off-peak rate w l t h an interruptible rate for certain appliances show benefits t o both customer and u t i l i t y . Alternatively, tariffs which are oriented towards high capacity charges cause widely varylng results and must be regarded as unsuccessful o r a t l e a s t unprowen. Probably the most successful results are from the tariff which i s reproduced below, together w i t h summarized result*: j(. A s t e s t i f i e d by &'. Douglas G. Bauer, Federal Ehergy Administration, before t h e North Carolina U t i l i t i e s Conmission in its generic case, b c k e t No. lL100, December 5, 1975. Off -Peak Rate Rate Features: Customer Charge $5.50 per month Ehergy Charge On-Peak Hours (fourteen consecutive hours between 7 a.m. and 9 p.m. ) F i r s t 200 kwh per month Q 2 .hO#/kwh Next k70 kwh p e r month 8 S.OO#/kwh A l l over 670 kwh per month O 3.60#/kwfi Off-Peak Hours ( t e n consecutive hours between 9 p.m. and 7 a.m. ) First 100 kwh per month O 2.4Oq!/kwh Next 230 kwh per month Q 1.5O#/M A l l over 330 kuh per month @ O.O8t/kwh (Note the price d i f f e r e n t i a l i s 4.5 to 1 and t h e block r a t e design r e f l e c t a cost j u s t i f i e d " l i f e l i n e t 1 component in the standard r e s i d e n t i a l rate, which f e a t u r e i s not an inherent p a r t of the off-peak r a t e , p r i c i n g d i f f e r - ential. ) Preliminary r e s u l t s from Pmgress Report 111, 12/2/75, indicate - "After f o u r months of data accumulation, the off-peak r a t e has provided savings f o r a l l of t h e customers and indications a r e that there i s some b e n e f i t to Green Mountain Power's system load. The average : , customer has saved approximately 15%. The highest saving t o date has been $20.71, a saving of 54%of t h e regular r a t e 01 b i l l . The average customerrs d a i l y peak load i s consistently occurring a t 10:OO p.m., r e f l e c t i n g the s h i f t of a sizable portion of load t o off-peak hours. Customer s a t i s f a c t i o n i s excellent with the off-peak rate. M f f e r s n t customers save in different months. Laundry and baths are the two b i g d a i l y household and personal d a i l y chores s h i f t e d to off-peak. Baking has been occasionally s h i f t e d off-peak. Turning off applicances such as water heaters during peak hours i s another common practice. In general, a l l of the off-peak customers are performing some o r a l l of the above a c t i v i t i e s in an e f f o r t to save money. Significantly, a l l demonstration customers a r e now using more kilowatt hours between 9:00 p.m. and 7:00 a.m. than they a r e d u r b g the day. From a system point of view, the Group Peak i s consistently a t 10:OO p.m. and approximatsly double any peak during the peak hours of 7:00 a.m. t o 9:00 p.m.It. Examples of other FEA a c t i v i t i e s include: (a) Preparation of a model which assumes a s t r a t e g y of peak r e s p o n s i b i l i t y prLcing and load management to reduce system peaks. Model r e s u l t s include savings of $48 b i l l i o n i n capacity and 8% in e l e c t r i c i t y price, together Kith 1.3 million Bbl/day of u t i l i t y o i l con- sumption. (b) Preparation of a- uorkbook f o r t h e U t i l i t y Load Managanent Conference held under the auspices of the NATO C o d t t e e on Challenges of Modern Society. This covers aspects of load managatmt, energy conservatian, load factors, r a t e structures, regulatory policy, off-peak markets, technical considerations and energy storage systems a l l on the - b a s i s of U.S ./Elmopean variants. A follow-up conference with emphasis on r a t e s t r u c t u r e s i s expected t o be held i n the U.S. 1976. Sponsorship of a h a d Management Conference i n Washington, (c) - D.C. June 1975 in association with APPA, EEI, NARUC, and NRECA . (d) Preparation of Energy C o n s e m t i o n Papers, e.g. "Opportun- i t i e s and Incentives f o r Electric U t i l i t y Load Managementu, by Gordian Associates Inc. (This i s Conservation Paper Number 32. It covers 315 pages and contains a list of 72 other documents and references. ) ( i i ) The Federal Power Colmnission (FPCL has also given consideration t o r a t e stsucture/load management f a c t o r s in both i t s r a t e and licensing cases. A s an example of both the Commissionls concern and the trans- i t i o n i n ratedlaking philosophy which i s taking place, some e x t r a c t s from the Caarmissionls Opinion No. 741 (Docket No. E-8973) in t h e case of r a t e s of t h e Bonneville Power AdministratLon, a r e of i n t e r e s t . '!BPArs new r a t e schedules eliminate