Hydro- Québec
Distribution
R-3644-2007 Application
DOMESTIC RATE REFORM
Original : 2007-08-01
HQD-12, Document 3
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Hydro- Québec
Distribution
Original : 2007-08-01
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HQD-12, Document 3
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TABLE OF CONTENTS
1.INTRODUCTION ...............................................................................................5
2. CURRENT STRUCTURE OF DOMESTIC RATES ..........................................8
2.1 Fixed Charge..............................................................................................9
2.1.1 Benchmarking of Fixed Charges for Domestic Rates ...........................9
2.1.2 Current Strategy for the Fixed Charge ................................................11
2.2 Energy Blocks .........................................................................................13
2.2.1 Number of Energy Blocks for Domestic Rates ................................13
2.2.2 Threshold of the first Energy Block .................................................16
2.2.3 Energy Block Rates.........................................................................19
2.2.4 Benchmarking of Energy Blocks for Residential Rates ...................21
2.2.5 Current Strategy for Energy Blocks .................................................22
2.3 Demand Charge.......................................................................................25
2.3.1 Benchmarking of the Capacity Invoice for Domestic Rates.............25
2.3.2 Current Strategy for the Demand Charge........................................26
3. SCENARIOS RELATED TO THE FIXED CHARGE.......................................27
3.1 10% Decrease of the Fixed Charge........................................................27
3.2 50% Decrease of the Fixed Charge........................................................29
3.3 Analysis and Recommendation for a Decrease of the Fixed Charge .31
4. SCENARIOS FOR THE THRESHOLD OF THE FIRST ENERGY BLOCK....32
4.1 Winter Threshold of the First Block at 35 kWh/day..............................32
4.2 Summer Threshold of the First Block at 25 kWh/day...........................35
4.3 Analysis and Recommendations for Threshold of the First Block .....38
5. ENERGY PRICE ADJUSTMENTS .................................................................39
5.1 Total Increase on the Second Block......................................................39
5.2 Analysis and Recommendation for Energy Price Adjustments ..........42
6. INTRODUCTION OF A THIRD BLOCK .........................................................42
6.1 Threshold of the Third Block at 60 kWh/day.........................................44
6.2 Threshold of the Third Block at 100 kWh/day.......................................46
6.3 Threshold of the Third Block at 150 kWh/day.......................................47
6.4 Analysis and Recommendation for a Third Consumption Block........49
7. PROPOSED REFORM OF THE CAPACITY INVOICE FOR RATE D ...........54
8. PROPOSED REFORM TO RATE DM............................................................58
8.1 Closing Rate DM......................................................................................60
8.2 Capacity Invoice for Rate DM .................................................................61
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1.INTRODUCTION
The Régie de l’énergie ordered the Distributor to carry out a rate reform in light of
the fact that the marginal cost of supply is three times higher than the average
cost. In itself, the situation is not exceptional. The electricity industry in Quebec
has been inescapably faced with increasing electricity prices for a long time. In
fact, historically, in the context of an integrated company, which is the context in
which the current rate structures were defined, the marginal cost associated with
certain uses already largely exceeded the current marginal cost. A major reform
of domestic rates already took place by going from a degressive two-block
structure in 1978, to a progressive two-block structure. Hydro-Quebec has since
been among the first distributors to integrate a signal of increasing marginal costs
into its rate structure. Although the regulatory context has changed, the reality of
increasing costs is not new and it is echoed in the current structure of Rate D.
Today, the Régie asks the Distributor to pursue analyses in which the marginal
cost signal becomes the main topic of interest. However, the Distributor notes
that the role of the ratemaker is not one-dimensional and it cannot solely rely on
the marginal cost signal.1 This exercise must have other underlying principles; a
good rate – one that truly fulfills its role of informing the customer of the costs
associated with the service rendered – constitutes a whole that must answer to
all those principles in the best possible way.
To this end, it is essential to come back to the basic texts. Here, the Distributor
refers to James Bonbright whose writings constitute an indisputable and
fundamental reference in ratemaking.2 According to Bonbright, the following
principles are essential when designing a rate:
“Revenue-related Attributes:
1
Following this logic, considering that the current marginal cost of supply is uniform across all uses, a Rate
D exclusively based on marginal costs should only have one energy block.
2
Bonbright, James C., Albert L. Danielsen and David R. Kamerschen. “Principles of Public Utility
Rates”, Public Utilities Reports, 2nd ed., 1988.
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1. Effectiveness in yielding total revenue requirements under the fair return
standard without any socially undesirable expansion of the rate base or
socially undesirable level of product quality and safety.
2. Revenue stability and predictability, with a minimum of unexpected
changes seriously adverse to utility companies.
3. Stability and predictability of the rates themselves, with minimum of
unexpected changes seriously adverse to ratepayers and with a sense of
historical continuity. (Compare “The best tax is an old tax.”)
Cost-related Attributes:
4. Static efficiency of the rate classes and rate blocks in discouraging
wasteful use of service while promoting all justified types and amount of
use:
o in the control of the total amounts of service supplied by the
company;
o in the control of the relative uses of alternative types of service by
ratepayers (on-peak versus off-peak service or higher quality
versus lower quality service).
5. Reflection of all of the present and future private and social costs and
benefits occasioned by a service’s provision (i.e., all internalities and
externalities).
6. Fairness of the specific rates in the apportionment of total costs of service
among the different ratepayers so as to avoid arbitrariness and
capriciousness and to attain equity in three dimensions: (1) horizontal (i.e.,
equals treated equally); (2) vertical (i.e., unequals treated unequally); and
(3) anonymous (i.e., no ratepayer’s demands can be diverted away
uneconomically from an incumbent by a potential entrant).
7. Avoidance of “undue discrimination” in rate relationships so as to be, if
possible, compensatory (i.e., subsidy free with no intercustomer burdens).
8. Dynamic efficiency in promoting innovation and responding economically
to changing demand and supply patterns.
Practical-related Attributes:
9. The related, practical attributes of simplicity, certainty, convenience of
payment, economy of collection, understandability, public acceptability,
and feasibility of application.
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10. Freedom from controversies as to proper interpretations.”
These principles rely on the present and future reality of costs; they avoid
arbitrariness and discrimination; they promote efficiency and effectiveness. The
Distributor believes that fragmenting the ratemaker’s beliefs, modifying the
components of a rate without an overall vision, carrying out partial analyses that
are unduly biased toward one principle while the others are excluded, and giving
way to undocumented arbitrariness, could lead to undesirable distortions in the
price signal given to customers. Even if these distortions are relatively minimal
and selective on the short-term, they could have undesirable long-term
consequences. The precautionary principle demands an overall ratemaking
vision.
According to Bonbright, these 10 principles are not of equal importance.
Principles 1, 4, 5, 6 and 7 are the most determinant. The 1st principle is respected
from the moment the revenue requirement is approved by the Régie.
The 4th and 5th principles, “Static efficiency of the rate classes and rate blocks in
discouraging wasteful use of service while promoting all justified types and
amount of use” and “Reflection of all of the present and future private and social
costs and benefits occasioned by a service’s provision (i.e., all internalities and
externalities)”, gain all of their importance in the context of ratemaking reform.
Bonbright speaks of the effectiveness of different rate classes and rate blocks in
discouraging wasteful use while promoting (electricity) consumption when it is
justified. The Distributor insists on two elements of this statement.
On the one hand, the efficiency of rate blocks in discouraging wasteful use
implies that the blocks that are defined are significant to the customer. The
Distributor has already explained to the Régie that it does not assume that all
customers understand the structure of Rate D. Conversely, customers know their
overall bill and this is what will influence their energy choices. Changes that will
be the result of a structural change must be analyzed by taking into account the
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significant variations they will lead to on customers’ overall bills, and their
capacity to induce efficient behaviour. This implies that a structural change must
ensure the application of a sufficiently high price for a significant volume of kWh
and for a significant number of customers. This also implies that every customer
should be significantly compensated for his energy efficiency efforts. The
Distributor will use this principle to justify the existence of two energy blocks for
Rates D and DM.
On the other hand, Bonbright also states that certain volumes of electricity
consumption can be promoted when it is justified. Again, Bonbright excludes
arbitrariness: as it will demonstrate, here the Distributor thoroughly scrutinizes
the threshold of the first rate block and insists on the importance of justification
and demonstration.
The 6th and 7th principles of ”Fairness of the specific rates in the apportionment of
total costs of service among the different consumers ” and “Avoidance of “undue
discrimination” in rate relationships so as to be, if possible, compensatory (i.e.,
subsidy free with no intercustomer burdens)” in particular, deal with the userpays principle. Customers must pay for the costs that they incur. While it may
rely on a principle of social equity, venturing on a different route and requiring
certain customers to bear the costs incurred by other customers is not a winning
solution in the long-term. Sooner or later economic reason must assert itself.3
The Distributor will turn to this principle in particular when discussing the fixed
charge.
2. CURRENT STRUCTURE OF DOMESTIC RATES
The Distributor’s domestic rates (D, DM, DT and DH) are made up of a fixed
charge, two energy blocks and a demand charge.
3
In the presence of particular conditions, it is often more efficient to resolve a problematic situation via a
commercial program than to modify the rate structure for all customers.
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2.1 Fixed Charge
The fixed charge, expressed in ¢/day, is the fixed component of domestic rates. It
partially covers the costs incurred by the Distributor to establish a commercial
relationship particular to each contract. These costs include customer service
charges (meter readings, billing, receipt of payments, bad debt, theft, telephone
responses, claims and complaints and customer relations) and metering
(acquisition, installation and maintenance of metering equipment). These costs
are primarily related to the number of customers served and are independent
from energy consumption. At its current level of 40.64¢/day, the fixed charge
remains slightly higher than costs for 2008 which amount to 39.09¢/contract/day.
However, if we add service loop charges to this, the total cost amounts to
42.72¢/contract/day.
Table 1
Revenue Requirement for Customer Service and Metering
2008
Revenue Requirement
($M)
(¢/contract/day)
Customer Service
Metering
Total
Service loop
Total including service loop
422.3
75.2
497.5
46.2
543.7
33.18
5.91
39.09
3.63
41.72
In compliance with Bonbright’s 6th principle, the Distributor believes the fixed
charge should inform each customer of the embedded costs he incurs,
regardless of his consumption.
2.1.1 Benchmarking of Fixed Charges for Domestic Rates
The fixed charge applied by the Distributor is comparable to those of other utility
companies across North America. To exemplify this, table 2 shows the fixed
charges applied to residential customers in some North American cities, in April
2006.
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Table 2
Fixed Charge for 30 days on April 1, 2006
Residential Customers (1 000 KWH per Month)
Cities
CAN$/month
Percentage of the total
monthly bill (%)
Canadian cities
12.19
18
Charlottetown, PE
Edmonton, AB
Halifax, NS
Moncton, NB
Ottawa, ON
Regina, SK
St-John’s, NL
Toronto, ON
Vancouver, BC
Winnipeg, MB
21.55
6.18
10.83
17.74
5.98
14.41
15.69
13.64
3.63
6.25
18
6
10
17
6
14
16
12
6
10
Canadian average
11.64
12
Boston, MA
Chicago, IL
Detroit, MI
Houston, TX
Miami, FL
Nashville, TN
New York, NY
Portland, OR
San Francisco, CA
Seattle, WA
7.54
8.36
7.39
6.55
6.06
9.83
12.94
8.20
5.20
3.42
3
9
6*
3
5
10
7
10
2*
4
American average
6.86
5
Average
9.69
9
Montreal, QC
American cities
* Application of a minimal bill
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Table 2 shows that, compared to other distributors, the weight of the fixed charge
in the Distributor’s bill is high. This is partially explained by a slightly higher fixed
charge and by Hydro-Quebec’s low energy prices.
