Fixed Charges and Utility Transformation

The Maryland Public Service Commission is taking up several interesting rate issues. At the Pace Energy and Climate Center, we are working with Earthjustice on behalf of Maryland Solar United Neighborhoods (MD SUN), Chesapeake Climate Action Network, Fuel Fund of Maryland, and the Institute for Energy and Environmental Research on some of those issues.

The Pace Energy and Climate Center is a public interest intervenor based at the Elisabeth Haub School of Law (formerly Pace Law School) in White Plains, New York. For nearly 30 years, the Center has worked to advance clean energy policy in New York, the Northeast, and across the US and around the world. We have been very active in the New York Reforming the Energy Vision proceeding and are active parties in every major rate case in the state.

Our primary engagement has been on the Maryland PSC’s new proceeding on utility transformation and grid modernization, styled “PC44” and stemming from the recent acquisition of Maryland utilities by Exelon. Pace prepared a blueprint document for the proceeding, called “The Utilities of Maryland’s Future,” and available from the Pace website or as item 12 at the Maryland PSC website for cause PC 44.

Soon after filing our utility transformation white paper, we learned of another proceeding. A very large electric cooperative tried unsuccessfully to obtain legislation authorizing them to propose increased fixed customer charges and to target distributed net metering policy in Maryland. The Maryland PSC held a stakeholder engagement meeting to look at the issues and has hired a consulting firm to study the impacts of increased fixed charges.

We jumped in to connect the dots between utility transformation and fixed charges, and prepared the following comments.

Introduction: The Commission is wise to take up the issue of fixed customer charges at this time, especially in light of its proceeding in PC 44. This is an important opportunity to take a hard look at customer charges with a view toward the future of Maryland’s electric utilities. In considering fixed customer charges, the Commission should:

1. Adopt a policy that any fixed customer charge should be narrowly structured to recover only those costs and components of costs that vary exclusively with customer count; and
2. Initiate an inquiry to investigate the unbundling and functionalization of distribution cost of service elements for all utilities in support of a broader agenda of utility transformation.

Efficient Fixed Customer Charges: A fixed customer charge should be narrowly tailored to recover only costs and components of costs that vary exclusively with customer count. The fixed customer charge should not be used to recover embedded fixed costs that can be properly attributable to energy or demand costs. Fixed customer charges should therefore reflect the portion of the meter, the portion of the service drop, and the portion of the billing and collection costs that directly increase when a new customer is added to the system.

Allowing or encouraging a utility to propose an increased fixed customer charge to recover embedded fixed costs that could be allocated to demand or energy costs would be unwise and inappropriate for several reasons:

· Increasing fixed customer charges to recover fixed costs that could be recovered through a volumetric charge is regressive and would unfairly discriminate against low energy users. Low energy users include low income customers, elderly customers on fixed incomes, students, and customers who invested in energy efficiency and self-generation. Increasing fixed customer charges to recover class-wide fixed costs would force these customers to subsidize high energy users who actually drive high demand and energy costs.

· Increasing fixed customer charges to recover fixed costs that could be recovered through a volumetric charge would be economically inefficient because it encourages utilities to plan poorly and overbuild their systems. An increased fixed customer charge guarantees recovery of fixed costs and would be the definition of regulatory approval for the extraction of monopoly rents.

· In this regard, it is important to note that there is no economic theory supporting the notion that rate design should mimic business cost structure. Many utilities seeking to increase fixed customer charges have asserted that utilities are “high fixed cost businesses,” and that “in order to send efficient price signals,” they should design rates to include high fixed charges. The fact that the word “fixed” appears in the first and last part of that justification does not constitute a sound foundation — or any foundation — for an argument that high fixed charges advance economic efficiency. There are many examples of capital-intense, high-fixed cost businesses in competitive markets that price their services entirely with volumetric charges — such as airlines, hotels, train service, and others. Moreover, a non-bypassable customer charge is the very opposite of a price signal.

· Increasing fixed customer charges would frustrate the economics of important customer activities and investments in distributed energy resources that are strongly favored in Maryland state policy. Increased fixed customer charges make energy efficiency less valuable, and take value from prior investments in distributed energy resources such as energy efficiency and distributed generation.

· Increased fixed customer charges usually result in reduced volumetric energy-based charges because of the zero-sum nature of revenue requirement allocation in rates. These reduced energy charges further encourage wasteful consumption and, indeed, send exactly the wrong price signal to customers that unnecessary energy consumption has less economic consequence.

Fixed Customer Charges in the Context of Utility Transformation and Grid Modernization: Allowing or encouraging increased fixed customer charges would frustrate important work that the Commission is undertaking relating to utility transformation and grid modernization. Increased reliance on clean, lower-cost, and customer-empowering distributed energy resources is key to this transformation. Increased fixed customer charges frustrate the development of markets for distributed energy resources.

Increasing fixed customer charges to lump together a wide range of distribution system fixed costs would frustrate and obscure an important opportunity to unbundle and functionalize distribution system and service costs. For example, in an intelligent utility system the investments associated with advanced metering infrastructure (AMI) enable the utility and customers to not only accomplish the basic function of recording consumption, but also to enable demand response, time of use rates, and other activities aimed as demand management. When coupled with user information systems, this infrastructure can enable reductions in energy use. As a result, the demand- and energy-related costs of AMI meters should be unbundled from total costs and functionalized appropriately. This will not only reduce customer charges and the regressiveness of rates, but will also ensure that volumetric charges for energy and demand costs properly reflect all costs associated with those functions.

Demand Charges: A demand charge for residential and small commercial customers suffers from many of the same problems associated with using a fixed customer charge to recover fixed costs. Demand charges are essentially fixed customer charges for customers without the disposable income to invest in demand-reducing measures, are particularly regressive in their impact on low-income customers, and are essentially meaningless as a price signal unless customers have advanced understanding of, and tools to deal with, their levels of demand.