Shifting requirements drive energy ratemaking
Advances in technology are changing the energy industry. We generate a growing portion of our electricity with renewable resources, advances in automation and communication technology make our power grid smarter, and it’s more reliable than ever before.
Exciting news for American consumers, these advances are also changing the cost structure of the energy industry. Because costs determine electric cooperative rates, changing costs require changes to co-op ratemaking.
Not-for-profit electric cooperatives work hard to ensure their rates are fair to all members. To accomplish this, cooperatives design their rates so the bill each member receives matches the cost of serving that member as closely as possible.
But just because a co-op’s rates are designed to be fair doesn’t mean they’re always easily understood. In fact, rate structures that do the best job of fairly assigning costs can be hard to understand.
As the energy sector moves through this unprecedented period of innovation and change, cooperatives across the United States are experimenting with new rate structures to best recover costs and pay for the electric grid in a fiscally responsible manner that’s fair to all members.
Here’s a quick look at three of the approaches co-ops are trying.
Rather than charge the same price for electricity at all times, time-of-use rates charge different prices based on the time of day when energy is used. The goal is to reward consumers for reducing energy use at the times when demand is highest.
For most electric cooperatives, demand spikes in the afternoon and early evening hours as air conditioners battle rising temperatures and families return home from school and work and set about their evening routines.
When demand spikes, electric cooperatives must purchase extra electricity to meet it. And because demand is at its highest, the extra power typically comes at a higher price. There are savings to be had if the purchase can be reduced or avoided.
A time-of-use rate helps ensure there’s always power available when consumers need it but provides price incentives to shift certain activities—such as running the dryer or dishwasher—to times when demand for electricity is lower.
When co-op members embrace this model, they can lower their monthly bills and help the cooperative reduce its costs—which can save members even more money in the long run.
Perhaps the most confusing concept in energy billing is the demand charge.
Historically, most residential consumers have not paid demand charges. But as our power grid becomes smarter and our network of generation resources gets more complex, it’s likely that more electric cooperatives will incorporate demand charges into their residential rate structures.
Demand measures the greatest amount of electricity you demand from the system at one moment in time. The greater the demand the higher the cost to build, operate, and maintain equipment adequate to deliver the energy.
To understand demand charges, imagine you’re at a party chatting with two guests you’ve never met before, and you ask them how they got to the party. Betsy tells you she drove 150 miles per hour to get to the party. David just says he drove 150 miles.
There’s a big difference between a car capable of traveling 150 miles and a car capable of traveling 150 miles per hour.
If you obey the speed limit, any car can take you 150 miles. But if you want to go 150 miles per hour, you’ll need an expensive car with extra horsepower.
The same thing is true with electricity. If you demand large quantities of electricity delivered all at once, the cooperative needs larger, costlier equipment to accommodate that demand. Even if your maximum demand occurs only once in a while, the cooperative has to ensure its system is capable of meeting the need when it comes.
If Betsy and David use electricity the same way they use their cars, Betsy is going to be paying more than David each month, even if their total energy use is the same.
Fixed Monthly Charges
Most electric cooperatives charge a fixed monthly fee to be connected to the co-op’s lines. The name of that fee varies, but common terms include customer charge, service availability charge, fixed charge, or access charge.
No matter what it’s called, the purpose is to recover the cost of the poles, wires, bucket trucks, computers, switches, and the people who furnish electricity to your home or business. Every month, those costs are the same whether you use a lot of electricity or turn off everything in your house and go on a four-week vacation.
Most utilities, including most electric cooperatives, have never charged the full monthly cost of service as a flat fee. Often, the fixed portion of a member’s bill is only a fraction of the actual cost to build and maintain the power lines to their home or business. The rest of that cost has been made up with a separate delivery charge that varies based on how much energy is used.
To understand the difference between these structures, imagine a new vehicle with a sticker price that would require a monthly car payment of $500.
Now, imagine if instead of charging $500 per month, the car company structured your payment so it was $250 per month, plus an additional 25 cents for every mile driven.
If you drove 1,000 miles per month, you’d end up paying the same amount. If you drove more than that, your payment would be higher, and if you drove less than 1,000 miles, your payment would be lower.
That’s how most cooperatives currently charge for the delivery of electricity to your home. While not ideal, it’s an approach that’s worked for years, and most co-op members are familiar and comfortable with it.
But as renewable technologies become more popular and consumers have a wider range of available energy choices, the old model doesn’t fully cover the cost of maintaining the grid.
As not-for-profit, member-owned organizations, electric cooperatives want to help their members find the best energy solutions to meet their needs. If members want to install solar, cooperatives want to help. If members want to reduce their energy use through home improvements and efficient appliances, cooperatives are eager to provide advice.
But even if we consume less energy or produce some of our own, we still need the power grid unless we’re willing to go without at night or when it’s overcast or the wind stops blowing or becomes too strong. It costs a lot of money to operate and maintain that grid, and if kilowatt-hour rates continue covering part of those fixed costs—to quote the Wisconsin Public Service Commission’s order in an investor-owned utility’s 2014 rate-setting proceeding—“this results in higher-use customers subsidizing lower-use customers regardless of the reasons those customers may have lower use.”
In a co-op situation, at least part of the fixed costs would be shifted onto other members while a minority enjoy both their savings from lower kilowatt-hour usage and the fixed-cost subsidy.
By lowering the variable delivery charge and increasing the fixed charge, electric cooperatives can keep the grid running safely and reliably for everyone whether they need it all the time or part of the time, while allowing members to make energy choices that work best in their lives.
This system does a better job of fairly charging each member for the actual cost of their service. Some members end up paying a bit more, some a bit less, but the total amount of money raised by the cooperative remains unchanged.
Change and Adaptation
The coming years will bring many changes to the way we generate, deliver and use electricity, and advances in energy technology promise to greatly improve our quality of life. America’s electric cooperatives are working hard to ensure that whatever the future may bring, you’ll be connected to that future through a modern energy grid that is safe, reliable, and fairly priced for all.
—Justin LaBerge writes on consumer and cooperative affairs for the National Rural Electric Cooperative Association, the Arlington, Va.-based service arm of the nation’s 900-plus consumer-owned, not-for-profit electric cooperatives. WECA’s Dave Hoopman contributed to this article.