2.1.2 Current Strategy for the Fixed Charge
In the past few years, in the context of deregulation and to minimize risk, some
American utilities chose to increase their fixed charge to recover a portion of their
supply costs. This practice has been widely criticized4 because it alters the
relationship between the price signal and customer behaviour. In fact, from the
moment in which a significant portion of the electricity bill is unduly fixed,
customers do not have any interest in reducing their consumption or in making
the right energy choices. For this reason, and contrary to this practice, the
Distributor chose to freeze the fixed charge as of April 1, 2005.
Prior to that date, the significance of the fixed charge on customers’ overall bills
contributed to rendering the average price of D and DM rates degressive.
Therefore, the more a customer’s consumption increased, the more the average
price of energy consumed decreased, even if the second consumption block was
billed at a higher rate than the first block. Figure 1 shows this relationship.
4
To this effect see Weston, Frederick, "Charging for Distribution Utility Services: Issues in Rate Design",
The Regulatory Assistance Project, December 2000.
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Figure 1
Degressivity of the Average Price of Rate D on April 1, 2004 and 2007
In order to make the average price of Rates D and DM less degressive, and
thereby send a better price signal with the second energy block, the Distributor
proposed to freeze the fixed charge on April 1, 2005. In decision D-2005-34, the
Régie approved this proposal because the weight of the fixed charge relative to
the total bill was decreased. In doing so, the Régie increased the progressivity of
domestic rates and improved the price signal.
In decision D-2006-34, again the Régie opted to freeze the fixed charge for
domestic rates because this component is not an elastic part of the rate structure
and because customer service costs, which are at its core, were very stable in
the past and they remained at a similar level for 2006.
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As shown in figure 1, the fixed charge freeze approved by the Régie three times
in a row5 contributed to making Rate D progressive. It should be noted that the
freeze of the fixed charge corresponds to a decrease of the latter in constant
dollars.
2.2 Energy Blocks
To set energy blocks it is necessary to: determine the number of blocks required,
define the volumes associated with each block and, at the same time, to set the
prices of each of the defined blocks.
2.2.1 Number of Energy Blocks for Domestic Rates
If the Distributor wished to ascribe to Bonbright’s 4th principle to the letter, and
give customers the long-term marginal price signal, there would be no need to
define more than one consumption block because, as the following table shows,
all the kWh used by customers present a similar marginal cost of supply and
transmission for all uses.
5
D-2005-34, 2006-34 and D-2007-12
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Table 3
Marginal Costs by use for Rate D Customers 6
(In ¢ / kWh)
1
Constant Annuity
(10 years)
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
10.68
9.86
10.06
10.26
10.46
10.67
10.88
11.09
11.31
11.53
11.76
Water heating
Supply and Transmission
9.81
9.06
9.24
9.42
9.60
9.79
9.99
10.18
10.38
10.59
10.80
Transmission-Native load
0.63
0.58
0.59
0.61
0.62
0.63
0.64
0.66
0.67
0.68
0.70
Distribution
0.24
0.22
0.23
0.23
0.24
0.24
0.25
0.25
0.26
0.26
0.27
11.55
10.65
10.87
11.09
11.31
11.54
11.77
12.00
12.25
12.49
12.74
Space heating
Supply and Transmission
9.74
8.98
9.16
9.34
9.53
9.72
9.92
10.12
10.32
10.53
10.74
Transmission-Native load
1.31
1.21
1.23
1.26
1.28
1.31
1.34
1.36
1.39
1.42
1.45
Distribution
0.50
0.46
0.47
0.48
0.49
0.50
0.51
0.52
0.53
0.54
0.55
11.07
10.22
10.42
10.63
10.84
11.05
11.27
11.50
11.72
11.96
12.19
All uses
Supply and Transmission
9.79
9.04
9.22
9.40
9.59
9.78
9.97
10.17
10.37
10.58
10.79
Transmission-Native load
0.92
0.85
0.87
0.88
0.90
0.92
0.94
0.96
0.98
1.00
1.02
Distribution
0.35
0.33
0.33
0.34
0.35
0.35
0.36
0.37
0.37
0.38
0.39
1
The nominal discount rate used is 6,46%
The Distributor cannot set a consumption block at a price of, say, 9.79¢/kWh
since that would generate revenues that exceed the revenue requirement. It is
therefore necessary to make an adjustment to what would be a marginal-cost
based rate in order to meet the revenue requirement. In this context, the
Distributor proposes the following solution, inspired by the rules of RamseyBoiteux:7 setting a higher price for one consumption block for which demand is
elastic in order to promote energy efficiency, and adjusting the price of the
consumption block for which demand is not elastic.
"Whenever incremental costs exceed embedded costs for a
utility, overcollection of revenues will occur: whenever
embedded costs exceed incremental costs, undercollection of
revenues will occur.
6
See HQD-14, document 3.
Électricité de France, Tarification de l’électricité en France : principes et construction des barèmes,
DEPS Tarification, Cahier 30, Juin 1995 : “these rules, known as Ramsey-Boiteux, show that the search for
a “collective optimum” must be translated by variances between the price and marginal costs that are
inversely proportional to the elasticity of demand to prices.”
7
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Several methods of making rate adjustments exist. Assume an
overcollection situation. One adjustment method, widely
supported, is the inverse elasticity rule; departure from
marginal cost pricing should be inversely proportional to the
elasticity of demand. Those customers with elastic demands
would be charges marginal cost-based rates; those customers
with inelastic demands would be charges rates below marginal
costs. In this way, prices below marginal costs "would distort
consumption decision as little as possible". Another method is
to lower or eliminate the customer charge. A third method is
the adopt and inverted rate structure, in which the tailblock
rate reflects marginal costs and "the initial block or blocks are
set at a low enough level to meet the revenue requirement."8
(HQD underlines)
This principle was also reiterated by NERA in its report to Manitoba Hydro. The
Distributor also agrees with NERA when the latter highlights the importance of
applying a sufficiently high price to a significant volume of kWh and for a
significant number of customers.
“Inverted block rates can provide efficient price signals
because the run-off rate can be set at or close to marginal
cost, and the first block set to recover the remaining revenue
requirement. The size of the first block determines how many
customers are exposed to the efficient run-off rate: if the first
block is too large, few customers will face the efficient price.
The size of the first block also determines the differential
between the first and second block prices. Choosing the block
size is thus a critical task in the design of inverted block
rate.”9(HQD underlines)
However, to reach the objective of promoting energy efficiency, each block must
be meaningful to the customer. That is, the customer must be able to associate a
price to a specific consumption and he must know that at a given time in his
billing period, he passes from one block to another; this is the objective of a price
signal.
8
Phillips, Charles F., “The Regulation of Public Utilites – Theory and practice”, Public Utilities Reports,
2nd ed., 1988.
9
NERA Economic Consulting, “Review of time-of-use and inverted electric rate structures for application
in Manitoba”, July 28, 2005.
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The Distributor has therefore identified a first block of annual consumption for
which demand is less elastic. By doing so, the marginal kWh consumed and
associated with a second block can be attributed to a more elastic demand.
Finally, the Distributor notes that a two-block rate structure makes it possible to
assign a larger relative share of the bill to the largest consumers and a smaller
share to smaller consumers. The redistributive nature of this structure is more a
function of the level of consumption than of the specific use made of the first
block kWh.
2.2.2 Threshold of the First Energy Block
The threshold of 30 kWh per day for the first block of Rate D was set at the end
of the 1970’s based on the monthly profile of customers that did not use
electricity for heating. This definition was related to the marginal cost structure of
that time and it reflected the fact that the arrival of electric heating for domestic
use exerted an upward pressure on costs.
In the current context of improving the price-signal, it is no longer a question of
defining a profile without the heating load, but of defining a consumption block
that is significant for the customer and for which demand is less elastic. The
Distributor therefore wishes to reiterate that the first 30 kWh/day neither include
nor exclude any specific uses.
Although the underlying paradigm that defined the first block has changed, the
Distributor justifies the threshold of 30 kWh per day on the basis of underlying
consumptions. By doing so, faithful to the Bonbright principles, the Distributor
ensures that the threshold of 30 kWh/day is not arbitrary, but rather one that
relies on concrete data. The Distributor has many ways to justify it.
The data from a customer sample measured by the Distributor (Table 4) confirms
that, given an average consumption of 28 kWh/day (27 kWh without air
conditioning), the threshold of 30 kWh/day remains adequate. Consumption
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associated with basic uses is relatively constant throughout the year, making it
identifiable and meaningful for the customer. The billing data also shows that for
the average residential Rate D customer, average daily consumption for all uses
combined is approximately 30 kWh from June to August included.
Table 4
Monthly Allocation of Basic Uses
Month
Average kWh per
day
(including air
conditioning)
Average kWh per
day
(excluding air
conditioning)
January
31
31
February
30
30
March
30
30
April
28
28
May
27
26
June
25
25
July
25
24
August
25
24
September
24
24
October
24
24
November
27
27
December
33
33
28
27
Year
Summer (May to
October)
Winter (November to
April)
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26
31
25
31
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On the one hand, the average consumption per use allows the Distributor to
determine the daily consumption associated with what were historically referred
to as basic uses, namely appliances, lighting and water heating. Table 5 shows
the average consumption per use for all households whose average yearly
consumption (including space heating) is 17 773 kWh. It shows an average
consumption of 29 kWh/day for all uses excluding space heating. This reaffirms
the relevance of the threshold of 30 kWh/day.
Table 5
Average Consumption per Use for All Households
Annual consumption1
(kWh/year)
Uses
Appliances2
Lighting
Air conditioning
Other uses
Total (without water
heating)
Water heating
Total (with water
heating)
Space heating
All uses
1
2
Daily consumption
(kWh/day)
4 714
966
155
1 340
13
3
0
4
7 175
20
3 447
9
10 622
29
7 112
17 733
19
49
Takes into account the penetration rate of households
Stove, refrigerator, freezer, dishwasher, washer and dryer
On the other hand, the Distributor can classify into uses the basic requirements
associated with typical cases used throughout this document. As shown in Table
6, consumption associated with appliances and lighting ranges between 15 and
24 kWh/day. However, this total ranges between 27 and 42 kWh/day if
consumption for water heating is added. Although these typical cases do not
represent average cases,10 this analysis shows that basic uses, for typical singlefamily homes, are billed in the first energy block.
10
These typical cases are based on actual cases and they take into account the socio-demographic variables
of households.
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Table 6
Average Consumption per Use for Typical Cases of
Single-Family Homes
Uses
Appliances*
Lighting
Total (without
water heating)
Water heating
Total (with water
heating)
*
Small home
111 m3 (1 200ft2)
20 494 kWh/year
11
4
Medium home
158 m3 (1 700ft2)
26 484 kWh/year
16
4
Large home
207 m3 (2 230ft2)
32 054 kWh/year
19
5
15
21
24
12
14
18
27
34
42
Stove, refrigerator, washer, dryer and freezer (for the medium and large homes)
2.2.3 Energy Block Rates
When the Distributor was able to meet demand growth with the heritage pool
contract at 2.79¢/kWh, the variance between both energy blocks was based on
the average-cost variance11 between basic uses and other uses. The evidence in
the 2005-2006 rate application12 showed, on this basis, that the price variance
between the first and the second block of Rates D and DM could range between
a minimum of 34% and a maximum of 50%. However, in the post-heritage
context, in which the rate structure must be much more representative of
marginal costs, this variance is no longer an objective in itself but a consequence
of the reflection of marginal costs.
Table 3 shows the marginal costs associated with Rate D. To promote energy
efficiency and to align the structure of the domestic rate in the long-term, the
price of the second block should at least tend toward the marginal supply cost
(supply and transmission) for heating. This cost is estimated at 9.74¢/kWh
(constant annuity over 10 years). By 2017, the marginal heating cost increases to
11
12
Or revenue requirement.
R-3541-2005, HQD-1, Document 2 pages 14 to 17.
