I have been working on rate design issues since 1979, when I joined the EPRI Electric Utility Rate Design Study. The job involved working with utilities, regulators, and other stakeholders who were involved in the rate design process throughout the US and Canada. All facets of the utility industry were involved in the Study: investor-owned, municipally owned and rural cooperatives.
The focus was on Time-of-Use (TOU) Rates, which had been given a strong impetus by the Public Utility Regulatory Policies Act (PURPA) of 1978. As the years turned into decades, pilots with TOU rates were performed to understand customer acceptance and response to TOU rates and to provide input into cost-benefit analysis.
With time, more and more utilities became interested in the topic. Many conferences were held on the topic and numerous articles were published. However, the lack of smart meters posed a significant barrier to TOU pricing. It languished.
When California was hit with its energy crisis in the years 2000-01, one of the contributing factors was found to be the lack of connection between retail and wholesale markets. TOU pricing was in the spotlight once again and breakthroughs in smart metering technology eventually allowed it to be rolled out.
Today, in the US, some 80% of households have smart meters and 10% are on some form of TOU rate. The percentage continues to rise with each passing year.
Even then, many barriers have to be overcome before TOU pricing will become the dominant form of pricing. Some barriers arise from consumer apathy to electricity pricing in general and some arise from their lack of interest in changing their lifestyles in response to TOU rates. Others arise from an institutional bias among utilities and regulators toward change.
In this presentation, I address 16 commonly asked questions about TOU rates. I refer to them as time-varying rates (TVRs) since TOU rates now encompass static as well as dynamic rates. Here are the questions.
- What is the regulatory framework that governs rate design?
- How do TVRs fit into the broad picture of rate design?
- What exactly are TVRs?
- What are the guidelines for designing TVRs?
- What should you do with TVRs?
- Do customers respond to TVRs?
- Do customers respond to TVRs in cold climates?
- The perennial question – should you do your own pilot?
- What other questions need to be addressed as you move forward with TVRs?
- What should you not do with TVRs?
- Â What is the status of TVRs rates in the US?
- What is the geographical dispersion of TVRs in the US?
- What TVRs are being offered in other countries?
- What will the customer of the future look like?
- Can TVRs help lower the operating costs of electrification?
- Are TVRs a panacea?
D. J. Bolton, a British engineer who wrote a textbook on costs and tariffs in electricity supply, said all the way back in 1938:
There’s never been any lack of interest in the subject of electricity tariffs. Like all charges upon the consumer, they are an unfailing source of annoyance to those who pay, and an argument among those who levy them… There is general agreement that appropriate tariffs are essential to any rapid development of electricity supply and there is complete disagreement as to what constitutes an appropriate tariff.
Thus, the presentation is entitled “Zen and the Art of Rate Design.” Many tensions have to be resolved before any change in rates can take place. It requires a form of meditation.
Zen is characterized by the use of koans, which are brief paradoxical statements whose mastery is essential to meditation. Once the monks have been so trained, they abandon their ultimate dependence on reason and are forced into gaining sudden intuitive enlightenment.