EFFICIENT PRICING OF
STANDBY DISTRIBUTION
SERVICES
Presented to
Edison Electric Institute
Distributed Generation Task Force
Milwaukee, Wisconsin
CHRISTENSEN ASSOCIATES
By
Kelly Eakin, Vice President
Laurits R. Christensen Associates, Inc.
June 20, 2001
1 June 2001

Efficient Pricing Of
Standby Distribution Services
The Message
 Rate design principles the same for standby and full-requirements rates.
 Efficiency requires fixed costs recovered through fixed charges.
 Properly unbundled distribution rates are equally applicable to standby and full-requirements services for each class.
 Other industry objectives should not interfere with efficient pricing of standby services.
CHRISTENSEN ASSOCIATES 2 June 2001

Distribution Service Rate Design
Principles & Goals (1)
 Recover the Costs of the Distribution System
–
Fixed
–
Variable
–
Marginal
 Accurate Reflection of the Total Costs of
Serving Each Customer Class
 Compatibility with Efficient Price Signals In
Competitive Supply Market
CHRISTENSEN ASSOCIATES 3 June 2001

Distribution Service Rate Design
Principles & Goals (2)
 Eliminate Cost-Rate Disparities
– between pricing components
– between customer classes
 Fairness in the Apportionment of Total
(Common) Costs
 Rates Should Encourage Customers to Make the Most Efficient Consumption Decisions
CHRISTENSEN ASSOCIATES 4 June 2001

Distribution Service Rate Design
In Practice (1)
 Fixed Costs Recovered Through Fixed Charges
 Level of Fixed Charges
– For the system it is determined by the aggregate customer load
– Contribution by each customer group is then their individual maximum load
–
Process requires determining the expected maximum load for each customer
– Maximum measured demand during a specified period is best approach
CHRISTENSEN ASSOCIATES 5 June 2001

Distribution Service Rate Design
In Practice (2)
 Preferred Approach is an Access Charge


Most Practicable Approaches
– Ratcheted Demand Charges
–
Contract Demand Charges
“As-Used” Demand Charges Insufficient
–
Will Under-Collect Needed Revenue Requirement, or
– Unfairly Fall on Full Requirements Customers
 This approach is equally applicable to standby services.
CHRISTENSEN ASSOCIATES 6 June 2001

Distribution Service Rate Design
Counter Argument #1
Claim: “On-Site Generators Are Different – Rate
Design Should Be Different”
Response: No. From a distribution service rate design perspective, they are the same as other customers that relies on the system to deliver power consumed from the grid
– they impose about the same costs on distribution
– they derive similar benefits from the distribution
– they can be in a separate class but pricing should not be different
CHRISTENSEN ASSOCIATES 7 June 2001

Distribution Service Rate Design
Counter Argument #2
Claim:
“Coincident Peak (CP) Method is a superior method to allocate fixed costs to OSGs.”
Response: CP was useful to allocate generation before the days of hourly pricing. However, CP approach not appropriate for distribution services
–
Distribution planned on a location basis
– Customers are not billed on a location basis
–
Maximum demands of the customers the most reliable indicator of distribution costs imposed and benefits received
CHRISTENSEN ASSOCIATES 8 June 2001

Distribution Service Rate Design
Counter Argument #3
Claim: “Fixed charges will discourage new generation. Rates policy should encourage generation.”
Response : Efficient rates for standby will encourage efficient on-site generation while discouraging uneconomic bypass.
CHRISTENSEN ASSOCIATES 9 June 2001

Efficient Pricing
Of Standby Distribution Services
CHRISTENSEN ASSOCIATES 10 June 2001