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10.74¢/kWh. These costs are much higher than the current price for the second
energy block.
Moreover, in order to promote the optimal use of resources, the price can be
evaluated as a function of the price of an alternative product. For example, the
cost in kWh-equivalent for natural gas heating, for the energy bill alone, was
7.74¢/kWh in the winter 2006-2007.13 By adding the additional acquisition and
maintenance costs of natural gas systems compared to those of electric
baseboards, the price per kWh-equivalent is 11.43¢/kWh. This price is therefore
a part of the upper benchmarks to set the price for the second block. In fact, by
coming closer to this value, the Distributor limits the substitution of fuels toward
electricity, a substitution that could not take place without exerting upward
pressure on supply costs for all customers.
Marginal costs and the price of alternative products show that the rate of the
second block could be clearly superior to the current rate of 7.03¢/kWh. In
addition, the first block rate should also not distance itself too much from
marginal price signals since all uses show a similar marginal price.
However, in terms of the price signal, for a majority of customers, all energy
efficient behaviour will ultimately translate into savings in the second block,
whether the reduction of kWh used is attributable to lighting, appliances, water
heating or space heating in the winter. Therefore, a customer who consumes an
average of 40 kWh in winter will see a decrease in his electricity bill of 7.03¢/kWh
for every kWh saved, irrespective of what it is used for, as long as it is billed in
the second block. That is the price signal that the Distributor wants to send to
residential customers via energy block rates.
13
If we consider a 70% efficiency factor for natural gas heating systems. See HQD-12, document 1, section
5.1.1.
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2.2.4 Benchmarking of Energy Blocks for Residential Rates
The benchmarking carried out by the Distributor among some Canadian and
American distributors reveals very clear tendencies in terms of the number of
blocks.14
One Block
In Canada, domestic rate structures generally have only one block and a
transition is under way toward a progressive two-block structure.15 Only Ontario
has adopted seasonal billing, however it may eventually be replaced by time-ofuse (TOU) pricing once advanced metering is implemented.
Two Blocks
In the United States, domestic rates are generally made up of two progressive
blocks. This reflects the tendency that started at the beginning of the 1980’s to
abandon degressive price structures and to promote consumption management
in the context of demand growth and environmental concerns. Several
Distributors offer two-block seasonal rates but, among them, the prices that are
associated to each can either be degressive and/or progressive depending on
the season. In fact, it appears that some utilities continue to apply rates that
promote the use of electricity in winter (for example, Commonwealth Edison and
Consolidated Edison).
Three Blocks
Among the utilities examined, four of them offer a basic rate made of three
energy blocks. For Pacific Power & Light and Georgia Power, the sum of
consumption associated with the first two blocks is equivalent to consumption
14
See HQD-12, document 6.
Manitoba Hydro intends to eliminate degressive rates for all customer categories in its next rate
application. Energy NB had already announced that it was considering a progressive residential rate by
2010. Therefore, in its evidence submitted on July 3, 2007, as a first step, it suggested a smoothing of the
residential block structure.
15
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associated with Rate D. For Avista Utilities, the sum of consumption for the first
two blocks totals 1 300kWh/month, which is 44% higher than consumption
associated with the first block of Rate D. In actual fact, Duke Energy’s threeblock structure corresponds to a two-block structure because the prices of the
last two blocks are identical. Seattle City Light offered a three-block rate but
recently eliminated the third block that applied to consumption exceeding 3 000
kWh/day and which had been introduced in the context of an energy crisis that
began in the early 2000’s but only affected 2% of customers.
PG&E is the only Distributor in the study that offers rates composed of five
progressive blocks. However, these blocks refer to a reference consumption that
varies by customer location and the presence of electric heating.
2.2.5 Current Strategy for Energy Blocks
The Distributor proposes to maintain the existing energy-block structure. As for
the evolution of energy prices, the proposed reform consists of increasing the
price of the second block twice as much as the first. The price of the second
energy block of domestic rates is Distributor’s most important lever to promote
efficient behaviour from its domestic customers.
This strategy makes it possible to reflect long-term marginal costs in the second
block more quickly while improving the price signal of the first block, considering
that supply costs have an impact on all consumption. The Distributor considers it
prudent to increase the rate of the second block gradually as much because of
the context in which marginal costs continue to evolve, as to avoid rate impacts
that are too significant for customers.
Table 7 shows the medium term evolution of the structure of Rate D using the
assumption of a 2% annual increase in 2008, 2009 and 2010.16 This scenario
reflects the same orientations approved by the Régie since April 1, 2005: freeze
16
The Distributor uses these hypotheses for rate increases solely as an example in order to show the
impacts of different scenarios analysed in the present document.
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of the fixed charge; increase of the second block that is double that for the first;
and annual increase of the demand charge for Rates D and DM of 75¢/kW and
18¢/kW respectively.
Table 7
Example of Structure of Rates D and DM
Using Hypothesis of 2% Annual Increase
- Increase of the 2nd Energy Block Double that of the 1st -
Rates D and DM
Fixed
charge
(¢/day)
1st block
block
Rate Structure
2nd
Ratio
2nd/1st
D Demand
DM Demand
Charge
Charge
$/kW
¢/kWh
April 1, 2007
40.64
5.29
7.03
1.33
5.46
1.35
-Current reform-
40.64
5.37
7.23
1.35
6.21
1.53
13.7%
13.3%
6.96
1.71
12.1%
11.8%
7.71
1.89
10.8%
10.5%
April 1, 2008
April 1, 2009
April 1, 2010
0.0%
1.4%
2.9%
40.64
5.44
7.44
0.0%
1.4%
2.9%
40.64
5.52
7.66
0.0%
1.4%
2.9%
1.37
1.39
In order to provide a more precise idea of the impacts of the evolution of
domestic rates, a simulation of some typical cases was performed. As shown in
the following Table, despite the heterogeneity among cases, the impacts remain
acceptable considering the average increase. Given the greater increase of the
second block and the freeze of the fixed charge, large consumers will be subject
to a more significant increase while smaller consumers will be subject to a
smaller increase.
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Table 8
Rate Impact by Typical Case
Using Hypothesis of 2% Annual Increase
- Increase of the 2nd Energy Block Double that of the 1st -
Rates D and DM
Customer
1st Block
Apartment
Building
62 840
kWh
Large
Customer
100 kW
411 700
kWh
10 950
kWh
124 160 kWh
$2 968
$4 375
$30 001
$728
$8 507
$51
$73
$114
$976
$8
$172
2.2%
2.3%
2.5%
2.6%
3.3%
1.2%
2.0%
$41
$53
$75
$117
$996
$8
$175
2.0%
2.2%
2.3%
2.5%
2.6%
3.2%
1.2%
2.0%
$30
$42
$54
$77
$119
$1 016
$9
$179
2.0%
2.2%
2.3%
2.5%
2.6%
3.2%
1.1%
2.0%
Large
Home
electricity32 054 kWh
Very
Large
Home
42 818
kWh
Imposing
Home
$1 820
$ 2 211
$28
$40
1.5%
2.0%
$12
$29
2.0%
1.5%
$25
$12
2.0%
1.5%
Average
Rate D
Customer
14 407 kWh
Apartment
$1220
$800
$1 406
$24
$12
2.0%
$25
April 1, 2007
Small
Home
11 590kWh 20 494 kWh
Average
Home
-Heated with
26 484 kWh
-Current reformApril 1, 2008
April 1, 2009
April 1, 2010
Using this scenario, Table 8 shows, for each year and using the billing data for
2006-2007, the allocation of bill increases on an annual basis. Rate impacts are
very concentrated: nearly 86% of customers are subject to a rate increase
ranging between 1 and 3%, while only 14% of customers are only subject to an
increase below 1%. Only 0.1% of customers are subject to an increase ranging
between 3% and 4%.
Table 9
Rate Impact on Rate D
Using Hypothesis of 2% Annual Increase
- Increase of the 2nd Energy Block Double that of the 1st Variation of the annual bill (%)
Customer allocation (%)
Less than 1
From 1 to 2
From 2 to 3
From 3 to 4
From 4 to 5
5 and over
14.1%
50.2%
35.6%
0.1%
0.0%
0.0%
Total
100.0%
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2.3 Demand Charge
The application of a demand charge for Rate D customers whose power demand
exceeds 50 kW in winter17 makes it possible for customers who have the capacity
to manage their winter peak to be subject to a price signal for power. These
power demands in winter are generally associated with heating loads. As Table 3
shows, the marginal costs of transmission and distribution associated with space
heating (1.81 ¢/kWh) differ from the marginal costs of transmission and
distribution for all uses (1.27¢/kWh).
The demand charge plays a role that is equivalent to the role of a third
consumption block. In other words, it makes it possible to apply a higher price for
consumption that is marginal to the second block.18 In doing so, for these
customers, there is a clear link between their energy choices –between the
management of their power demand in winter- and their bills, whereas a third
energy block could not be associated with any specific consumption.
2.3.1 Benchmarking of the Capacity Invoice19 for Domestic Rates
Among the utilities examined, only the Distributor applies a demand charge to
domestic rates. However, the eligibility criteria for domestic rates imposed by
other distributors are stricter than those of the Distributor because they tend to
strictly limit the domestic rate to residential customers, to small farms or to mixed
uses with a limit of only a few kW for power, and they even exclude the common
areas of apartment buildings. Large customers billed by the Distributor at Rate D
would therefore fall into the rate classes of other distributors that generally
17
This demand charge is associated with an electrical entrance that is superior to 200 amps and an annual
consumption of 130 000 kWh.
18
An alternative would be to create a third energy block (see section 5).
19
In the present document the translator employs the term “capacity invoice” to refer to the demand charge
billed by the Distributor for power (kW).
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include a capacity invoice. The capacity invoice for Rate D thereby takes into
consideration more lenient admissibility criteria.
2.3.2 Current Strategy for the Demand Charge
Because the demand charge is a component upon which the customer can take
action, since 2005, the Distributor has chosen to emphasize the use of a demand
charge as a third block in order to give a price signal that reflects the avoided
cost of power for heating. Consequently, in addition to the price of the second
block, customers whose consumption exceeds 130 000 kWh would also have to
pay the equivalent of the marginal cost of transmission and distribution for their
additional consumption.
The adjustments to the capacity invoice that began in 2005 have made it
possible to increase the demand charge gradually to a level that more closely
reflects the variance between the price of the second block and the price signal
for heating.
As shown in Table 7, under the current reform,20 the demand charge in 2010 is
$7.71/kW, which translates into an additional 0.76 ¢/kWh for customers whose
demand exceeds 50 kW in winter.21 For that same year, the second block rate is
7.66¢/kWh. For a customer who pays a demand charge, the rate for kWh
marginal to those in the second block is therefore 8.42¢/kWh22 whereas the
avoided cost for space heating in 2010 is estimated at 11.09¢/kWh (see Table 3).
The proposed adjustments tend toward a better price signal.
20
The current reform corresponds to a freeze of the fixed charge, an increase of the second block that is
twice that of the first block, and an annual increase of the demand charge of 75¢/kW.
21
Using a 47% load factor applicable to consumption exceeding 50 kW.
22
That is 7.66¢/kWh + 0.76¢/kWh
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3. SCENARIOS RELATED TO THE FIXED CHARGE
In its energy strategy, the Government asked Hydro-Quebec to submit a new
rate structure to the Régie de l’énergie, including a more significant price
variance than is currently the case but without modifying the Distributor’s overall
revenue. One way to achieve this consists of reducing the fixed charge and
making the increase on the second consumption block more significant, thus
accentuating the price signal. The Distributor presents two scenarios involving a
decrease of the fixed charge, one of 10% and another of 50%.