promotional f e a t u r e s associated with its p r i o r abundance of power, such as i f i i g a t i o n and developmental discounts. They tend to move fm "postage stamp" r a t e s which a r e authorized by t h e Bomeville Project Act, first by identifying and assigning c e r t a i n c o s t s to customers, and second, by i n s t i t u t i n g a seasonal r a t e d i f f e r e n t i a l n . BFA a l s o plans t o work with t h e Northwest Public Power Association t o examine t h e concept of time-of-day pricing, although B P A considers that t h i s is a f f e c t i v e only i f implemented a t the r e t a i l level. The Commission nevertheless went on t o s t a t e : "Careful consideration of r a t e designs directed toward bringing r a t e s more c l o s e l y into alignment w i t h costa by agencies such as B P A w i t h its considerable expertise and resources m u l d c l e a r l y be in the public i n t e r e s t m . This B P A example is perhaps of p a r t i c u l a r i n t e r e s t in demon- s t r a t i n g t h a t r a t e s t r u c t u r e s a r e of concern.and undergoing change, not only a t the r e t a i l level,' b u t a t t h e wholesale level, and not only i n t h e case of inwstor-owned u t i l i t i e s b u t also i n the area of publlc power systsms. In concluding its B PA opinion t h e Cotamission also referred t o a proposed requirement t h a t f u t u r e r a t e applications include complete cost studies in support of the proposed r a t e schedules. Subsequently, on October 9 , 1975, llRevisions to Regulations under the Fedeml Power Act t o Provide f o r F i l i n g of Rate Design Infonnationtl were promulgated. (Although the B PA hearing w as not held under the Federal Power Act i t m u l d appear t h a t s i m i l a r infomation would be required.) These revisions are p a r t i a l l y sunnnariz ed below. In addition, the following excerpts from the Commission~sOrder indicate the b a s i s upon which the changes a r e dsemed necessary and form s i g n i f i c a n t commentary upon the changes which have taken place in the energy s i t u a t i o n over the very recent past. The Commission observes: It----- The Federal Power Act makes reference t o two principal objectives t o be pursued by the Commission, namely: ( a ) assurance of----- an abundant supply of e l e c t r i c energy throughout the United S t a t e s with the g r e a t e s t possible economy ---- and ( b ) regard f o r ----- the proper u t i l i z a t i o n and consemation of natunal resources ---- . The principal t h r u s t of natio.ml power p o l i c i e s f o r many decades has been toward the first of these objectives. Recently, however, Flit policy has s h i f t e d t o greater concern f o r the second objective, namely proper u t i l i z a t i o n and con- servation of our n a t u r a l resources including f u e l s ------. (emphasis added) It is primarily with the l a t t e r objective in view t h a t some degree of restructuring of e l e c t r i c u t i l i t y r a t e s t o r e f l e c t marginal cost pricing principles may be in order. It has been argued t h a t pricing on this b a s i s w i l l bring about a c l o s e r alignment of r a t e s t o costs and thereby minimize misallocation of resources a s well as reduce waste, inequity and d i s ~ r i m i n a t i o n ~ ~ . 'We believe t h a t t h i s matter should be examined by 6 11 e l e c t r i c systems with a view to determining whether a l t e r n a t e pricing mechanisms, p a r t i c u l a r l y those based on marginal cost principles, f o r wholesale s a l e s sub- j e c t to the j u r i s d i c t i o n of this Commission w u l d be economically sound a s well a s in accordance with s t a t u t o r y requirements11. The amended regulations require t h a t ( i n t a r a l i a ) : "In support of the design of the proposed r a t e , the f i l i n g public u t i l i t y s h a l l submit the following material: ( a ) a narrative statement describing and justifying t h e objectives of the design of the preferred r a t e . (emphasis added) If the purpose of the r a t e design is to-r e f l e c t costs, t h e n a r r a t i w should s t a t e how t h a t objective i s achieved, and should be accompanied by a summary cost analysis t h a t would j u s t i f y t h e rate design. If the r a t e design is not intended to r e f l e c t costs (whether f u l l y distributed, incremental o r other) a statement should be rurnished j u s t i i y i n g the departure fmm cost-based r a t e s . - (iii) The General Services Administration E l e c t r i c a l U t i l i Section (GSA) a c t s as interrenor on behalf