IEEE Power & Energy Magazine - May/June 2020 - 19

©ISTOCKPHOTO.COM/TRONAND

Innovations in Rate Designs
integrate distributed energy resources (DERs). These capital investments, along with most other
utility costs, do not vary with the
volume of electricity consumed.
They thus cannot accurately be
reflected through a volumetric
charge. This has resulted in large
residential customers effectively
subsidizing smaller customers,
who, as a result of low energy usage, pay less relative to the costs
they impose on the system. An
additional limitation of flat volumetric charges is that they fail to
capture the effects of temporal
and seasonal variability, which
result in peak periods that are
more expensive to utilities than
off-peak periods.
Consequently, a m isa lignment between utilities' cost and
rate structures currently exists,
particularly with respect to the
residential class. In response to
this challenge, many utilities
are introducing innovative, costreflective tariffs better aligned
with both their own needs and
those of their customers. In short,
utilities seek to develop the tariffs
of tomorrow.

The Principles of Rate Making
The same seminal principles that have guided rate design for
decades should motivate regulatory designs of future tariffs.
James Bonbright's principles for public utility rates, first
published in 1961, have remained in place in spite of various
technological advances and evolving industry trends. These
principles continue to be widely accepted (see the "For Further Reading" section). As shown in Table 1, they can be
distilled to five key criteria.
Economic efficiency means that the resources are not
used to generate and deliver electricity in such a way that
their reallocation will increase the total cost to consumers
and producers, resulting in an overall increase in the total
cost to society. In other words, no resources consumed in
the delivery of electricity should be wasted through overinvestment and operating costs.
may/june 2020	

The second criterion, equity, refers to fairness among
customers and between the utility and customers. Although
rate design nearly always involves some degree of cross-subsidy, a utility should aim to remove unintentional subsidies
between customer types. According to Bonbright, a natural
way to achieve equity among customers with different load
profiles and consumption values is through cost-reflective
rates. Under such rates, customers who incur high costs for
the system will pay proportionally higher amounts than lowcost customers.
Revenue stability refers to the utility's ability to recover
its costs through a sufficient and predictable level of revenues. Bill stability, the fourth criterion, then stipulates that
while the utility must recover its costs, ideally through costreflective rates, it must also protect customers from unmanageable fluctuations in their bills. Although new rates will
nearly always result in bill increases for some customers,
utilities can take steps to minimize seriously adverse and
unexpected impacts, for instance by gradually implementing
changes to rates.
Finally, customer satisfaction is needed for the successful
implementation of any changes to the pricing structure. If
not properly explained or rolled out, even simple rates can
cause confusion and subsequently trigger a backlash from
customers. Regulators and utility companies who anticipate
such an adverse reaction from customers will resist implementing new rates.

Rethinking Present-Day Rate Making
Underpinning all five key criteria is the principle of cost
causation, which Bonbright considered the most important
standard of reasonable rates. In the case of electricity, costs
consist of three elements:
✔✔ a fixed cost for servicing the customer
✔✔ a capacity cost associated with the distribution grid,
the transmission network, and the power plants
✔ ✔ an energy cost associated with the production of
electricity.
Cost causation says that revenues should reflect these three
costs. However, given the ubiquity of two-part tariffs for
residential customers, this has historically not been the case.
Instead, as typified in Figure 1, utilities employing two-part
rates typically recover most of the costs of residential service
on a volumetric basis. To achieve this, they build nonvariable fixed and capacity costs into the energy charge using
assumptions about class load factors and applying them
equally to all customers in the class.
As a result, a common violation of the equity principle
occurs under two-part rates when "peaky" customers, who
ieee power & energy magazine 	

19


http://www.ISTOCKPHOTO.COM/TRONAND

IEEE Power & Energy Magazine - May/June 2020

Table of Contents for the Digital Edition of IEEE Power & Energy Magazine - May/June 2020