3.1 10% Decrease of the Fixed Charge
A 10% decrease of the fixed charge has an impact on all domestic customers. In
order to clearly demonstrate the impact of this modification, in Table 10 the
Distributor shows the structure of Rates D and DM, using a hypothesis of
constant revenues, in which a 10% decrease of the fixed charge is applied.
Table 10
Example of Structure of Rates D and DM
Using Hypothesis of Constant Revenues
- 10% Decrease of Fixed Charge -
Rates D and DM
Fixed
charge
(¢/day)
1st block
block
Rate Structure
2nd
Ratio
2nd/1st
D Demand
DM Demand
Charge
Charge
$/kW
¢/kWh
April 1, 2007
40.64
5.29
7.03
1.33
5.46
1.35
10% decrease of fixed
charge & equivalent
increase of 2nd block
36.58
5.29
7.20
1.36
5.46
1.35
-10.0%
0.0%
2.4%
0.0%
0.0%
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When a 10% reduction is applied, the fixed charge is 36.58¢/day, which no
longer allows for metering and customer service costs to be covered. Table 11
shows the impacts of a 10% reduction of the fixed charge and an equivalent
increase of the price of the second block on typical cases, using the assumption
of constant revenues. The result is that only small consumers see a decrease in
their bills while all other consumers would see an increase because the
decrease in the fixed charge is not sufficient to compensate for the increase in
price for the second block of energy.
Table 11
Rate Impact by Typical Case
Using Hypothesis of Constant Revenues
- 10% Decrease of Fixed Charge for Rates D and DM -
Rates D and DM
April 1, 2007
Average
Rate D
Customer
14 407 kWh
Apartment
Small
Home
11 590kWh 20 494 kWh
Average
Home
-Heated with
26 484 kWh
Customer
1st Block
Apartment
Building
62 840
kWh
Large
Customer
100 kW
411 700
kWh
10 950
kWh
124 160 kWh
Large
Home
electricity32 054 kWh
Very
Large
Home
42 818
kWh
Imposing
Home
$1220
$800
$1 406
$1 820
$ 2 211
$2 968
$4 375
$30 001
$728
$8 507
Weight of fixed
charge
12%
19%
11%
8%
7%
5%
3%
0%
20%
10%
10% decrease of
fixed charge and
equivalent
increase of 2nd
block
$0
-$11
$2
$12
$22
$40
$75
$675
-$15
$15
0.0%
-1.4%
0.2%
0,7%
1.0%
1.3%
1.7%
2.3%
-2.0%
0.2%
11%
17%
9%
7%
6%
4%
3%
0%
19%
9%
Weight of fixed
charge
Table 12 shows that, for each year and using billing data for the years 20062007, nearly 62% of Rate D customers are subject to a very slight decrease.
This decrease is explained by the fact that those customers benefit from a
decrease of the fixed charge without however being affected by the rate increase
of the second block.
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Table 12
Rate Impact on Rate D
Using Hypothesis of Constant Revenues
- 10% Decrease of Fixed Charge Variation of the annual bill (%)
Customer allocation (%)
Less than -2
From –2 to -1
From –1 to 0
From 0 to 1
From 1 to 2
2 and over
26.6%
15.0%
19.9%
30.5%
7.7%
0.2%
Total
100.0%
3.2 50% Decrease of the Fixed Charge
A 50% decrease of the fixed charge reduces its weight relative to the average
among other distributors. In Table 13, the Distributor shows the structure of
Rates D and DM, using a hypothesis of constant revenues, in which a 50%
decrease of the fixed charge is applied.
Table 13
Example of Structure of Rates D and DM
Using Hypothesis of Constant Revenues
- 50% Decrease of Fixed Charge -
Rates D and DM
Fixed
charge
(¢/day)
1st block
block
Rate Structure
2nd
Ratio
2nd/1st
D Demand
DM Demand
Charge
Charge
$/kW
¢/kWh
April 1, 2007
40.64
10% decrease of fixed
charge & equivalent
increase of 2nd block
20.32
-50.0%
Original : 2007-08-01
5.29
7.03
1.33
5.29
7.89
1.49
0.0%
12.3%
5.46
1.35
5.46
1.35
0.0%
0.0%
HQD-12, Document 3
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A 50% decrease of the fixed charge leads to a significant increase of the second
block rate. However, a fixed charge thus reduced to 20.32¢/day, only covers
approximately half of metering and customer service costs.
Table 14 shows the impact of this scenario on typical cases. The result is that
although a 50% decrease of the fixed charge increases the progressivity of
domestic rates, it also generates a widespread dispersion of rate impacts.
Table 14
Rate Impact by Typical Case
Using Hypothesis of Constant Revenues
- 50% Decrease of Fixed Charge for Rates D and DM -
Rates D and DM
April 1, 2007
Weight of fixed
charge
10% decrease of
fixed charge and
equivalent
increase of 2nd
block
Weight of fixed
charge
Average
Rate D
Customer
14 407 kWh
Apartment
Small
Home
$1220
$800
$1 406
12%
19%
11%
11 590kWh 20 494 kWh
Customer
1st Block
Apartment
Building
62 840
kWh
Large
Customer
100 kW
411 700
kWh
10 950
kWh
124 160 kWh
$2 968
$4 375
$30 001
$728
$8 507
5%
3%
0%
20%
10%
Large
Home
electricity32 054 kWh
Very
Large
Home
42 818
kWh
Imposing
Home
$1 820
$ 2 211
8%
7%
Average
Home
-Heated with
26 484 kWh
$0
-$55
$12
$60
$108
$200
$373
$3 380
-$74
$75
0.0%
-6.9%
0.9%
3.3%
4.9%
6.8%
8.5%
11.3%
-10.2%
0.9%
6%
10%
5%
4%
3%
2%
2%
0%
11%
5%
Table 15 also shows that, for each year and using billing data for 2006-2007, bill
decreases and increases are spread over a large interval, ranging between less
than –4% to 4% and more.
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Table 15
Rate Impact on Rate D
Using Hypothesis of Constant Revenues
- 50% Decrease of Fixed Charge Variation of the annual bill (%)
Customer allocation (%)
Less than -4
From – 4 to -2
From –2 to 0
From 0 to 2
From 2 to 4
4 and over
45.2%
7.6%
8.8%
11.4%
13.4%
13.5%
Total
100.0%
3.3 Analysis and Recommendation for a Decrease of the Fixed Charge
Bonbright’s 6th principle suggests that a customer must pay the Distributor for his
actual cost of service and the price signal of rates must give customers an
incentive to optimize their energy choices. When setting the price of an electricity
rate, the ratemaker must seek to achieve these two objectives in order to ensure
an optimal impact for society.
The Distributor believes that the scenarios examined in the present section do
not allow for this optimal impact to be achieved. On the one hand, a 10%
decrease of the fixed charge does not allow for a significant increase of the price
signal of the second block. On the other hand, the 50% decrease goes against
cost-causality.
The shifting of costs means that the addition of new residential customers leads
to expenses that exceed the revenues generated by the fixed charge. In turn, this
translates into a need to increase the rates of all customers. Every new customer
would generate further rate increases notwithstanding his consumption.
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However, if the objective is to increase the progressivity of Rate D, then
decreasing the fixed charge is a better alternative than a rate decrease because
it amounts to a decrease based on the least elastic component and it does not
deteriorate the price signal for any domestic customer.
It is relevant to reiterate that the current level of the fixed charge reflects the fixed
costs attributable to metering and customer service. A decrease of the fixed
charge would no longer make it possible to reflect these fixed costs and it would
be unduly favourable to customers whose consumption is not regular throughout
the year. This is the case of customers that have a cottage or that spend part of
the winter outside of Quebec. It would also be favourable to customers who use
a different energy source for space heating since they rarely consume electricity
in the second block.
For these reasons, the Distributor proposes to the Régie, to renew the freeze of
the fixed charge for the coming years as long as the metering and customer
service costs continue to be covered.
4. SCENARIOS FOR THE THRESHOLD OF THE FIRST ENERGY BLOCK
In the following sections, the Distributor presents two scenarios of seasonal
ratemaking based on the seasonal rate adopted in Ontario.
4.1 Winter Threshold of the First Block at 35 kWh/day
As explained later in the document, in the Quebec context, a higher threshold in
winter would dilute the price signal. This would be counter to one of the
objectives set by the Régie in decision D-2006-34 and by the Government in its
energy strategy. In fact, increasing the first block to 35 kWh/day for the winter
period (equivalent to about 1000 kWh/month) would lead to billing an additional
5 kWh/day at the rate of the first block (5.29¢/kWh). However, this consumption
should be billed at the rate of the second block (7.03¢/kWh) since it is generally
related to winter uses that contribute to the system’s peak and create an upward
pressure on the Distributor’s supply costs. In addition, fewer customers would be
Original : 2007-08-01
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billed at the rate of the second block. Consequently, these customers would be
deprived of its price signal.
Although it is unacceptable from the perspective of price signals, the Distributor
shows the rate structure and impacts of this scenario in Tables 16 to 18.
Table 16
Example of Structure of Rates D and DM
Using Hypothesis of Constant Revenues
- Energy Threshold in Winter at 35 kWh/Day Fixed
charge
(¢/day)
Rates D and DM
1st block
block
Rate Structure
2nd
Ratio
2nd/1st
D Demand
DM Demand
Charge
Charge
$/kW
¢/kWh
April 1, 2007
40.64
5.29
7.03
1.33
1.31
5.46
1.35
st
Threshold of the 1 block
in winter at 35 kWh and
equivalent increase of
price of 1st block
Threshold of the 1st block
in winter at 35 kWh and
equivalent increase of
price of 2nd block
40.64
5.37
7.03
0.0%
1.6%
0.0%
40.64
5.29
7.12
0.0%
0.0%
1.3%
1.35
5.46
1.35
0.0%
0.0%
5.46
1.35
0.0%
0.0%
Increasing the threshold to 35 kWh/day in the winter period leads to billing 5%
more kWh in the first block than using the annual threshold of 30 kWh/day. As a
result, the number of customers that are only billed in the first block increases by
10%. Therefore, fewer customers are subject to the price signal of the second
block. Conversely, large customers are subject to a more significant increase of
their bills only because an increase in the consumption admissible in the first
block is not high enough to compensate for the increase in the price of the
second block.
Original : 2007-08-01
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Table 17
Rate Impact by Typical Case
Using Hypothesis of Constant Revenues
- Energy Threshold in Winter at 35 kWh/Day for Rates D and DM Customer
1st Block
Apartment
Building
62 840
kWh
Large
Customer
100 kW
411 700
kWh
10 950
kWh
124 160 kWh
$2 968
$4 375
$30 001
$728
$8 507
-$1
-$1
-$1
-$1
$9
-$7
-0,1%
0.0%
0.0%
0.0%
0.0%
1.2%
-0.1%
-$2
$4
$9
$19
$38
$366
$0
-$10
-0.1%
0,2%
0.4%
0.6%
0.9%
1.2%
0.0%
-0.1%
Large
Home
electricity32 054 kWh
Very
Large
Home
42 818
kWh
Imposing
Home
$1 820
$ 2 211
-$1
-$1
-0.3%
-0.1%
$0
-$9
0.0%
-1.1%
Average
Rate D
Customer
14 407 kWh
Apartment
April 1, 2007
$1220
$800
$1 406
Threshold of the 1st block
in winter at 35 kWh and
equivalent increase of
price of 1st block
$0
-$2
0.0%
Rates D and DM
Small
Home
11 590kWh 20 494 kWh
Average
Home
-Heated with
26 484 kWh
st
Threshold of the 1 block
in winter at 35 kWh and
equivalent increase of
price of 2nd block
Table 18 shows the deterioration of the price signal resulting from an energy
threshold of 35 kWh/day in the winter period. In fact, for a large majority of
customers, an increase in either of the energy rates does not compensate for the
effect of billing more kWh in the first block.