of t h e Federal Oove&ent i n r a t e cases where Federal Government energy contracts o r power b i l l s a r e l i k e l y to be increased a s a r e s u l t of u t a t y r a t e action. Active i n t e r - vention is decided on grounds of significance o r m a t e r i a l i t y e. g. the amount of increase r e s u l t i n g fmm t h e application o r a change of principle such a s a change to a cost-of-service basis. On occasion the Office w i l l delegate i t s intervention r o l e to other f e d e r a l agencies, such a s the Dapartment of Defence and E Z U , where these are closely involved in the p a r t i c u l a r case. The Section is now placing more emphasis in its interventions upon r a t e s t r a c t u r e and load management aspects. ( i v ) The National Science Foundation (NSFL has sponsored, supported a n d o r financed many projects in t h e energy sector. The horizon is somewhat wider than t h a t of some of the other agencies and may generally be described a s r e l a t e d to energy production (includfng t h e newer sources such as s o l a r and geothermal energy) and to demand and usage (including conservation, load management, systems a n a l y e load forecasting, and pricing; with developaent of r e l a t e d computer models). Much of this work is r e l a t e d to the pricing/load managemant subject of this memorandum and examples of completed projects a r e l i s t e d o r summarized in Annex 3. (v) The Energy Research and Development Administration (ERDA) while -- not d i r e c t l y involved Fn r a t e s t r u c t u r e application - active on is relatedly the technical s i d e -- of energy research. 9. Research Organizations In addition to t h e preceding u t i l i t y , s t a t e and f e d e r a l a c t i - v i t i e s , there a r e a l s o a number of research organizations which are carrying out w o k in this area. In particular, t h e Electric Power Research I n s t i t u t e (EPRI) is engaged in a l a r g e research program, p a r t of which is devoted to the subject under discussion. This I n s t i t u t e i s t h e research am of the e l e c t r i c u t i l i t y industry; public, p r i ~ a t e and cooperative, and i t s a c t i v i t i e s a r e summarized in Annex Ir. Its main a c t i v i t i e s a r e technical i n nature with i t s 2 r i n c i p a l r a t e s t r u c t u r e work being the NARUC study pre- viously referred t o in Section 6. Other organizations knoun to be involved i n r e l a t e d research a r e U s t e d i n Annex 5, many of which are being funded by NSF. Many of these studies a r e outside the s t r i c t definition of LuadManagement, being prin- c i p a l l y concerned w i t h a l t e r n a t e f u e l developnent. Nevertheless, t h s s e a r e included as being of r e l a t e d h i t e r e s t . ANNEX 1 Page 1 of 4 pages Outline of Terms of Refersnce f o r a Tariff Stucty Objective 1 . The purpose of the study i s t o derive a h r i f f structure which r e f l e c t s a s closely as possible the costs to t h e economy of meeting the demand f o r e l e c t r i c i t y subject t o any constraints imposed by the revenue requirements of the u t U t y to meet its f i n a n c i a l objectives and by any income distribution objectives ( e .g. subsidizing poorer consumers ) which the e l e c t r i c i t g t a r i f f s may be required to serve. 2. Suggested guidelines f o r the execution of t h e six* are a s follows : Analysis of Cost Structure (a) The relevant costs a r e n o t the f h a n c i a l costs to the u t i l i t y of expanding and operating i t s system t o meet the demand b u t the incremental costs to the economg. S t r i c t l y speaking, theref ore, shadow prices ( f o r capital, labor and foreign exchange) r a t h e r than actual prices to the u t i l i t y should be used a s appropdate f o r measuring costs and any taxes on the u t i l i t y ' s inputs should be deducted and subsidies added back. However, the consultant cannot be expected t o calculate the appropriate shadow prices to use b u t must r e l y on guidance f rom the authorities. Failing this, he w i l l have no alternative b u t t o use the actual prices of inputs (duly corrected f o r taxes and subsidies), although it i s suggested t h a t , In any case, the oppor- t u n i t g cost of c a p i t a l f o r discounting f u t u r e costs should be taken a s 10%. (b) It i s expected t h a t the f i r s t s t e p would be t o analyze the marginal costs of generating, transmitting and dis- t r i b u t i n g e l e c t r i c i t y a t d i f f e r e n t places, times and -voltage levels to different consumers over the