IEEE Power & Energy Magazine - May/June 2020 - 25

make appropriate modifications in language (and possibly
in the rate-design parameters, such as the magnitude of the
demand charge and the charges for energy by TOU as well
as the duration and temporal location of the peak period)
to make the new tariffs more understandable to customers.
To better test customer acceptance and the amount of
demand response to the new tariffs, utilities can conduct
additional pilots. Pilots should be designed on scientific principles of experimental design that would preserve the internal and external validity of the results, allowing them to be
extrapolated to the population of customers and applied to
different prices than the ones being tested. Randomized controls, randomized encouragement, and matching controls are
different ways of preserving pilot validity.
Given these pilot results, the utility must then decide on the
rollout strategy and whether it should be mandatory, default,
or opt in. As a point of reference, Fort Collins rolled out TOU
energy rates to all its residential customers on a mandatory
basis as of 1 October 2018. Also, as of 1 October 2018,
the Sacramento Municipal Utilities District began rolling
out time-of-use energy rates with a US$20-per-month service
charge on a default basis in California. In Ontario, Canada,
TOU rates have been rolled out as the default tariff for energy
supply since 2007 (which means that customers can opt out of
the rate). At this point, only 10% have opted out. The distribution tariff is a flat bill. Finally, the utility must track the deployment of the new tariffs, survey customers for feedback, set up
social media sites and monitor the conversation, and make any
necessary modifications to the rate design.

Conclusions
TOU rates were first tested in the United States in the late
1970s. Fourteen pilots showed that customers accepted such
rates and responded to the price signals in a fairly predictable fashion. The tests were motivated by the energy crisis of
the 1970s and the passage of the Public Utilities Policies Act
in the United States under the Carter administration, which
put the spotlight on TOU rates.
But not much happened, since smart meters were lacking, and other priorities surfaced. Most notably, there was
a newfound interest in restructuring the electricity industry
and offering customers a retail choice of energy suppliers.
Tariff reform was put on the back burner.
The California energy crisis of 2001-2002 put the focus
back on tariff reform, along with advanced metering and
demand response. Hundreds of pilots were carried out in the
United States and abroad showing that customers accepted
such rates and responded in a fairly predictable pattern.
Smart-meter deployments began in earnest and now encompass half of the residential population. Modern tariffs, however, touch fewer than 5% of customers.
Progress is stymied because of the fear of the unknown
and by a concern that rate reform will harm low-income

may/june 2020	

customers, customers with disabilities, and senior citizens.
Customer backlash remains a primary concern. Secondary
concerns relate to the inability of several billing systems to
handle the new tariffs.
The way forward is to conduct pilot programs where none
have been done to deploy the new tariffs, which could be
offered with temporary bill protection. Additionally, they
should be accompanied with customer-education and marketing campaigns to ease the transition.
Ultimately, these three-part rates provide a favorable option
as the default tariff to maximize economic efficiency and intercustomer equity. They can be paired with alternative designs
that would be offered only on an opt-in basis.
There are signs of change. Technological advancements
have already cleared some of the major barriers to tariff
reform. With slowing sales and growing DER penetration, the
day is not far off when the tariffs of tomorrow will become
the tariffs of today.

For Further Reading
J. Bonbright, Principles of Public Utility Rates. New York:
Columbia Univ. Press, 1961.
M. Everett, C. Fang, A. Ramirez, and J. Schneider, "A
modern rate architecture for California's future," Public Utilities Fortnightly, vol. 156, no. 12, pp. 8-14, Nov.
2018.
A. Faruqui, H.-P. Chao, V. Niemeyer, J. Platt, and K.
Stahlkopf, "Analyzing California's power crisis," Energy J.,
vol. 22, no. 4, pp. 29-52, 2001. doi: 10.5547/ISSN0195-6574EJ-Vol22-No4-2.
A. Faruqui and J. R. Malko, "The residential demand for
electricity by time-of-use: A survey of twelve experiments
with peak load pricing," Energy, vol. 8, no. 10, pp. 781-795,
1983. doi: 10.1016/0360-5442(83)90052-X.
A. Faruqui, S. Sergici, and C. Warner, "Arcturus 2.0: A
meta-analysis of time-varying rates for electricity," Electr. J., vol. 30, no. 10, pp. 64-72, Dec. 2017. doi: 10.1016/j.
tej.2017.11.003.
S. S. George and E. Bell, "Key findings from California's
recent statewide TOU pricing pilots," Electr. J., vol. 31, no.
8, pp. 52-56, Oct. 2018. doi: 10.1016/j.tej.2018.09.013.
J. Lazar and W. Gonzalez, "Smart rate design for a smart
future," Regulatory Assistance Project, Montpelier, VT,
July 2015. [Online]. Available: https://www.raponline.org/
wp-content/uploads/2016/05/rap-lazar-gonzalez-smart-rate
-design-july2015.pdf

Biographies
Ahmad Faruqui is with The Brattle Group, San Francisco,
California.
Cecile Bourbonnais is with The Brattle Group, San
Francisco, California.
p&e


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https://www.raponline.org/wp-content/uploads/2016/05/rap-lazar-gonzalez-smart-rate-design-july2015.pdf https://www.raponline.org/wp-content/uploads/2016/05/rap-lazar-gonzalez-smart-rate-design-july2015.pdf https://www.raponline.org/wp-content/uploads/2016/05/rap-lazar-gonzalez-smart-rate-design-july2015.pdf

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