Table 18
Rate Impact on Rate D
Using Hypothesis of Constant Revenues
- Energy Threshold in Winter at 35 kWh/Day –
Allocation of customers (%)
Variation of the annual bill (%)
Rate increase of the
1st block
Rate increase of the
2nd block
Less than -2
From –2 to -1
From –1 to 0
From 0 to 1
From 1 to 2
2 and over
0.0
0.0
71.1
20.4
8.5
0.0
0.0
9.8
46.4
43.5
0.3
0.0
Total
100.0
100.0
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The Distributor believes that no economic justification exists to bill more kWh in
the first block only to then increase energy prices, the price of the second block
in particular. A good price signal is one that is geared towards the highest volume
of consumption so that a greater number of customers may have access to a
higher credit, which promotes energy efficiency.
It would be more justified to decrease the threshold of the first block in the winter
period so as to amplify the price signal. However, because this measure affects
basic uses, it could have significant impacts on the entire customer base, more
so since almost 70% of the population uses electricity for heating purposes.
4.2 Summer Threshold of the First Block at 25 kWh/day
If we rely on the monthly allocation of basic requirements shown in Table 4, it
could appear justified to decrease the threshold of the first block in the summer
period, which goes from April 1st to November 30th as specified in the
Distributor’s Distribution Tariff.
In Table 19, the Distributor shows the structure of Rates D and DM, using
constant revenues, in which the threshold of the first energy block is decreased
to 25 kWh/day in the summer period.
Table 4 shows that basic uses during the months of April, May and November
exceed 25 kWh/day. Consequently, an energy threshold set at 25 kWh/day in
summer leads to the risk of billing basic uses that are not elastic in the second
block.
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Table 19
Example of Structure of Rates D and DM
Using Hypothesis of Constant Revenues
- Energy Threshold in Summer at 25 kWh/Day -
Rates D and DM
Fixed
charge
(¢/day)
1st block
block
Rate Structure
2nd
Ratio
2nd/1st
D Demand
DM Demand
Charge
Charge
$/kW
¢/kWh
April 1, 2007
40.64
5.29
7.03
Threshold of the 1st block
in summer at 25 kWh and
equivalent decrease of
price of 1st block
40.64
5.15
7.03
0.0%
-2.6%
0.0%
Threshold of the 1st block
in summer at 25 kWh and
equivalent decrease of
price of 2nd block
40.64
5.29
691
0.0%
0.0%
-1.7%
Threshold of the 1st block
in summer at 25 kWh and
equivalent decrease of
the fixed charge
37.57
5.29
7.03
-7.6%
0.0%
0.0%
1.33
1.36
1.31
1.33
5.46
1.35
5.46
1.35
0.0%
0.0%
5.46
1.35
0.0%
0.0%
5.46
1.35
0.0%
0.0%
A decrease in the threshold of the first energy block during the summer period
must be compensated by a decrease of one of the rates or of the fixed charge.
Table 20 shows the rate impacts of these structures on typical cases.
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Table 20
Rate Impact by Typical Case
Using Hypothesis of Constant Revenues
- Energy Threshold in Summer at 25 kWh/Day for Rates D and DM Customer
1st Block
Apartment
Building
62 840
kWh
Large
Customer
100 kW
411 700
kWh
10 950
kWh
124 160 kWh
$2 968
$4 375
$30 001
$728
$8 507
$8
$8
$8
$8
$8
$17
0,4%
0.4%
0.3%
0.2%
0.0%
1.1%
0.2%
$2
$0
-$6
-$19
-$43
-$466
$20
$17
0.6%
0.1%
0,0%
-0.3%
-0.6%
-1.0%
-1.6%
2.7%
0.2%
$0
-$3
$4
$9
$10
$10
$10
$10
$10
$29
0.0%
-0.4%
0.3%
0,5%
0.5%
0.3%
0.2%
0.0%
1.4%
0.3%
Large
Home
electricity32 054 kWh
Very
Large
Home
42 818
kWh
Imposing
Home
$1 820
$ 2 211
$2
$7
-0.3%
0.1%
$0
$5
0.0%
Average
Rate D
Customer
14 407 kWh
Apartment
April 1, 2007
$1220
$800
$1 406
Threshold of the 1st block
in summer at 25 kWh
and equivalent decrease
of price of 1st block
$0
-$4
0.0%
Rates D and DM
Small
Home
11 590kWh 20 494 kWh
Average
Home
-Heated with
26 484 kWh
st
Threshold of the 1 block
in summer at 25 kWh
and equivalent decrease
of price of 2nd block
st
Threshold of the 1 block
in summer at 25 kWh
and equivalent decrease
of the fixed charge
A decrease in the price of the first block deteriorates the price signal for the 15%
of customers that only consume energy in the first block or for 47% of kWh used
in Rate D. Decreasing the price of the second block cancels out the effect of
billing more kWh in the second block and it is unduly advantageous to large
customers. A decrease in the fixed charge is the least prejudiced alternative in
terms of the price signal since it does not directly affect energy prices. However,
as explained earlier, a decrease in the fixed charge does not adhere to the
causality of average costs and it is favourable to customers that do not consume
energy throughout the year.
Table 21 shows that a decrease in the price of the first block or the fixed charge
lowers the price of the annual energy bill for over 50% of customers. Despite the
fact that fewer customers would be subject to a decrease of their energy bills, the
fact remains that 85% of customers that consume energy in the second block
would be subject to a deterioration of the price signal, given the decrease in the
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price of the second block. This would be counter to the main objective of the
ratemaking reform.
Table 21
Rate Impact on Rate D
Using Hypothesis of Constant Revenues
- Energy Threshold in Summer at 25 kWh/Day –
Allocation of customers (%)
Variation of the annual
bill (%)
Price decrease of
the 1st block
Price decrease of
the 2nd block
Decrease of the
fixed charge
Less than -2
From –2 to -1
From –1 to 0
From 0 to 1
From 1 to 2
2 and over
0.0
23.8
31.2
44.9
0.1
0.0
0.0
0.7
35.9
54.9
7.8
0.7
17.8
10.2
24.7
45.6
1.6
0.0
Total
100.0
100.0
100.0
4.3 Analysis and Recommendations for Threshold of the First Block
The capacity of residential customers to modify their consumption for uses
excluding space heating is very low because the demand to which it is
associated is not very elastic. In fact, in its report for Manitoba Hydro, NERA
notes:
"Customers with electric space heat capability are typically more
elastic than those without, which implies that it is more important for
them to face a marginal-cost based price signal in the heating season.
This suggests that the first block size in an inverted block rate structure
should be set low enough to put most customers with electric heat into
the more efficient, marginal cost-based second block.”23
23
NERA Economic Consulting, “Review of time-of-use and inverted electric rate structures for application
in Manitoba”, July 28, 2005.
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With the aim of improving the price signal, the Distributor deems it preferable to
modify the price of the second block than to modify the threshold of the first
block. On the one hand, modifying the threshold of the first block does not
improve the marginal cost signal. On the other hand, it is difficult to clearly target
customers affected by a significant modification to the rate structure itself.
Given the risk of billing heating in the first block if the threshold is increased in
the winter period, or the risk of billing basic requirements in the second block if
the threshold of the first block in the summer period is decreased, the Distributor
prefers to maintain the first block threshold at 30 kWh per day for both the winter
and summer periods.
Achieving a better price signal does not require the introduction of seasonal
thresholds that make the rate more complex. The Distributor reiterates that it is
preferable to accentuate the price signal by increasing energy prices without
modifying the rate structure itself. Enhancing the price signal by increasing
energy prices gives customers a direct incentive to adopt energy efficiency
measures to minimize their bill increases. By doing so, the Distributor respects
Bonbright’s 9th principle, which advocates rate simplicity, public acceptability and
understanding.
5. ENERGY PRICE ADJUSTMENTS
5.1 Total Increase on the Second Block
A rate increase made entirely on the second rate block constitutes an alternative
to the current strategy of increasing the price of the second block twice as much
as that of the first block. Table 22 shows the evolution of Rate D on the medium
term by applying annual rate increases of 2% to this scenario.24
24
This scenario also assumes a freeze of the fixed charge and annual increases of the demand charges of
75¢/kW and 18¢/kW for Rates D and DM respectively.
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Table 22
Example of Structure of Rates D and DM
Using Hypothesis of 2% Annual Increase
- Total Increase on the Rate of the 2nd Energy Block Rates D and DM
Rate Structure
Fixed
charge
(¢/day)
st
1 block
block
2
nd
Ratio
2nd/1st
D Demand
DM Demand
Charge
Charge
$/kW
¢/kWh
April 1, 2007
40.64
5.29
7.03
1.33
5.46
1.35
Scenarios-
40.64
5.29
7.31
1.38
6.21
1.53
April 1 2008
0.0%
0.0%
4.0%
13.7%
13.3%
April 1 2009
April 1 2010
40.64
5.29
7.60
0.0%
0.0%
3.9%
40.64
5.29
7.89
0.0%
0.0%
3.9%
1.44
1.49
6.96
1.71
12.1%
11.8%
7.71
1.89
10.8%
10.5%
Although an increase made entirely on the price of the second block improves
the price signal more rapidly, this scenario assumes a freeze of the price of the
first block. Consequently, the price signal for 51% of Rate D customers would
show no improvement at all. Moreover, the 463 368 customers (18% of
customers) that only consume energy in the first block are not subject to any
increase of electricity rates given a freeze of the fixed charge and the price of the
first block. It should also be noted that 71% of customers are only billed at the
rate of the first block at least once a year. In a context in which all kWh
consumed cost about 10¢/kWh, it is inefficient to freeze the price signal for such
a large number of customers.
Table 23 shows the impacts of a rate increase that is made entirely on the price
of the second block. A freeze of the price of the first block almost completely
mitigates the price signal for small customers; coupled with the significant price
increase of the second block, this scenario generates a greater dispersion of
rate impacts.
Original : 2007-08-01
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Table 23
Rate Impact by Typical Case
Using Hypothesis of 2% Annual Increase
- Total Increase on the price of the 2nd Energy Block -
Rates D and DM
Average
Rate D
Customer
14 407 kWh
Apartment
$1220
$800
April 1, 2007
Small
Home
11 590kWh 20 494 kWh
$1 406
Average
Home
-Heated with
26 484 kWh
Customer
1st Block
Apartment
Building
62 840
kWh
Large
Customer
100 kW
411 700
kWh
10 950
kWh
124 160 kWh
$4 375
$30 001
$728
$8 507
Large
Home
electricity32 054 kWh
Very
Large
Home
42 818
kWh
Imposing
Home
$ 2 211
$2 968
$1 820
-ScenariosApril 1, 2008
April 1, 2009
April 1, 2010
$24
$6
$28
$44
$60
$90
$146
$1 282
$0
$170
2.0%
0.8%
2.0%
2.4%
2.7%
3.0%
3.3%
4.3%
0.0%
2.0%
$25
$6
$29
$45
$61
$92
$149
$1 304
$0
$174
2.0%
0.8%
2.0%
2.4%
2.7%
3.0%
3.3%
4.2%
0.0%
2.0%
25$
$7
$29
$46
$62
$94
$152
$1 328
$0
$177
2.0%
0.8%
2.0%
2.4%
2.7%
3.0%
3.3%
4.1%
0.0%
2.0%
Using billing data for 2006-2007, Table 24 shows the allocation of bill increases
on an annual basis: 39% of customers are subject to an increase below 1% of
which 18% are subject to a freeze of their bill. This confirms that the price signal
is significantly mitigated.