next few years, defined f o r t h e purpose as the period 1976-79. This would require due a t t e n t i o n t o t h e daily and seasonal variations in forecast system demand and, t o the extent possible, i n forecast demands o f various consumer classes. Much of the required information f o r , this purpose may have t o be specially collected e .g. by taking substation readings, by enquiring about shift- working, seasonal work-patterns, e t c . and by statis- t i c a l analysis of available load curves. The b a s i s f o r the estimates of marginal costs would be the dwelopnent program f o r the period 1976-79, the proposed operating regime and pmposals f o r subsequent expansion. ANNEX 1 Page 2 of 4 pages : c ) For time periods when demand does not come up against the system capacity constraint (allowing f o r t h e reserve margins s e t to maintain s e c u r i t y of supply) marginal costs would be simply marginal running costs grossed up to allow f o r losses a t the d i f f e r e n t voltage l e v e l s and, where relevant, in different regions. The relevant losses a r e incremental losses, even if they can be estimated only a p p r o h t e l y , n o t average losses. (d) A t periods when an increase . i n generation would bring the system up against t h e security constraint, the marginal cost of meeting demand would be the addition to a l l system costs resulting from adding t o generation capacity andlor storage, transmission and d i s t r i b u t i o n in order t o provide the increased supply w i t h an unchanged pmbabuitjr of failure. (e) It would a l s o be necessary to study the incremental costs a t t r i b u t a b l e to poor power f a c t o r s f o r 'those type of consumer ( t h e l a r g e r ones) who can be dxpected to improve t h e i r power f a c t o r i n response t o s u i t a b l e t a r i f f incentivis. The most important cost to concentrate on i s the extra MVA capacity required to c a t e r f o r these poor power f a c t o r s . Existing Tariffs It i s envisaged t h a t the next s t e p would be to examine the existing t a r i f f s t r u c t u r e and r a t e s and compare them with the s t r u c t u r e of marginal costs of supply derived from the foregoing analysis. Large differences between the two may be an indication t h a t the e d s t i n g system is giving the wrong price signals t o consumers. h i n a t i o n of the existing system should pay p a r t i c u l a r attention to the types of metering in use and the q u a l i t y of meter main- tenance, since tauswould pmvide some guidance t o what types of t a r i f f a r e f e a s i b l e . Other f e a t u r e s t o look f o r in examing the e x i s t i n g system a r e whether it i s d i f f i c u l t to administer, conducive t o disputes o r con- ducive t o fraud, since these w i l l provide useful pointers to improvement i n devising the new tariff structure. New Tariff Pmposals ( g ) With the information thus collected, it should be possible to make a f i r s t s e t of proposals f o r changing the existing tariff system so t h a t the incentives (and dis- incentives) it provides t o consumers correspond more - - Page 3 of 4 pages closely to the schedule of marginal c o s t s derived. These pmposals would c o n s i s t of a c l a s s i f i c a t i o n of consumers and a tariff (or s e t of t a f l f s ) f o r each class, together with any connection charges and charges f o r reactive power which can be j u s t i f i e d . They would have to be modified a s necessary t o take account of the following: ( i ) Any strong arguments f o r s l a n t i n g elec- t r i c i t y t a r i f f s because of price d i s t o r t i o n s ( e.g. of s u b s t i t u t e s f o r pubUc e l e c t r i c i t y supply) elsewhere in the economy which a r e U e l y to affect electricity sales i n the absence of such slanting. (ii) The need f o r the u t i l i t y to secure an adequate r a t e of return on n e t a s s e t s i n operation. This would generally mean, i f the revenues based on marginal c o s t pricing a r e i n s u f f i c i e n t , r a i s i n g these elements of the proposed t a r F f f s where demand i s l e a s t e l a s t i c . (iii) Any income and r e d i s t r i b u t i o n objectives (e.g. b u g h subsidizing poorer consumers) to which e l e c t r i c i t y tarlffs may be required to con- , tribute. ( i v ) P r a c t i c a l i t y and cost. There is a trade-off between the c o s t of administering any tarFff s t r u c t u r e (which depends l a r g e l y on the cost of metering and billing) and the extent to which it can r e f l e c t the s t r u c t u r e of m