Rate Design
June 23, 2015
Laurie Reid
Overview
1. A little bit of physics
2. The Ratemaking Process
3. Generally Accepted Ratemaking Principles
4. What’s happening in Ontario
5. Conclusions
2
1. A little bit of Physics
Electricity - Sinusoidal Waves
3
Electricity - Sinusoidal Waves
4
Real, Apparent and Reactive Power
Inductance
Leading
5
Real, Apparent and Reactive Power
Inductance
Leading
Capacitance
Lagging
6
Real, Apparent and Reactive Power
Inductance
Leading
Matching
Steady State
Capacitance
Lagging
7
Real, Apparent and Reactive Power
Inductance
Leading
Matching
Steady State
Capacitance
Lagging
8
2. The Ratemaking Process
 Rate Design is Phase 3 of the standard
three phase ratemaking process used by
most regulators, commonly referred to as:
 Rate-base rate-of-return regulation, or
 Cost of service regulation
Revenue
Requirement
Cost
Allocation
Rate
Design
9
Customer Classes and Cost Allocation
• Customers are defined by size and load profile
From
To
Sample Customer
-
49 kW
Residential, Corner Store, Most Farms
50
250 kW
Monster home; 20 unit multi-res; Commercial
garage; Large dairy farm or greenhouse
250
499 kW
Supermarket
500
999 kVA
Home Depot or Small machine shop
1000
2499 kVA
Costco or 30 floor condominium
2500
4999 kVA
Auto parts manufacturer or 2300 Yonge St
5000
And above kVA
TD Centre; Hospital; UofT; Stelco
10
Customer Classes and Cost Allocation
Residential
Hotel
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Cost Allocation and Customer Classes
Sub-transmission
Customer
TS
Primary
Customer
DS
Distribution
Transformer
Retail
Customer
G
Secondary Distribution
E.g.,120 V
Transmission
(e.g.,230 kV)
Sub-transmission
(E.g.,44 kV)
Primary Distribution
(E.g., 32/4.8kV)
Transmission System Distribution System
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3. Generally Accepted Ratemaking Principles
• Legislative mandate for regulation:
– Just and reasonable
– In the public interest
• Electricité de France monopoly tariff development,
Pierre Massé and Marcel Boiteux, 1950s
– Those who incur costs should pay them
– So that they understand the value
• The Principles of Public Utility Rates,
James C. Bonbright, 1961
– Balance of generally accepted ratemaking principles
– Capital attraction
• The Economics of Regulation: Principles and Institutions,
Alfred E. Kahn, 1970
– Some things aren’t monopolies anymore and should be
competitive
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Current Ontario Tariff for Low-volume Consumers
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Bonbright’s Principles:
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Bonbright’s Principles: Effective
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Bonbright’s Principles: Effective
• Straight fixed/variable
– Recovering the fixed costs in a fixed charge
(most of distribution)
• Revenue for a class divided by the number of
customers in the class
– Recovering the variable costs in a variable
charge (fuel costs for generation, losses, etc.)
• Based on variable cost
– Capital attraction and certainty for investment
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Bonbright’s Principles:
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Bonbright’s Principles: Stability
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Bonbright’s Principles: Stability
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Bonbright’s Principles: Stability
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Bonbright’s Principles: Stability
• Revenue stability for utility
– Cash flow → short term debt
– Deferral or variance accounts → interest
• Rate stability for ratepayer
– Complaints
– Budgeting → Bad debt for utility
• Higher fixed charge
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Bonbright’s Principles:
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Bonbright’s Principles: Static efficiency
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Bonbright’s Principles: Static efficiency
• Maximizing use of system
– Peak capacity is product
• Ramsey pricing
– Promotional pricing to customers with elastic
demand
• Generators don’t pay
• Economic development rate
• Off-peak rate
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Bonbright’s Principles:
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Bonbright’s Principles: Appropriately priced
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Bonbright’s Principles: Appropriately priced
• Internalities
– Costs and benefits
• Power Quality (kVA rates)
• Distributed generation
• Externalities
– Promoting green energy (carbon tax)
– Social programs (lifeline rates)
– Economic development (seasonal rates, rural)
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Bonbright’s Principles:
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Bonbright’s Principles: Fair
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Bonbright’s Principles: Fair
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Bonbright’s Principles: Fair
• Cost causality
– Rates or Charges
– Cost drivers: customer numbers or demand
• No intergenerational subsidies
– “Used and useful” or “Work in Progress”
• Beneficiary pays
– Least cost option
– First past the post
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Bonbright’s Principles:
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Bonbright’s Principles: No undue discrimination
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Bonbright’s Principles: No undue discrimination
• Equals treated equally
– New or existing customers
– Postage stamp rates: urban / suburban / rural
– Limitations of metering
• Unequals treated unequally
Due discrimination → Maximizing use of system → Unfair
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Bonbright’s Principles:
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Bonbright’s Principles: Dynamic Efficiency
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Bonbright’s Principles: Dynamic Efficiency
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Bonbright’s Principles: Dynamic Efficiency
Incent the behaviour that you want to induce
Excess capacity
Limited capacity
45
45
40
40
35
35
30
30
25
25
20
20
15
15
10
10
5
5
0
0
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Bonbright’s Principles:
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Bonbright’s Principles: Practical and Simple
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Bonbright’s Principles: Practical and Simple
• Simplicity
• Certainty
• Feasibility of Application
• California
– 2 zones
– 4 seasons
– 12 usage tiers
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Bonbright’s Principles:
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Bonbright’s Principles: Free from controversy
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4. What’s happening in Ontario
Ontario Tariff for Residential Consumers
Ontario Residential Change
70
60
Monthly Charge ($)
50
Fixed/Variable
40
30
20
Fully Fixed
10
0
0
500
1000
1500
2000
2500
Monthly Usage (kWh)
3000
3500
4000
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Implementing the New Rate Design Approach
• The Board has directed the transition to fully
fixed distribution rates for residential electricity
customers
1. Over 4 years
2. Equal adjustments every year
• Next step: Electricity Commercial and Industrial
– Valuing connection; capacity; and distributed
resource
– Cost driven; customer controlled; and forward
looking
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5. Conclusions
 Traditional small volume customer rate designs
did not correspond to cost drivers
 Advanced metering provides an opportunity to
improve link between cost drivers and rates
 Rate design can be used to enhance regulatory
principles/objectives including:
 Economic efficiency
 Conservation
 Distributed Generation
 But change creates winners and losers
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• https://www.youtube.com/watch?v=IA2Z48
nlDoQ
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