A subscription plan for electricity?

Reaction from Janine Migden-Ostrander, Briana Kobor and Marcel Hawiger

An article in the September issue of Public Utilities Fortnightly by Lon Huber with Navigant and Richard Bachmeier with Tucson Electric Power (TEP) proposes a “subscription plan” approach for electricity that would eliminate usage charges and bill fully through a fixed charge instead.

In the example they describe, plans appear to be priced differently not based on kilowatt-hours used but based on varying plan offerings and elements (see Figure 1 in the article). For example, one of the significant differences shown is whether a customer could override utility control of their smart thermostat for free on peak control days. Customers with the highest-priced plan could do so, while those with the lowest-priced plan could not.

In this post, three rate design experts provide reaction to the subscription plan approach as presented by TEP and Navigant in the September issue of Public Utilities Fortnightly. Janine Migden-Ostrander is a Principal at the Regulatory Assistance Project (RAP); Briana Kobor is Regulatory Director at Vote Solar; and Marcel Hawiger is Staff Attorney at The Utility Reform Network (TURN).

Just at a high level to start, what was your first reaction to the article in PUF by Navigant and TEP on subscription plans for electricity?

Marcel: My first reaction was that this is what utilities have dreamed about for years — a totally fixed bill, revenue certainty guaranteed. If you use a lot of energy, which is more often a higher income household, not paying based on usage might work out. But for those who use less electricity, like lower-income families, paying based on usage is more beneficial. So that’s a fundamental concern right at the outset.

Briana: I come at this from my experience with utilities like TEP and others in Arizona pushing in recent years for mandatory demand charges and higher customer charges. So this struck me as another way for a power company to try to move from recovering its business costs appropriately based on how much different customers actually use the grid — and instead shifting to individual customers paying for costs that aren’t actually related to them.

Janine: I was struck first by the lack of specificity in what the authors are proposing. Is the peak “control day” override by the utility they’re talking about just for a brief period — or is it a long portion of the day? What exactly are the penalties for overriding utility control of your thermostat on a hot day if you can’t afford a premium plan price? What are the terms for getting out of the plan? How long is the company agreeing to lock in the plan cost without increasing the rate on customers? These kinds of details matter a lot.

Can you talk now in more detail now about an aspect of the approach that particularly draws your attention or concerns you?

Briana: Equity is a huge concern here. What TEP and Navigant describe is an approach where those who can afford a big monthly sticker price plan can have control over their energy use — they can use the power they need to keep their AC on a safe setting on a 110-degree day in Tucson. But for a senior living on a fixed income, on the plan price level they might be able to sign up for, the power company can automatically turn off their AC on extreme heat days — or levy an additional charge if the customer wants to override the company control that day.

That approach creates difficult choices and an unpredictable bill for a lower-income household, which raises real dangers like foregoing cooling or getting behind on payments and facing the risk of service disconnection. Those are pretty different stakes than with a subscription billing approach for a movie streaming service like Netflix.

Janine: The authors pitch this based on the idea that the utility is taking on risk of increased energy use instead of the customer — that the utility will be incentivized to cut energy use and actually can through its programs. But as long the utility can still come in for a rate case every year, the company simply isn’t taking a lot of risk and there isn’t much incentive created for them to curb total consumption.

Now if the utility were offering plans with a locked-in rate for five years, that would be different — that could create a real efficiency incentive for a utility. If that were the case, we might see something like a home energy efficiency upgrade offered as part of the plan, which could really curb overall usage. Instead, it’s just a few LED bulbs. That’s a sign right off the bat that there isn’t a real incentive being created here to reduce total usage — that there’s no real risk swap with customers as the authors claim.

Marcel: This clearly isn’t about reducing total consumption, but it is designed in theory at least to reduce peak consumption through demand response, so let’s focus on that. In some of the current demand response frameworks to reduce peak use that we see today, in California for example, everyone pays the same volumetric rates and there’s an incentive or reward provided for volunteering to let the utility control your appliance during peak periods. In other words, the utility pays the customer in order for the utility to gain some control.

TEP and Navigant are proposing to flip this on its head, making the customer pay the utility in order to gain back control — and providing a structure where those with means can buy more freedom. So it would shift from a framework where everyone is treated the same in terms of service — and has equal opportunity to benefit from providing some control to the utility — to an approach that segregates based on ability to pay and rations power accordingly. That’s really troubling.

What about some of the other features that are part of the authors’ sample subscription plans, like renewables and a smart thermostat?

Janine: This goes back again to the core goals of the approach. If it’s really about incentivizing the utility to cut total consumption — the risk-shift the authors claim — then we should see add-ons that actually do that, like new heat pumps and insulation and air sealing for people’s homes. But we don’t see those.

And given that it’s an approach that removes price signals to conserve then we should get a lot more clarity around what renewables means in this plan. Is it going beyond what’s already required by other renewable measures in the state, or not? And given how low-cost wind and solar energy are now, we should see 100% renewables in all the pricing tiers, not just the premium. Implying that renewable energy is “premium” is an optic that bothers me — it’s just not the case anymore.

Marcel: None of the add-ons the authors drop into their sample subscription plans necessitate the billing structure they’re proposing, so they read more as marketing than defense of the rate design. Sure, a free smart thermostat is of some value, but there are already utility programs now that give out or subsidize a smart thermostat as part of signing up for a demand response program. And installing traditional air conditioner load control devices on the central AC unit outside the house may be a more cost-effective approach.

On renewables, they’re not offering to put rooftop solar on customers’ homes and provide net metering, and it’s not clear they’re even talking about building additional renewable capacity. If they’re just talking about renewable energy credits, it’s not clear what the environmental benefits might be, and there are already utility programs for that approach now.

Briana: Utilities should be helpful with expanding access to renewable energy and tools and technologies for people to control their energy use, but this monthly fee approach isn’t about those goals. There’s no reason a utility needs to lock residents into paying a set amount of money every month in order to do good work in those areas. On solar, economics and public preference are already driving a ton of solar deployment, at all scales, and putting hundreds of thousands of people to work. On DERs, there’s also consumer demand, falling prices, rebates and financing programs.

What about the idea of pilot testing this type of approach?

Marcel: I generally support pilots, but just looking at the sample plans TEP and Navigant have put forth in their article I don’t see something worth testing there. We don’t need a 100 percent fixed charge to get smart thermostats out there. And we don’t need a system that is premised on being most punitive for those with least means.

Janine: I’m a believer in choice and there is a need for ideas and creativity in rate designs going forward, but in the right place and with the right kind of pilot and attention to detail and oversight. In a monopoly market like electricity is in many places, if you couple that with a push for something like this in a place where the utilities commission doesn’t have the appetite to really get deep into the details or the utility isn’t good on transparency, then that could be a real problem.

Briana: I see this as a U-turn on the good national conversation going on about creating smarter electricity rate design, which includes the movement to optional time varying rates. Rather than making rates “smarter,” a 100 percent fixed fee approach would remove all the price signals. There’s just too much concern here both for an efficiency incentive and for equity.