a r g h a l costs. Complex metering, f o r example, i s l i k e l y &o be w o r t h h o e only f o r l a r g e r con- sumers, since the response of small consumers t o the extra incentives ( o r disincentives) it o f f e r s would not j u s t i f y the expense. (h) ModFficatians of the s t r i c t "marginal c o s t n t a r i f f s should be designed t o cause t h e l e a s t possible disturbance to the incentives they offer t o consumers i n r e l a t i o n to the costs of supplying them. (i) The new tarfff schedule should provide f o r the aulmmatic adjustment of r a t e s in the event of increases i n the price of f u e l f o r the u t i l i t y ' s steam-electric generating plant. The price l e v e l above which this fuel-adjustment clause comes i n t o e f f e c t should be defined. ANNEX 1 - of 4 pages Implementation of New T a r i f f s The consultant should give careful consideration to the problem of t r a n s i t i o n from t h e old t o the new t a r i f f s in order t o make the changeover more acceptable. He should prepare a plan, in close consultation with the u t i l i t y ' s management, f o r the implementation of the new t a r i f f structure in stages, possibly introducing some of t h e new t a r i f f s a s options I n the f i r s t instance. The plan should include provision f o r publdcity, meter acquisition and i n s t a l l a t i o n , meter reading and b i l l i n g , and a l l nec- essarg s t a f f t r a i n i n g to ensure a smooth transmission t o the new system. ANNEX 2 Page 1 of 3 pages Federal & e r a Acbninis t r a tion R e c t r i c Rate Demonstration Programs Rate Demonstration Projects Aznded to date a r e summarized below: Arizona f i e 1 and Energy Office Load management p r o j e c t Incorporating: - customer response to incentive r a t e s - load scheduling systems and harctware - load shaping and optimization - supervisory controlled load management. Arkansas Public Service Commiss ion In depth, empirical analysis of the e l a s t i c i t y of consumer d.emand to three pricing schemes f o r residential, commercial and i n d u s t r i a l classes: (a) time-of -day r a t e s f o r the summer peak period; (b) an increased summer/winter d i f f e r e n t i a l ; (c) n (residential) t a r i f f s f l a t t e n e d energy charges i . Connecticut PubU c U t i l i t i e s Commission Field t e s t of peak-load pricing f o r r e s i d e n t i a l consumers: (a) to determine customer responses to a v a i l a b i l i t y of an e l e c t r i c energy r a t e based upon peak-load pricing; and (b) to determine the energy conservation, load deferral and cost saving p o t e n t i a l a t t r i b u t a b l e to changes i n con- sumption patterns. los Angeles Department of Water and Power (in collaboration with the Rand Corporat&onf To c o l l e c t and analyze data on changes i n e l e c t r i c i t y consumption under a v a r i e t y of experimental t a r i f f s . New B r s e y S t a t e Ehergy Office . Tests r e l a t e d t o peak-load pricing i n experimental r a t e s t r u c t u r e s to determine e l a s t i c i t y in r e s i d e n t i a l usage. P i l o t application of an Automatic:Remote Meter Reading and Control System to demonstrate practic- a b i l i t y of t h i s equipment f o r implementation of peak-load pricing and load shedding. ANNEX 2 Page 2 of 3 pages Public U t i l i t y Commission of Ohio To develop and t e s t several c r i t i c a l elements of an economic load management program: (a) development of r e s i d e n t i a l load c h a r a c t e r i s t i c s ; (b) development of a computer program t o determine the incremental cost of producing e l e c t r i c i t y ; (c) demonstration of radio control of e l e c t r i c water heating, a h conditioning and heating; (d) demonstration of r e s i d e n t i a l incremental cost pricing implemented by time-of -day metering; (e) development of an i n d u s t r i a l load simulation model; and (f) demonstration of an ecoriomical energy storage system. Vemont Public Service Board To t e s t customer acceptance and l o a d f i n a n c i a l management effectiveness of a broad range of r a t e designs, load-control systems and signalling devices, including: (a) six non-traditional r a t e designs inverted demand,- off-peak, t h r e e part, peak kw demand, contract, and i n t e r r u p t i b l e demand; and (b) replacement of e x i s t i n g heating systems w i t h hydranic ' heat storage units, t o be charged under an off-peak r a t e schedule. (Experimental work in Vermont i s also referred to under the NSF project details - Annex 3 . ) Michigan Public