Table 24
Rate Impact for Rate D
Using Hypothesis of 2% Annual Increase
- Total Increase on the Price of the 2nd Energy Block Variation of the annual bill (%)
Customer allocation (%)
Less than 1
From 1 to 2
From 2 to 3
From 3 to 4
From 4 to 5
5 and over
39.2
26.2
31.9
2.7
0.1
0.0
Total
100.0
Original : 2007-08-01
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Hydro- Québec
Distribution
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5.2 Analysis and Recommendation for Energy Price Adjustments
Taking into account the requests made by the Government, fuel prices, and
marginal price signals in particular, the Distributor considers it preferable to
continue increasing the price of the second block twice as much as the first in
order to improve the price signal while limiting rate impacts on customers. The
Distributor’s proposal has the additional advantage of improving the price signal
for the first block, which is not insignificant given that the increase of supply
costs affects all customers.
The Distributor believes it is possible to emphasize the price signal of the last
kWh consumed by adding an additional reform of the capacity invoice (see
section 7) to the current energy-price reform.
6. INTRODUCTION OF A THIRD BLOCK
Introducing a third consumption block is one of the options considered by the
government in its energy strategy as a way to increase the price variance
between the two blocks of Rate D. This would assign a larger relative portion of
the Distributor’s revenue requirement to the largest electricity consumers,
thereby reducing the share of smaller consumers.
As mentioned earlier, the two current blocks of consumption of Rate D were
historically associated with different uses. The first block covered basic uses
while the second mainly covered heating. No other use or level of consumption
would naturally define a third block. To this effect, Figure 2 demonstrates that the
distribution of annual consumptions of residential customers is smooth and
devoid significant ruptures; this distribution of annual consumption does not
make it possible to isolate a distinct and easily identifiable group of large
customers who would be targeted by a third consumption block.
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Figure 2
Distribution of Rate D Customers by Annual Consumption block
The only way to define an additional consumption block is to arbitrarily subdivide
the second consumption block. The sections that follow examine three thresholds
for the third block: 60, 100 or 150 kWh/day.
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6.1 Threshold of the Third Block at 60 kWh/day
Setting a third consumption block as of 60 kWh/day makes it possible to divide in
half the total consumption billed in the second block. Since, under the current
structure of Rate D, total consumption is about equally divided in each of the two
blocks, that means that with a third block starting at 60 kWh/day, 51% of
consumption for Rate D would be billed in the first block, 25% in the second
block and, finally, 24% in the third block.
In theory, on an annual basis, a third block set at 60 kWh/day would affect
774 000 customers (30% of customers in the sample) whose annual
consumption exceeds 21 900 kWh. However, given the seasonal nature of
individual consumption profiles, nearly 1 487 000 customers or 57% of Rate D
customers, would be billed in the third block. Among them, 570 000 customers
consume less than 20 000 kWh per year. Consequently, although the
introduction of a third block seeks to increase the price signal for the largest
consumers, some small customers would also be affected.
In Table 25, the Distributor shows the impacts on rate components that would
result from the introduction, in 2009, of a third consumption block at 60 kWh/day
coupled with a 2% annual increase, over the specified period. To avoid freezing
the price signal of the first energy block, the price of the first block was increased
at the same pace as under the current reform.25
25
In compliance with the current reform the Distributor continues a freeze of the fixed charge and the
annual increase of the demand charges for Rates D and DM of 75¢/kW and 18¢/kW respectively.
Original : 2007-08-01
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Table 25
Example of Structure of Rates D and DM
Using Hypothesis of 2% Annual Increase
- Introduction of a 3rd Energy Block in 2009 at 60 kWh/day 1st block
block
Fixed
charge
(¢/day)
Rates D and DM
2nd block
Rate Structure
3rd
Ratio
2nd/1st
Ratio
3rd/2nd
D Demand
DM Demand
Charge
Charge
$/kW
¢/kWh
40.64
5.29
7.03
7.03
1.33
1.00
5.46
1.35
40.64
5.37
7.23
7.23
1.35
1.00
6.21
1.53
April 1, 2008
0.0%
1.4%
2.9%
2.9%
13.7%
13.3%
April 1, 2009
40.64
5.44
7.37
7.51
6.96
1.71
0.0%
1.4%
1.9%
3.9%
12.1%
11.8%
April 1, 2007
-Scenarios-
April 1, 2010
40.64
5.52
7.52
7.80
0.0%
1.4%
1.9%
3.8%
1.35
1.36
1.02
1.04
7.71
1.89
10.8%
10.5%
Table 26 shows the impacts of this scenario on typical cases. For almost all of
the cases examined the price signal decreases given the lower price increase of
the second block. Only customers who consume as many kWh in the third block
as they do in the second block would be truly affected by the introduction of a
third energy block.
Table 26
Rate Impact by Typical Case
Using Hypothesis of 2% Annual Increase
- Introduction of a 3rd Energy Block in 2009 at 60 kWh/day -
Rates D and DM
April 1, 2007
Customer
1st Block
Apartment
Building
62 840
kWh
Large
Customer
100 kW
411 700
kWh
10 950
kWh
124 160 kWh
$2 968
$4 375
$30 001
$728
$8 507
$51
$73
$114
$976
$8
$172
2.2%
2.3%
2.5%
2.6%
3.3%
1.2%
2.0%
$30
$38
$59
$105
$1 221
$9
$134
1.5%
1.6%
1.7%
1.9%
2.3%
3.9%
1.2%
1.5%
$22
$31
$38
$60
$107
$1 250
$9
$136
1.5%
1.6%
1.7%
1.9%
2.3%
3.9%
1.2%
1.5%
Large
Home
electricity32 054 kWh
Very
Large
Home
42 818
kWh
Imposing
Home
$1 820
$ 2 211
$28
$40
1.5%
2.0%
$10
$22
2.0%
1.3%
25$
$11
2.0%
1.3%
Average
Rate D
Customer
14 407 kWh
Apartment
Small
Home
Average
Home
-Heated with
11 590kWh 20 494 kWh 26 484 kWh
$1220
$800
$1 406
$24
$12
2.0%
$25
-ScenariosApril 1, 2008
April 1, 2009
April 1, 2010
Original : 2007-08-01
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Page 45 of 63
Hydro- Québec
Distribution
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6.2 Threshold of the Third Block at 100 kWh/day
A third consumption block that would begin at 100 kWh/day would make it
possible to target 10% of kWh consumed in Rate D. In theory, it affects
customers whose consumption exceeds 36 500 kWh (approximately 124 000 or
5% of customers in the sample). However, given the seasonal nature of
individual consumption profiles, over 818 000 or 31% of customers, would be
billed in the third block including about 54 500 who consume less than 20 000
kWh per year.
In Table 27, the Distributor shows the impacts on rate components that would
result from the introduction, in 2009, of a third consumption block at 100
kWh/day coupled with a 2% annual increase, over the specified period.26
Table 27
Example of Structure of Rates D and DM
Using Hypothesis of 2% Annual Increase
- Introduction of a 3rd Energy Block in 2009 at 100 kWh/day Rates D and DM
Fixed
charge
(¢/day)
April 1, 2007
40.64
-ScenariosApril 1, 2008
April 1, 2009
April 1, 2010
Rate Structure
Ratio
1st block 2nd block 3rdblock
2nd/1st
¢/kWh
5.29
7.03
Ratio
3rd/2nd
7.03
1.33
1.00
1.35
1.00
40.64
5.37
7.23
7.23
0.0%
1.4%
2.9%
2.9%
40.64
5.44
7.41
7.58
0.0%
1.4%
2.4%
4.8%
40.64
5.52
7.58
7.94
0.0%
1.4%
2.4%
4.8%
1.36
1.37
1.02
1.05
D Demand
DM Demand
Charge
Charge
$/kW
5.46
6.21
1.53
13.7%
13.3%
6.96
1.71
12.1%
11.8%
7.71
1.89
10.8%
10.5%
26
As with the threshold for the third block examined previously, the Distributor doubles the price of the
third block compared with the price of the second block without reducing the increase of the first block, in
compliance with the current reform. The Distributor continues to freeze the fixed charge and the annual
increase of the demand charges for Rates D and DM of 75¢/kW and 18¢/kW respectively.
Original : 2007-08-01
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Table 28 shows that a third energy block set at 100 kWh/day leads to a
deterioration of the price signal in most cases. Only customers who consume as
many kWh in the third block as they do in the second block would be subject to a
greater rate impact than under the current reform.
Table 28
Rate Impact by Typical Case
Using Hypothesis of 2% Annual Increase
- Introduction of a 3rd Energy Block in 2009 at 100 kWh/day -
Rates D and DM
April 1, 2007
Average
Rate D
Customer
14 407 kWh
Apartment
$1220
$800
Small
Home
Average
Home
-Heated with
11 590kWh 20 494 kWh 26 484 kWh
$1 406
$1 820
Customer
1st Block
Apartment
Building
62 840
kWh
Large
Customer
100 kW
411 700
kWh
10 950
kWh
124 160 kWh
$4 375
$30 001
$728
$8 507
Large
Home
electricity32 054 kWh
Very
Large
Home
42 818
kWh
Imposing
Home
$ 2 211
$2 968
-ScenariosApril 1, 2008
April 1, 2009
April 1, 2010
$24
$12
$28
$40
$51
$73
$114
$976
$8
$172
2.0%
1.5%
2.0%
2.2%
2.3%
2.5%
2.6%
3.3%
1.2%
2.0%
$25
$11
$26
$36
$45
$71
$129
$1 479
$9
$155
2.0%
1.4%
1.8%
1.9%
2.0%
2.4%
2.9%
4.8%
1.2%
1.8%
25$
$11
$26
$36
$46
$73
$132
$1 528
$9
$157
2.0%
1.4%
1.8%
1.9%
2.0%
2.3%
2.9%
4.7%
1.2%
1.8%
6.3 Threshold of the Third Block at 150 kWh/day
A third consumption block starting at 150 kWh/day would allow to target 4% of
kWh consumed in Rate D. In theory, the consumption of customers affected by
this block exceeds 54 750 kWh/year, representing approximately 26 000 or 1%
of customers in the sample. Again, given the seasonal nature of individual
consumption profiles, 234 000 or almost 9% of customers, would in fact be billed
in the third block. However, the threshold of the third block would be sufficiently
high to exclude the very large majority of small customers. Nonetheless, it
affects almost 1 600 customers who consume less than 20 000 kWh per year.
Original : 2007-08-01
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Distribution
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In Table 29, the Distributor shows the impacts on rate components that would
result from the introduction, in 2009, of a third consumption block at 150
kWh/day coupled with a 2% annual increase, over the specified period.27 As with
the thresholds for the third block examined previously, the Distributor increases
the price of the third block twice as much as the price of the second block
without reducing the increase of the first block, in compliance with the current
reform.
Table 29
Example of Structure of Rates D and DM
Using Hypothesis of 2% Annual Increase
- Introduction of a 3rd Energy Block in 2009 at 150 kWh/day -
Rates D and DM
Fixed
charge
(¢/day)
1st block
block
2nd block
Rate Structure
3rd
Ratio
2nd/1st
Ratio
3rd/2nd
D Demand
DM Demand
Charge
Charge
$/kW
¢/kWh
April 1, 2007
-ScenariosApril 1, 2008
April 1, 2009
April 1, 2010
40.64
5.29
7.03
7.03
1.33
1.00
5.46
1.35
40.64
5.37
7.23
7.23
1.35
1.00
6.21
1.53
0.0%
1.4%
2.9%
2.9%
13.7%
13.3%
40.64
5.44
7.43
7.62
6.96
1.71
0.0%
1.4%
2.7%
5.3%
12.1%
11.8%
40.64
5.52
7.62
8.02
7.71
1.89
0.0%
1.4%
2.6%
5.3%
10.8%
10.5%
1.36
1.38
1.03
1.05
Contrary to the thresholds of 60 kWh and 100 kWh/day, a third block set at 150
kWh/day increases the price signal of the largest customers without decreasing
too significantly the price signal of smaller customers since the price of the
second block is only slightly lower than the price under the current reform.