Contents
IEEE Power & Energy Magazine - May/June 2020 - Cover1
IEEE Power & Energy Magazine - May/June 2020 - Cover2
IEEE Power & Energy Magazine - May/June 2020 - Contents
IEEE Power & Energy Magazine - May/June 2020 - 2
IEEE Power & Energy Magazine - May/June 2020 - 3
IEEE Power & Energy Magazine - May/June 2020 - 4
IEEE Power & Energy Magazine - May/June 2020 - 5
IEEE Power & Energy Magazine - May/June 2020 - 6
IEEE Power & Energy Magazine - May/June 2020 - 7
IEEE Power & Energy Magazine - May/June 2020 - 8
IEEE Power & Energy Magazine - May/June 2020 - 9
IEEE Power & Energy Magazine - May/June 2020 - 10
IEEE Power & Energy Magazine - May/June 2020 - 11
IEEE Power & Energy Magazine - May/June 2020 - 12
IEEE Power & Energy Magazine - May/June 2020 - 13
IEEE Power & Energy Magazine - May/June 2020 - 14
IEEE Power & Energy Magazine - May/June 2020 - 15
IEEE Power & Energy Magazine - May/June 2020 - 16
IEEE Power & Energy Magazine - May/June 2020 - 17
IEEE Power & Energy Magazine - May/June 2020 - 18
IEEE Power & Energy Magazine - May/June 2020 - 19
IEEE Power & Energy Magazine - May/June 2020 - 20
IEEE Power & Energy Magazine - May/June 2020 - 21
IEEE Power & Energy Magazine - May/June 2020 - 22
IEEE Power & Energy Magazine - May/June 2020 - 23
IEEE Power & Energy Magazine - May/June 2020 - 24
IEEE Power & Energy Magazine - May/June 2020 - 25
IEEE Power & Energy Magazine - May/June 2020 - 26
IEEE Power & Energy Magazine - May/June 2020 - 27
IEEE Power & Energy Magazine - May/June 2020 - 28
IEEE Power & Energy Magazine - May/June 2020 - 29
IEEE Power & Energy Magazine - May/June 2020 - 30
IEEE Power & Energy Magazine - May/June 2020 - 31
IEEE Power & Energy Magazine - May/June 2020 - 32
IEEE Power & Energy Magazine - May/June 2020 - 33
IEEE Power & Energy Magazine - May/June 2020 - 34
IEEE Power & Energy Magazine - May/June 2020 - 35
IEEE Power & Energy Magazine - May/June 2020 - 36
IEEE Power & Energy Magazine - May/June 2020 - 37
IEEE Power & Energy Magazine - May/June 2020 - 38
IEEE Power & Energy Magazine - May/June 2020 - 39
IEEE Power & Energy Magazine - May/June 2020 - 40
IEEE Power & Energy Magazine - May/June 2020 - 41
IEEE Power & Energy Magazine - May/June 2020 - 42
IEEE Power & Energy Magazine - May/June 2020 - 43
IEEE Power & Energy Magazine - May/June 2020 - 44
IEEE Power & Energy Magazine - May/June 2020 - 45
IEEE Power & Energy Magazine - May/June 2020 - 46
IEEE Power & Energy Magazine - May/June 2020 - 47
IEEE Power & Energy Magazine - May/June 2020 - 48
IEEE Power & Energy Magazine - May/June 2020 - 49
IEEE Power & Energy Magazine - May/June 2020 - 50
IEEE Power & Energy Magazine - May/June 2020 - 51
IEEE Power & Energy Magazine - May/June 2020 - 52
IEEE Power & Energy Magazine - May/June 2020 - 53
IEEE Power & Energy Magazine - May/June 2020 - 54
IEEE Power & Energy Magazine - May/June 2020 - 55
IEEE Power & Energy Magazine - May/June 2020 - 56
IEEE Power & Energy Magazine - May/June 2020 - 57
IEEE Power & Energy Magazine - May/June 2020 - 58
IEEE Power & Energy Magazine - May/June 2020 - 59
IEEE Power & Energy Magazine - May/June 2020 - 60
IEEE Power & Energy Magazine - May/June 2020 - 61
IEEE Power & Energy Magazine - May/June 2020 - 62
IEEE Power & Energy Magazine - May/June 2020 - 63
IEEE Power & Energy Magazine - May/June 2020 - 64
IEEE Power & Energy Magazine - May/June 2020 - 65
IEEE Power & Energy Magazine - May/June 2020 - 66