Service Commission Load management and energy conservation programs f o r i n d u s t r i a l e l e c t r i c customers. Wisconsin Public Senrice Comnission Experimental time-of-day r a t e structures f o r moderate and high- use r e s i d e n t i a l customers, i.e. with and without e l e c t r i c space heating. The program w i l l evaluate: ANNEX 2 Page 3 of 3 pages ( a ) changes in patterns; (b) the economics of the experiment and its expansion; ( c ) costs and pmblems r e metering; and ( f ) f a c t o r s (income, age, family s i z e ) which a f f e c t response. New York PubUc S e A c e Coarmission Time-of-day rate designs f o r certain Con. Ed. r e s i d e n t i a l and commercial customers. Non-F'unded Praj e c t s The non-funded projects may be bmadly classed under the following headings: (although this categorization i s n o t intended t o imply t h a t the projects i n each category a r e in any way repetitive): Number of Proposals (a) erquipuent t e s t i n g r e efficiencies and load cantzkl, w i t h related cost/ b e n e f i t analysis (b) load demand management 5 (c) r a t e designs to move loads to off-peak and encourage conservation b (d) usage data and changes i n price/con- sumption relationships b (el energy saving techniques 2 ( f ) load forecasting (g) LRIC s t u d i e s and application 1 National Science Foundation - L i s t i n g of Exam~leP r o j e c t s Brookhaven National Laboratory/State University of New York - New York Regional Energy Study This r e p o r t r e l a t e s t o development of methodology f o r regional energy planning, and i t s i n t e g r a t i o n i n t o multiregional n a t i o n a l analysis. C h a r a c t e r i s t i c s of energy use in the New York C i t y region a r e d e t a i l e d and analyzed. Included i s a study of socio-economic c h a r a c t e r i s t i c s of r e s i - d e n t i a l energy consumption which includes t h e f i n d i n g that: "There e x i s t s a s u b s t a n t i a l increase in both energy use f o r space heating and appliance energy consumption a s household income i n c r e a s e s u - and goes on to recommend t h a t socio-economic c h a r a c t e r i s t i c s of energy use should form a major element in any analysis of t h e s o c i a l and economic impact of pricing policy, conservation policy, f u e l a l l o c a t i o n and con- sumption regylation. University of Wisconsin - F'rencldAmerican Conference on Energy Systems, Foxwcasting, Planning and Pricing The summary of t h e proceedings, edited by Messrs. C. J. C i c c h e t t i and W.K. Foell, i s divided i nto f i v e sections: ( a ) Oveniiew (b ) Forecasting Techniques ( c ) E l e c t r i c i t y Planning and Design ( d ) Ehvironrnental h p a c t Analysis ( e ) R e c t r i c i t y Pricing; Theory and Practice. Input was primarily based on French and B r i t i s h experience in load management and marginal c o s t pricing, w i t h U.S. experience i n t h e areas of environmental impact and a l t e r n a t i v e energy sources. The State of Texas - Gavernors Enerw Advisorg Council - Special P r o j e c t s This pmgram consisted of some 40 p r o j e c t s involving the p a r t i c i - p a t i o n of indLviduals from 5 s t a t e u n i v e r s i t i e s , 8 s t a t e agencies, 5 t r a d e organizations and companies and i n d i v i d u a l Council members. The pmgram was subdivided a s follows: A. Supply and Demand (a) Energy supply and demand based on known resources !EEL2 Page 2 of 5 pages (b) Economic impact of the energy producing industries of Texas. (c) h p a c t of conservation practices on dennand. B. Rwirornnental and S o c i a l Bspects (a) Evaluation to determine opthum relationships between energy production, transmission and u t i l i z a t i o n , and environmental quality (b) Assessment of environmental impact of various possible measures t o a l l e v i a t e the energy shortage (c) Evaluation of the social impact of energy conservation measures to a l l e v i a t e the energy shortage. C. and Regulat.org P o l i q Le~al - ( a ) Assessment of the existing energy related, international, federal and s t a t e laws, and determinatdon of powers to act D. New Technolo= Coal (or l i g n i t e ) gasification Solar energy and s o l a r peak sharing Nuclear breeder reactors Ksgnetohydm@mmic power Solid waste usage Advanced power transmission and storage systems Secondary and t e r t i a r y o i l recoverg Magnetic containment and l a s e r fusion Increased efficiency of e l e c t r i c a l power s t a t i o n s Hydrogen based ene rgg distribution systems Suwnary of the some LO reports is not a p r a