27
The Distributor continues to freeze the fixed charge and the annual increase of the demand charges for
Rates D and DM of 75¢/kW and 18¢/kW respectively.
Original : 2007-08-01
HQD-12, Document 3
Page 48 of 63
Hydro- Québec
Distribution
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Table 30
Rate Impact by Typical Case
Using Hypothesis of 2% Annual Increase
- Introduction of a 3rd Energy Block in 2009 at 150 kWh/day -
Rates D and DM
April 1, 2007
Customer
1st Block
Apartment
Building
62 840
kWh
Large
Customer
100 kW
411 700
kWh
10 950
kWh
124 160 kWh
$2 968
$4 375
$30 001
$728
$8 507
$51
$73
$114
$976
$8
$172
2.2%
2.3%
2.5%
2.6%
3.3%
1.2%
2.0%
$38
$49
$78
$142
$1 620
$9
$166
1.9%
2.1%
2.2%
2.6%
3.2%
5.2%
1.2%
1.9%
$28
$39
$50
$80
$146
$1 683
$9
$169
1.9%
2.1%
2.2%
2.6%
3.2%
5.2%
1.2%
1.9%
Large
Home
electricity32 054 kWh
Very
Large
Home
42 818
kWh
Imposing
Home
$1 820
$ 2 211
$28
$40
1.5%
2.0%
$12
$27
2.0%
1.4%
25$
$12
2.0%
1.4%
Average
Rate D
Customer
14 407 kWh
Apartment
Small
Home
Average
Home
-Heated with
11 590kWh 20 494 kWh 26 484 kWh
$1220
$800
$1 406
$24
$12
2.0%
$25
-ScenariosApril 1, 2008
April 1, 2009
April 1, 2010
6.4 Analysis and Recommendation for a Third Consumption Block
Adding a third consumption block to the current rate structure dilutes the price
signal and leads to a more significant dispersion of impacts than the base
scenario.
Original : 2007-08-01
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Page 49 of 63
Hydro- Québec
Distribution
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Table 31
Summary of Energy Price Increases
- Introduction of a 3rd Energy Block in 2009 -
Rates D and DM
Price of energy
3rd
1st block 2nd block
block
¢/kWh
Energy price increase
3rd
1st block 2nd block
block
Variance relative to 2008 price
-Scenarios for April 1, 20092nd block at 30 kWh/day
5.44
7.44
3rd block at 60 kWh/day
5.44
7.37
3rd block at 100 kWh/day
5.44
3rd block at 150 kWh/day
5.44
1.4%
2.9%
7.51
1.4%
1.9%
3.9%
7.41
7.58
1.4%
2.4%
4.8%
7.43
7.62
1.4%
2.7%
5.3%
In fact, a rate structure that includes a third block implies an increase in the price
of the second block that is inferior to the increase applied to the current two-block
structure. The slow progression in the price of the second block leads to a
deterioration of the price signal for customers who only consume energy in the
first and second blocks: 43%, 69% or 91% of customers if the thresholds are set
at 60, 100 or 150 kWh/day respectively.
Moreover, a third energy block at a higher price does not guarantee an
improvement of the price signal for larger consumers because the price signal is
not significant for them. In fact, several among them do not consume a sufficient
volume of kWh in the third block to compensate for the deterioration of the price
signal that stems from the lower price of the second block.
Original : 2007-08-01
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Distribution
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Table 32
Summary of Rate Impact by Typical Case
- Introduction of a 3rd Energy Block in 2009Customer
1st Block
Apartment
Building
62 840
kWh
10 950
kWh
124 160 kWh
2.5%
2.6%
3.2%
1.2%
2.0%
1.7%
1.9%
2.3%
3.9%
1.2%
1.5%
1.9%
2.0%
2.4%
2.9%
4.8%
1.2%
1.8%
2.1%
2.2%
2.6%
3.2%
5.2%
1.2%
1.9%
Very
Large
Home
42 818
kWh
Imposing
Home
2.2%
2.3%
1.5%
1.6%
1.4%
1.8%
1.4%
1.9%
Apartment
2nd block at 30kWh/day
2.0%
1.5%
2.0%
3rd block at 60 kWh/day
2.0%
1.3%
3rd
block
kWh/day
2.0%
2.0%
Rates D and DM
Large
Customer
100 kW
411 700
kWh
Large
Home
electricity32 054 kWh
Average
Rate D
Customer
14 407 kWh
Small
Home
Average
Home
-Heated with
11 590kWh 20 494 kWh 26 484 kWh
-Scenarios April 1, 2009
at
3rd block at 150
kWh/day
100
Table 33 shows the allocation of rate impacts using the 2006-2007 sample. A
larger proportion of customers are subject to bill increases that are lower than the
average increase, confirming a deterioration of the price signal for several
customers. Moreover, none of the three-block structures examined has the effect
of significantly increasing the price signal when compared with the existing twoblock structure in which the price of the second block increases twice as quickly
as the first.
Original : 2007-08-01
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Page 51 of 63
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Distribution
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Table 33
Summary of Rate Impacts
Introduction of a 3rd Energy Block in 2009
Allocation of customers (%)
Variation of the annual
bill (%)
2nd block at
30 kWh/day
3rd block at
60 kWh/day
3rd block at
100 kWh/day
3rd block at
150 kWh/day
Less than 1
From 1 to 2
From 2 to 3
From 3 to 4
From 4 to 5
5 and over
14.1
50.2
35.6
0.1
0.0
0.0
14.2
57.2
27.7
0.9
0.0
0.0
14.0
64.2
20.5
1.2
0.2
0.0
13.9
60.3
24.9
0.7
0.1
0.0
Total
100.0
100.0
100.0
100.0
Table 34 shows that a very large proportion of customers are subject to a
decrease of their bill when a third block is introduced (between 62.5% and 75.9%
of customers depending on the threshold used) while less than one third of
customers are subject to an increase of their bill. However, as shown in previous
sections, the third block does not spare small customers.
Table 34
Summary of Rate Impacts Using Constant Revenues
- Introduction of a 3rd Energy Block in 2009-
Impact relative to the
two-block structure
3rd block at 60 kWh/day
3rd block at 100 kWh/day
Allocation of
Customers (%)
Average
Impacts %
Allocation of
Customers (%)
Bill Decrease
Bill Freeze
Bill Increase
62.5
4.6
32.9
-0.15
0.00
0.09
70.6
4.8
24.6
-0.14
0.00
0.11
75.9
5.1
19.0
-0.08
0.00
0.07
Total
100.0
-0.07
100.0
-0.07
100.0
-0.05
Original : 2007-08-01
Average
Impacts (%)
3rd block at 150 kWh/day
Allocation of
Customers (%)
Average
Impacts (%)
HQD-12, Document 3
Page 52 of 63
Hydro- Québec
Distribution
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Moreover, the slower progression of the price of the second block could promote
consumption for some uses. This is notably the case, among others, of air
conditioning for which consumption levels often range between 30 and 100
kWh/day in summer.
The Distributor wishes to reiterate that a structural change must ensure the
application of a sufficiently high price for a significant volume of kWh and for a
significant number of customers. Table 35 demonstrates introducing a third block
neither has an impact on a significant volume of kWh nor does it affect a
significant number of customers.
Table 35
Summary of Allocation of Consumption and
Customers in the 3rd Block
-Introduction of a 3rd Energy Block in 2009Allocation of consumption (%)
1 block
2nd block
3rd block
Customers in 3rd
block (%)
2nd block at 30kWh/day
51
49
-
-
3rd block at 60 kWh/day
51
25
24
57
3 block at 100 kWh/day
51
40
10
31
3rd block at 150 kWh/day
51
45
4
9
Rates D and DM
st
-Scenarios April 1, 2009-
rd
The Distributor believes that a third block leads to more inconveniences than it
has advantages. Since the main objective is to intensify the price signal, it can
only be achieved via a third block with a sufficiently high threshold to affect a
small percentage of kWh in Rate D, without affecting the price signal for small
customers. Yet, the higher the threshold, the fewer the customers that will be
affected. Moreover, a third block adds complexity to the rate structure of all
customers. In addition, the benchmarking that was carried out shows that few
distributors offer rates with more than two blocks and, in terms of consumption,
the three-block rate structures surveyed are generally equivalent to the two-block
structure of Rate D. The Distributor wishes to restate that the demand charge
Original : 2007-08-01
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Page 53 of 63
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applied to Rate D already plays the role of a third block in a more effective
manner.
The reform that led to an increase in the price of the second block that is twice
that of the first block has significantly improved the price signal to large
consumers over the past three years.
7. PROPOSED REFORM OF THE CAPACITY INVOICE FOR RATE D
The capacity invoice billed in winter at Rate D reflects the fact that the
Distributor’s main grid was conceived to meet the winter peak. However, it has
two main gaps.
First, the present capacity invoice for Rate D does not give customers any
incentive to manage their power demand in the summer period. This absence of
an incentive is particularly problematic in a context in which there is only a very
small variance between long-term marginal costs in summer and in winter.
In addition, the current structure of Rate D involves billing real power demand
expressed in kW while Rates G and M bill the higher of: real power demand
expressed in kW and 90% of apparent power demand expressed in kVA.28
Domestic customers do not have any incentive to install capacitors to improve
their power factor.
Because a bad power factor increases losses on the system and leads to voltage
fluctuations on electricity lines, the Distributor must then install additional
equipment to maintain the characteristics of voltage quality within its defined
targets. It is all of the Distributor’s customers that must bear those costs. The
absence of billing for apparent power in Rate D therefore creates an injustice that
must be corrected.
28
For Rate L, the billing of kVA applies to customers whose load factor is below 95%.
Original : 2007-08-01
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Page 54 of 63
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Distribution
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To compensate for these gaps, the Distributor recommends a new reform of the
capacity invoice. This reform deals with several facets of the capacity invoice.
With the aim of expanding the price signal for power to improve the management
of power demands, the Distributor proposes to bill power exceeding 50 kW on an
annual basis. This modification will allow the demand charge to fulfill a role that is
similar to a third block throughout the year.
To limit rate impacts, it is expected that a demand charge that is applicable in the
summer period will be introduced as of April 1, 2009. The Distributor will increase
this demand charge by 63¢/kW29 per year until it reaches the level of the winter
demand charge. The Distributor does not exclude the possibility of accelerating
this reform in accordance with customers’ consumption management efforts.
In order for the summer demand charge to reach the level of the winter demand
charge, the Distributor chooses to freeze the winter demand charge at its price
on April 1, 2008. However, this freeze does not mean that the Distributor
renounces to improving the price signal of the demand charge in winter. Rather,
the Distributor prefers that this objective be achieved via the introduction of an
automatic mechanism to set a minimum billing demand, equal to 65% of the
maximum power demand that falls wholly in the winter period.
29
10% of the winter demand charge applicable on March 31, 2009 under the condition that the result is
divisible by 30.
Original : 2007-08-01
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Page 55 of 63
Hydro- Québec
Distribution
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Table 36
Example of Structure of Rate D
Using Hypothesis of 2% Annual Increase
- Billing Reform of the Capacity Invoice in 2009 -
Rate D
Fixed
charge
(¢/day)
1st block
block
Rate Structure
2nd
Ratio
2nd/1st
Winter
Demand
Charge D
$/kW
¢/kWh
April 1, 2007
-ScenariosApril 1, 2008
April 1, 2009
April 1, 2010
40.64
5.29
7.03
1.33
5.46
40.64
5.37
7.23
1.35
6.21
0.0%
1.4%
2.9%
40.64
5.44
7.44
0.0%
1.4%
2.9%
40.64
5.52
7.65
0.0%
1.4%
2.9%
13.7%
1.37
-
6.21
0.0%
1.39
Summer
Demand
Charge D
$/kW
6.21
0.0%
0.63
1.26
When the summer demand charge reaches the level of the winter demand
charge, it will be $6.21/kW throughout the year, which is equivalent to
1.84¢/kWh.30 Billing for power on an annul basis allows to improve the price
signal of customers whose consumption exceeds 50 kW more quickly. For
example, a demand charge applicable only in the winter period must reach
$18.73/kW to reach a similar price signal. However, even at that level the
demand charge does not provide any incentive to customers to manage their
summer consumption.
