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Time-of-use rates or peak-time rebates?

Billed as a "Clash of the Dynamic Pricing Titans," a debate last week at the Kellogg School of Management University Club in San Francisco certainly had some sword clashing. But, in my view, the one-trick pony ridden by the consumer advocate was soon left in the dust, with the economist emerging as a clear winner early in the hour. Utilities need a clear path to optimize power delivery and cost, not a battle of wills regarding socialization and the definition of "necessity."

Moderated by To the Point's Judith Schwartz, the debate featured the arguments of The Brattle Group economist Ahmad Faruqui and The Utility Reform Network (TUNE) executive director Mark Toney. Here are some of my favorite tidbits from the "clash."

The challenge of engaging customers 

Faruqui: "The big issue is how to get customers engaged in the conversation, because customers want more reliable power at less cost; they want power that is green at less cost. In other words, they want things that nobody can provide them. That's the big challenge, how to change their expectations. (It's about) educating the people, getting them ready to accept what they have to accept. That is: there is no easy solution."

Toney: "I think there are two policy objectives that [TUNE] would agree we want to see. There's a tremendous value in shifting peak-load electricity use. From a consumer standpoint, we think that that is important because it reduces the cost you have to invest to build new plants just to run 100 hours of the year ... For some people, a price trigger might be useful, but again, there are ways to minimize the harm for certain customers who don't have the ability to shift."

Employing peak-time rebates

Toney: "Peak time rebates are an example which is a non-punitive way to send a price signal. I do think that there's a spectrum of proposals when it comes to time-based pricing, and that there are some that we think are more desirable, less punitive, than others. But we think that price signals are only a very small part of any solution that's really going to engage consumers. What we support is voluntary, opt-in, time-based pricing."

Faruqui: "This is an issue of great importance. There are people who cannot afford to pay for their electricity bills when hot weather arrives. That is regardless of any price signal we give them. They're just impoverished. They don't have enough income ... There are various ways of dealing with people's income not being sufficient. The real issue here is a philosophical issue. I heard you [Toney] say that you think price is a very, very small part of the total solution in terms of the energy picture ... As an economist, and as a policy analyst for years and years, I've always believed we live in a market economy. Demand and supply regulates the production and consumption of just about any product that you are buying today ... Peak-time rebates aer meant as a transition tool, but I don't see them as ultimately the end game. I think the end game has to reflect the cost of producing the power. Just the fact that we have the subsidy doesn't mean that we have to forever perpetuate the subsidies."

Opt-out versus opt-in

Faruqui: "If I am a customer, particularly in a utility service area, do I have the option of not paying for power? I don't. I have to pay for the power. There's a certain tariff that is a standard tariff, and I cannot opt out. I am stuck with it. And that is supposedly based on the cost of producing that power. So the issue is, what should it be based on? If the cost of power varies a lot by the hour, it will cost more to produce during the peak hours ... If we charge a flat rate, not a time-varying rate, then what does that do? It creates a cross-subsidy that's not visible, it's not transparent, and we have that today ... Is it fair today to ignore the problem that half of the customers who cost less are paying more, so that the others who cost more are paying less?"

Toney: "We support inclining block rates all over the country (like in California) for that reason. It provides a conservation incentive, and it addresses some of the question of the fairness of the system.  However, in any large system there are always socialized costs. We don't charge somebody extra because they live in a mountainous territory, which in fact is more expensive to serve. We don't say, 'here is your mountain surcharge, here's your rural surcharge.' ... There will always be a sharing of cost."

Let's continue the debate here. Toney says consumers, and consumer groups, can get behind a program of voluntary time-based pricing, as well as direct load control. Faruqui says consumers have to understand the true cost of producing power, and opt-out programs amount to forever-perpetuated subsidies.What do you think? (The Q&A portion of this debate can be accessed here.)

Kate Rowland
Intelligent Utility magazine

Twitter: @katerowland2


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