IEEE Power & Energy Magazine - May/June 2020 - 67
IEEE Power & Energy Magazine - May/June 2020 - 68
IEEE Power & Energy Magazine - May/June 2020 - 69
IEEE Power & Energy Magazine - May/June 2020 - 70
IEEE Power & Energy Magazine - May/June 2020 - 71
IEEE Power & Energy Magazine - May/June 2020 - 72
IEEE Power & Energy Magazine - May/June 2020 - 73
IEEE Power & Energy Magazine - May/June 2020 - 74
IEEE Power & Energy Magazine - May/June 2020 - 75
IEEE Power & Energy Magazine - May/June 2020 - 76
IEEE Power & Energy Magazine - May/June 2020 - 77
IEEE Power & Energy Magazine - May/June 2020 - 78
IEEE Power & Energy Magazine - May/June 2020 - 79
IEEE Power & Energy Magazine - May/June 2020 - 80
IEEE Power & Energy Magazine - May/June 2020 - 81
IEEE Power & Energy Magazine - May/June 2020 - 82
IEEE Power & Energy Magazine - May/June 2020 - 83
IEEE Power & Energy Magazine - May/June 2020 - 84
IEEE Power & Energy Magazine - May/June 2020 - Cover3
IEEE Power & Energy Magazine - May/June 2020 - Cover4
https://www.nxtbook.com/nxtbooks/pes/powerenergy_091020
https://www.nxtbook.com/nxtbooks/pes/powerenergy_070820
https://www.nxtbook.com/nxtbooks/pes/powerenergy_050620
https://www.nxtbook.com/nxtbooks/pes/powerenergy_030420
https://www.nxtbook.com/nxtbooks/pes/powerenergy_010220
https://www.nxtbook.com/nxtbooks/pes/powerenergy_111219
https://www.nxtbook.com/nxtbooks/pes/powerenergy_091019
https://www.nxtbook.com/nxtbooks/pes/powerenergy_070819
https://www.nxtbook.com/nxtbooks/pes/powerenergy_050619
https://www.nxtbook.com/nxtbooks/pes/powerenergy_030419
https://www.nxtbook.com/nxtbooks/pes/powerenergy_010219
https://www.nxtbook.com/nxtbooks/pes/powerenergy_111218
https://www.nxtbook.com/nxtbooks/pes/powerenergy_091018
https://www.nxtbook.com/nxtbooks/pes/powerenergy_070818
https://www.nxtbook.com/nxtbooks/pes/powerenergy_050618
https://www.nxtbook.com/nxtbooks/pes/powerenergy_030418
https://www.nxtbook.com/nxtbooks/pes/powerenergy_010218
https://www.nxtbook.com/nxtbooks/pes/powerenergy_111217
https://www.nxtbook.com/nxtbooks/pes/powerenergy_091017
https://www.nxtbook.com/nxtbooks/pes/powerenergy_070817
https://www.nxtbook.com/nxtbooks/pes/powerenergy_050617
https://www.nxtbook.com/nxtbooks/pes/powerenergy_030417
https://www.nxtbook.com/nxtbooks/pes/powerenergy_010217
https://www.nxtbook.com/nxtbooks/pes/powerenergy_111216
https://www.nxtbook.com/nxtbooks/pes/powerenergy_091016
https://www.nxtbook.com/nxtbooks/pes/powerenergy_070816
https://www.nxtbook.com/nxtbooks/pes/powerenergy_050616
https://www.nxtbook.com/nxtbooks/pes/powerenergy_030416
https://www.nxtbook.com/nxtbooks/pes/powerenergy_010216
https://www.nxtbook.com/nxtbooks/ieee/powerenergy_010216
https://www.nxtbook.com/nxtbooks/pes/powerenergy_111215
https://www.nxtbook.com/nxtbooks/pes/powerenergy_091015
https://www.nxtbook.com/nxtbooks/pes/powerenergy_070815
https://www.nxtbook.com/nxtbooks/pes/powerenergy_050615
https://www.nxtbook.com/nxtbooks/pes/powerenergy_030415
https://www.nxtbook.com/nxtbooks/pes/powerenergy_010215
https://www.nxtbook.com/nxtbooks/pes/powerenergy_111214
https://www.nxtbook.com/nxtbooks/pes/powerenergy_091014
https://www.nxtbook.com/nxtbooks/pes/powerenergy_070814
https://www.nxtbook.com/nxtbooks/pes/powerenergy_050614
https://www.nxtbook.com/nxtbooks/pes/powerenergy_030414
https://www.nxtbook.com/nxtbooks/pes/powerenergy_010214
https://www.nxtbookmedia.com