With the aim of eliminating the injustice created by the fact that only real power
demand expressed in kW is billed in Rate D, the Distributor recommends the
30
Using a 47% load factor applicable to consumption beyond 50kW.
Original : 2007-08-01
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Distribution
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introduction, as of April 1, 2009, of billing apparent power demand expressed in
kVA for customers whose power factor is below 90%.31
Table 37 shows an actual example of a customer affected by the reform of the
capacity invoice. All things being equal, this customer is affected as much by the
introduction of the automatic mechanism to set minimum billing demand as by
the annual application of the capacity invoice.
Table 37
Example of Rate Impact for Rate D
Using Hypothesis of 2% Rate Increase in 2009
- Billing Reform of the Capacity invoice25-04
to
08-08
2006-2007 Billing periods
Days
Winter days
09-08
to
23-08
24-08
to
21-09
22-09
to
23-10
24-10
to
21-11
22-11
to
19-12
20-12
to
18-01
19-01
to
21-02
22-02
to
22-03
23-03
to
23-04
24-04
to
23-05
Total
77
0
15
0
29
0
32
0
29
0
28
19
30
30
34
34
29
29
32
9
30
0
14 520
2 310
12 210
4 320
450
3 870
3 960
870
3 090
15 300
960
14 340
63 540
870
62 670
21 060
840
20 220
10 800
900
9 900
9 720
1 020
8 700
8 280
870
7 410
5 940
960
4 980
5 940
900
5 040
51
53
42
53
24
53
174
53
210
53
194
53
82
53
56
53
71
53
34
53
31
53
0
3
0
3
0
3
0
124
0
160
144
144
32
32
6
6
21
21
0
3
0
3
203
504
15%
29%
24%
11%
43%
16%
18%
21%
17%
23%
27%
9%
before reform
after reform
1 038
1 071
310
320
282
291
1 101
1 215
4 590
4 819
2 085
2 155
975
996
740
759
720
736
425
443
425
438
12 690
13 244
Rate Impact
3.1%
3.1%
3.2%
10.4%
5.0%
3.4%
2.2%
2.6%
2.2%
4.4%
3.1%
4.4%
CONSUMPTION (KWH)
1ST block
2nd block
Maximum Power Demand (KW)
Minimum Billing Demand (KW) – 65%
365
121
163 380
10 950
152 430
Capacity Invoice (KW)
Before reform
After reform
Load Factor
Bill
To April 1, 2008
To April 1, 2009
Table 38 shows the allocation of bill increases on an annual basis, for each year
and using 2006-2007 billing data. Rate impacts remain very concentrated: fewer
than 0.1% of customers are subject to a bill increase that is superior to 3%. The
number of customers that have a capacity invoice goes from 2 538 to 2 777.
31
The maximum power demand would then correspond to the higher of: real power demand expressed in
kW and 90% of apparent power demand expressed in kVA.
Original : 2007-08-01
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Page 57 of 63
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Distribution
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Table 38
Rate Impacts for Rate D
Using Hypothesis of 2% Rate Increase in 2009
-Billing Reform of the Capacity InvoiceVariation blocks of the
annual bill (%)
Allocation of customers (%)
Current reform
Reform of billing for
power charge
Less than 1
From 1 to 2
From 2 to 3
From 3 to 4
From 4 to 5
5 and over
14.1
50.2
35.6
0.1
0.0
0.0
14.6
51.1
34.3
0.0
0.0
0.0
Total
100.0
100.0
The Distributor estimates that, in practice, the impact of changes to the capacity
invoice can be minimized. To do so, customers affected by the change must
adopt more appropriate behaviour by optimizing their power demand or by
installing capacitors if necessary. Moreover, such customers will have access to
technical support from the Distributor.
8. PROPOSED REFORM TO RATE DM
Rate DM is a rate that is similar to Rate D but adapted to bulk metering. It applies
to a contract for electricity delivered to an apartment building or community
residence with dwellings for which bulk metering was selected. The singularity of
Rate DM resides in the multiplier applied to the number of dwellings, in the
calculation of the fixed charge, and in the threshold of the first block. Rate DM
was introduced to ensure that bulk metered customers were subject to similar
rates as individually metered customers that are subject to Rate D.
Original : 2007-08-01
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Distribution
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Since its introduction in 1975, Rate DM has followed the evolution of Rate D. In
fact, the fixed charge and energy prices are identical. Only the demand charge is
different.
The demand charge for Rate DM is lower than the demand charge for Rate D.
Due to bulk metering, the demand charge for Rate DM applies to all the charges
of the building. However, in the case of buildings with individual metering subject
to Rate D, the power demand applicable only to common areas and collective
services are subject to a capacity invoice since the power demand of dwellings
is not significant enough to be billed. Therefore, the application of a lower
demand charge for Rate DM, on average, seeks to bill the power demand of
common areas and collective services of apartment buildings subject to Rate
DM in the same way that power demand is billed for a building subject to rate D.
Benchmarking of Rates Applicable to Apartment Buildings
Rates that are applicable to apartment buildings depend, above all, on the type
of metering that is installed: individual or bulk.
For apartment buildings with units that are metered separately, the dwellings are
eligible to the same domestic rate as single-family homes. Among several North
American distributors, only individual metering is permitted, bulk metering is
closed to new apartment buildings. In fact, some American distributors have
forbidden bulk metering to new customers since 1976, but it is mostly following
the adoption of the 1978 Public Utilities Regulation Policy Act that many other
states did the same because bulk metering for new apartment buildings was an
obstacle to the efficient us of electricity. In Canada, EPCOR, FortisAlberta, and
Newfoundland Power forbid bulk metering to new customers.
Original : 2007-08-01
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Apartment buildings that do have bulk metering can be eligible to domestic rates
but their eligibility is generally limited to a maximum number of dwellings. 32
As for collective uses (or common areas), they are usually billed at the general
rate. This is the case irrespective of metering. When they are eligible to the
domestic rate, there is often a limitation to small apartment buildings or in terms
of the power level.
8.1 Closing Rate DM
Contrary to individually metered customers who modify their energy behaviour
when they are subject to a bill increase, the occupants of a collectively metered
dwelling do not have any direct monetary incentive to reduce their electricity
consumption33 and there are few ways to compensate for the absence of an
adequate price signal.
In a context in which improving the price signal is of particular importance, it is
necessary to avoid that new apartment buildings choose bulk metering. It is for
this reason that the Distributor proposes to close Rate DM for new contracts. In
this way, the Distributor reserves access to Rate DM for the 200 000 residential
customers that currently have access to it. If an entrepreneur opted for bulk
metering after April 1, 2008, the new apartment buildings would henceforth be
eligible to Rate D. In reality, this measure will affect few customers since in
Quebec, customers tend to choose individual metering over bulk metering.34
32
The maximum number of dwellings that are eligible ranges between 4 and 9.
Ontario Hydro estimated that bulk metering for apartment buildings increases electricity consumption by
40% and more (Energy Probe, May 25, 1998).
34
In Quebec, approximately 94% of customers are individually metered while in Ontario this rate is only
15%.
33
Original : 2007-08-01
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Distribution
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8.2 Capacity Invoice for Rate DM
As mentioned earlier, Rate DM was introduced to ensure that bulk metered
customers were subject to similar rates as individually metered customers
subject to Rate D. For example, the dwelling of an average customer subject to
Rate DM includes 9 dwellings and consumes approximately 110 000 kWh on an
annual basis. In this scenario, the unit price paid is 6.68¢/kWh and it is equivalent
to the unit price of 6.65¢/kWh that a customer would have paid if the building was
individually metered and included 10 contracts subject to Rate D (one contract
for each of the 9 dwellings and another one for common areas).
It is important that the energy prices subject to Rate DM be equivalent to those of
Rate D since, on the one hand, the current energy price structure ensures an
equivalent treatment between bulk-and individually metered customers. On the
other hand, the application of an identical price structure for Rate D and Rate DM
facilitates customers’ understanding of rates. Consequently, the Distributor does
not intend to disassociate the evolution of energy prices for Rate DM to the
evolution of energy prices for Rate D.
The capacity invoice for Rate DM should also be equivalent to the capacity
invoice for Rate D. Therefore, the Distributor proposes to increase the demand
charge for Rate DM on April 1, 2009 to the level of Rate D and proposes to apply
the elements of the power reform proposed for Rate D.35 In addition to
harmonizing the capacity invoice for Rate D and Rate DM, the proposed reform
also allows to improve the price signal for power to incite apartment buildings to
better manage their power.
To limit the rate impacts resulting from an increase of the demand charge and to
ensure rate neutrality, the Distributor introduced a new threshold for the capacity
invoice per dwelling. The capacity invoice for Rate DM therefore applies to the
35
Annual capacity invoice, automatic mechanism to set minimum billing demand and billing apparent
power demand.
Original : 2007-08-01
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Distribution
R-3644-2007 Application
portion exceeding the higher of: 50 kW, and the product of the threshold per
dwelling and the multiplier.
The Distributor sets this threshold at 4 kW per dwelling so as to ensure the
neutrality of revenues for power. In fact, the current demand charge for Rate DM
applied to the part exceeding 50 kW, generates the same revenues for power as
an equivalent demand charge for Rate D applied on the portion exceeding the
higher of: 50 KW and 4 kW and the product of the number of dwellings. This
reform of the capacity invoice for Rate DM mainly affects buildings with 12
dwellings or less that have a very significant power demand.36 Table 39 shows
the structure of Rate DM, as modified by this reform of the capacity invoice, as
well as the impacts on typical cases.
Table 39
Evolution of DM Rate Structure and Rate Impacts
Using Hypothesis of 2% Annual Increase in 2009
Rate Structure
Rate DM
Fixed
charge
(¢/day)
1st block
block
2nd
Ratio
nd
2 /1
¢/kWh
Winter DM
Demand
Charge
st
Summer DM
Demand
Charge
$/kW
Average DM
customer
Apartment
Building
12 004 kWh
112 513kWh
124 160
kWh
April 1, 2007
40.64
5.29
7.03
1.33
1.35
-
$7 959
$8 507
-Scenarios-
40.64
5.37
7.23
1.35
1.53
-
April 1 2008
April 1 2009
0.0%
1.4%
2.9%
$137
1.7%
$172
2.0%
40.64
5.44
7.44
1.37
6.21
0.63
$87
$174
0.0%
1.4%
2.9%
1.1%
2.0%
40.64
5.52
7.65
132
$178
0.0%
1.4%
2.9%
1.6%
2.0%
April 1 2010
1.39
6.21
1.26
Table 40 shows, for each year and using billing data for 2006-2007, the
allocation of bill increases on an annual basis. Rate impacts remain very
concentrated: 2.5% of customers are subject to an increase that exceeds 3%.
However, as discussed earlier, these impacts can be lessened by optimizing
power management.
36
The capacity invoice for a building with 12 dwellings remains 50 kW while the demand charge is higher.
Original : 2007-08-01
HQD-12, Document 3
Page 62 of 63
Hydro- Québec
Distribution
R-3644-2007 Application
Table 40
Rate Impact on Rate DM
Using Hypothesis of 2% Annual Increase in 2009
- Billing Reform of the Capacity InvoiceVariation of the annual bill (%)
Customer allocation (%)
Less than 1
From 1 to 2
From 2 to 3
From 3 to 4
From 4 to 5
5 and over
23.4
64.1
10.0
1.1
0.6
0.8
Total
100.0
Original : 2007-08-01
HQD-12, Document 3
Page 63 of 63