c t i c a l p o s s i b i l i t y within the i n t e n t of this Note. EuIPpean Approaches to Managing the ELectric Load Professor - T. Laaspere, Thayer School of Ehgineering, Dartmouth College - ?part of research f o r the Vermont Public Service Board) A s W a r study by Professor h a s p e r e was submitted a s d d e n c e a t the generic hearing before the New Pork Public Service Commission and is b r i e f l y summarized in Part 7 of this Note. EEL2 Page 3 of 5 pages - F i r s t Year Report Vermont E l e c t r i c U t i l i t y Load Program Program submitted by Richard V. de Grasse, Deputy Commissioner Vermont Public Service Board This i s the f i r s t report in an ongoing load management research program f o r e l e c t r i c u t i l i t i e s i n the S t a t e of Vermont. The full program w i l l cover a three year period. The Public Service Board was i n t e r e s t e d in research which m u l d f u r t h e r basic Board policy, i e ,:. (a) conseme e l e c t r i c energy and protect the environment; (b ) develop a cos t-based, non-discriminatory r a t e s t r u c t u r e based on a changed utility-economic environment; (c) keep consumers r a t e s a s low a s possible; and (d) keep Vemont u t i l i t i e s strong and viable. In l i n e t d t h these objectives year one included plans to: (a) develop a demand model; (b) process data from i n t e r r u p t i b l e serPice experiments; (c) assess the technical means f o r implementing i n t e r r u p t i b l e service and load-dependent r a t e s ; (d) detennine optimum insulation f o r residences and water heater; (e) stu* c o s t allocation tecki-iques and development of a cost-based r a t e structure; and (f) assess consumer response experience using day-night rates. Among submissions included in t h i s year s r e p o r t are: (a) Estimates t h a t load management, by moving from a demand oriented system geared ta delivering any amount of power a t angtine, to a more average - load oriented system which looks a t the demand side as well a s the supply side, can r e s u l t in a 15%t o 20% capacity saving in approxi- mately e i g h t years. Capital cost estimates a r e $80-$ll0 t o control a kw of load on peak versus $300-$500 f o r peaking capacity t o serve an additional peak k d of load. . = of 5 pages ( b ) Developlent of t h e relationship between load management and marginal cost r a t e design. ( c ) T e c h i c a l reports on the "hardwarell aspects of load management, including a cost conclusion t h a t load management has a 2 / 1 cost-benefit over building new peaking capacity. Additionally, a ripple control system has been ordered f o r year two studies. The Wisconsin - &L-,Regional - Ehergy Model A Systems Approach t o Xegional Gw h a i v- --- s is. Eherw , - - -- -- and Policv Svstems . - A - . - - - - - - - -- ,-, - --" Research -- Group, -- - @st i t u t e f o r Environmental Studies, Universitg of Wisconsin, Madison An i n i t i a l version of the model was put i n t o operation i n l a t e 1973. A s ~ l l a ~ a xreporty on the work of the Group, and the objectives and s t r u c t u r e of the Model, was published i n 1975. E a r l i e r reports by the Gmnp a r e available dealing with, i n t e r alia. - Alternative Future E l e c t r i c i t y Generation f o r the State of Wisconsin - Commercial Ehergy Use Model - Model of hvironmental h p a c t of Wisconsin E l e c t r i c i t y U se -. I n d u s t r i a l Ehergy Use Model - Fbsidential k e r g y Use Model - Simulatian Model of Iang-Range Expansion of ELectrIcity Generation Capacity in Wisconsin - Implications of Commercial Building Codes f o r Plergy Conservation. Rand Paper Series ( examples) A number of papers have been issued by the Rand Corporation, of wbich the following are examples: (a) Economic Principles and the Structure of Electric Rates: Cost of S e f i c e , Allocation of Costs, and Rate Design - Jan Paul Acton and Bridger M. Mitchell. ANNEX 3 ' P a g e o f 5 pages (b) Selected Econometric Studies of the Demand f o r Electricity: Review and Discussion - Bridger M. Mitchell, w i t h the assistance of Jan Paul Acton and R a w d Mawill. (c) A Model of Residential E l e c t r i c i t y Consumption - M.B. Beman and Morlie Hammer Graubard. (d) The Distribution Impact of Price Changes and Other Poli'cies on the Demand for Different Ehergy Types i n the Residential Sector - Jan Paul Acton and Bridger M. Mitchell. Report ( 1 ) records testimony on the subject matter b e f o ~ ethe E l e c t r i c Rate Structure C o d t t e e of the Board of Commissioners of the Los Angeles Department of Water and Power. Report ( 2 ) a l s o records testimony and i s r e l a t e d t o the California P.U.C. generic hearing. Report ( 3 ) was presented a t an Operations Research Society national meeting and i s based on consumption of e l e c t r i c i t y in Los Angeles. % p o r t (4) i s not y e t completed but working notes a r e available subject t o the sponsor's per- mission. EZectric Power Research I n s t i t u t e The b s t l t n t e fs 1975 program is estimated to cost $133 m i l l i o n , w h i l e a t January 1975 there were 271 research projects underway o r in contract negotiation, valued a t $208 million. Arrangements a l s o e x i s t f o r cooperative working with Federal Agencies such a s ERDB, Deparbnent of . the I n t e r i o r and NASA, and Kith other energy i n t e r e s t e d groups such aa NARUC The areas of study a r e subdivided into four divisions: (a) F o s s i l Fuel Advanced Systems (b) Nuclear Power ( c ) Transmission and M s t r i b u t i o n ( d ) Energy Systems, EhviK,ment and Conservation. A11 divisions are i n turn f u r t h e r divided, with the Energy Systems, &vinmment imd Conservation Division, having four sections: ( a ) M r o n m e n t a l Assessment (b) h e r o Supply ( c ) h e r g y Demand and Conservation (d) Energy Modeling. Rnphasis on t h e Denand and Conservation side appears to be p a r t i c u l a r l y related to energy usage and %hardwaremaspects, with the principal "software" ( r a t e s ) emphasis being involvement i n the NBRUC Resolution 9 Study which is described further in the NBRUC section of this mmoranchun. ANNU. 5 Page 1 of 2 pages Research Organizations - Ongoing Studies AIA Research Corporation Solar Heating and Cooling System. Clark University Non-conventional Incentives f o r the Adoption of Solar & e r a Design: Peak-Load Pricing and Off-Peak Solar Ehergy Con- s t r u c t i o n f o r Commercial and Residential Buildings. Cornell University Validation and Dissemination of the Integrated Pe trolaurn Company Survey Data Base. hvironmental Future Inc. Regional Implementation Centers a s Incentives f o r t h e Early Adoption of Solar Energy by the Building Industry. Environmental Law I n s t i t u t e E h e r s Developnen t in Colorado. Franklin I n s t i t u t e Research Laboratories Implications of R e s i d e n t i a l Solar Space Conditioning on Rectric Utilities. Massachusetts I n s t i t u t e of Technology Natural Gas Policy Model. Analysis of t h e World O F 1 ~ i a r k a t i s s u e d OctoSer 1975). ( F i r s t progress r e p o ~ t National Bureau f o r Economic Research I n d u s t r i a l Demand f o r h e r g y . Pearce and Brand Study of the Competitive Develo-gent of Solar and Geothermal Enera. Puerto ace Resollrces Authority Lmpact of S o l a r Heating and Cooling on Xlectric U t i l i t i e s . Regional and Urban !Flaming Implementation Inc. Evaluation of Alternatives f o r Overcoming Mortgage Market Constraints on t h e Commercial Acceptance and Use of R e s i d e n t i a l S o l a r Heating and Cooling Technologies. @E ! L5 Page 2 of 2 pages Societal h a l y t i c s I n d t i t u t e Barriers to the Use of Wind Ehergy Machines: The Present Legal/Regulatory Regime and a Preliminary Estimate of Potential Legal/PolitfcaL/Societal Problems. State of Iouisiana, Department of Conservation." Developnent of a Model to forecast E l e c t r i c i t y Demand (Responsive t o price changes though not t o r a t e s t n r c t u m s a s such. ) Vniwrsity of Delaware Solar Water Heating: Economic Feasibility, Capture Pptential, and hcentives. University of Southern California Evaluation of Lcentives f o r the Development of Ocean Thelma1 Gradient Ecchange Technology. Utah S t a t e Universitg The Use and Abuse of the Regulatory Process i n the Solar Ehergy Space Conditioning and Water Heating hdustzy. University of Pennsylvania International Analysis of Deanand E l a s t i c i t i e s between Fuel tspes . Uniwrsitg of Texas Documentationcnd Dissemination of Research Results f o r the Energy System Modelling I n t e r f u e l Competition Pmject. Universitg of washington* Inverted Rate Structures. (Research by Professor Hohlenberg on the effects of b e r t e d r a t e structures upon r e s i d e n t i a l consumption. The sample families are i n the S e a t t l e area and the research is funded by the City of Seattle.) University of Wisconsin Study of Energy Systems and Regulatory Policies f o r Wisconsin - A State and %gional .Prototgpe. (Extension of e a r l i e r work - see report ref erred to i n Amax 3 . ) N.B. ( a ) Funding of the above projects is generally through NSF, except f o r studies marked."