NHPUC IR 15-296 Investigation into Grid Modernization

Joint Stakeholder Rate Design Recommendations, 9/9/16

Acadia Center, City of Lebanon, Conservation Law Foundation, NEEP, NHDES,

New Hampshire Legal Assistance, The Jordan Institute, and Revolution Energy

TASK: To develop a series of rate design recommendations.

“Your rate design recommendations should cover both residential/small C&I and large C&I customers. You should focus on how rate design in New Hampshire needs to evolve to support grid modernization goals. You should also develop recommendations on how metering functionality should evolve to support both rate design and grid modernization more broadly.”

BACKGROUND: Grid modernization arises in part from state and federal efforts implemented in the 1990s to restructure the electric utility industry with the objective of introducing greater market forces and customer choice to help drive efficiency and innovation. Consequently, as background to these rate design recommendations, it may be helpful to consider a number of goals and principles expressed in New Hampshire’s Electric Utility Restructuring statute, RSA 364-F, enacted into law more than 20 years ago, which help inform the weight that we recommend be given to various rate design principles going forward (with emphasis added):

374-F:1 Purpose. –

I. The most compelling reason to restructure the New Hampshire electric utility industry is to reduce costs for all consumers of electricity byharnessing the power of competitive markets. The overall public policy goal of restructuring is to develop a more efficient industry structure and regulatory framework that results in a more productive economy by reducing costs to consumers while maintaining safe and reliable electric service with minimum adverse impacts on the environment. Increased customer choice and thedevelopment of competitive markets for wholesale and retail electricity services are key elements in a restructured industry . . . .

II. A transition to competitive markets for electricity is consistent with the directives of part II, article 83 of the New Hampshire constitution which reads in part: "Free and fair competition in the trades and industries is an inherent and essential right of the people and should be protected against all monopolies and conspiracies which tend to hinder or destroy it.'' Competitive markets should provide electricity suppliers with incentives to operate efficiently and cleanly, open markets for new and improved technologies, provide electricity buyers and sellers with appropriate price signals, and improve public confidence in the electric utility industry.”

374-F:3 Restructuring Policy Principles. –. . .

II. Customer Choice. . . . Customers should be able to choose among options such as . . . real time pricing,and generation sources including interconnected self generation . . . .”

While good rate design requires the balancing of a variety of principles and objectives, New Hampshire policy clearly gives considerable weight to customer choice, the development of competitive markets, including for retail electricity services, and the provision of “appropriate price signals.” In this context it seems apparent that “appropriate price signals” include those that achieve economic and operational efficiency and help achieve express public policy goals such as “maintaining safe and reliable electric service with minimum adverse impacts on the environment.” New Hampshire statutory policy calls out specifically for customers to have the choice of real time pricing. Even as that concept and practice was still relatively new and limited to wholesale markets two decades ago, it was apparent to legislators that enabling retail load (customers) to respond to temporal price signals in supply markets is a important to realizing economic efficiency and productivity.

BEST PRACTICES: Numerous experts have addressed the question of what appropriate price signals and rate design should look like. For example:

●“According to the principle of cost causation, rates should be designed to reflect costs, to promote efficiency in the use of electricity and equity across customers.”[1]

●“For years, electric industry experts have recognized the importance of smart rate design founded on mechanisms that send correct price signals to customers. A brief canvas of the literature reveals the following consistent principles of smart rate design...rates should:

• Be economically efficient, based on total system long-run marginal (not embedded) costs;

• Allow for customers to connect to the grid for no more than the cost of connection;

• Be comprehensible to the customer;

• Assure grid reliability;

• Recover system costs in proportion to how much electricity consumers use, and when they use it;

• Provide customers with the correct price signals about usage and consumption patterns;

• Fairly compensate customers who supply power to the grid at the power’s full value;

• Allow for competition within the market for both generation and ancillary services;

• Assure recovery of utility’s prudently incurred costs;

• Maintain fairness to all customer classes and subclasses;

• Maximize the value of new technologies as they become available; and

• When possible, be temporally and geographically dynamic.

“Pursuing smarter rate design can reduce overall system costs while still allowing utilities to receive necessary revenue, create incentives for customers to implement solutions that serve utilities’ interests, promote the integration of DERs, and ensure net benefits to the grid. Some of these rate design techniques include: time-of-use (“TOU”) and other time-varying rates; well-designed minimum billing; and revenue decoupling. Advanced metering infrastructure—including smart meters—also allow utilities to implement even more granular rate designs, such as location-based rates and attribute pricing. . . .

“The efficiency and effectiveness of TOU pricing depend on its ability to reflect real-time changes in electricity conditions. At their simplest, TOU rates communicate to customers that the cost to produce and deliver electricity is much higher during peak hours than off-peak hours. For example, TOU customers receive the correct signal that turning up an air conditioner on a hot summer afternoon increases the cost and the need for new capacity over the long run. In their more complex forms, such as RTP rates, time-varying rates provide a full picture of the hourly cost to produce and deliver electricity and give greater control to consumers to shift their behavior based on their needs and investment decisions.”[2]

●“These principles and priorities should be reflected in smarter rates designed to maximize the value of technology innovations, open up new markets, and accommodate the distribution and diversification of customer-sited generation resources. This necessarily includes consideration of what those future technologies and policies could look like, with a focus on metering and billing, market structure, and pricing. In particular, rate design should provide a “price signal” to customers, utilities, and other market participants to inform their consumption and investment decisions regarding energy efficiency, demand response (DR), and DG, collectively referred to as distributed energy resources (DER). Bidirectional, time-sensitive prices that more accurately reflect costs most closely align with the principles of modern rate design.”[3]

●“There is a strong argumentto be made for changing the rate structure that applies to all customers, as sending all customers the most appropriate price signal should result in the most economically efficient outcomes related to electricity consumption, as well as decisions on the installation of DER.”[4]

RATE DESIGN RECOMMENDATIONS: In light of these considerations, as well as other relevant factors including the state policy goal of reducing unnecessary carbon emissions, the joint stakeholders recommend the following principles and practices for electric utility rate design in New Hampshire:

●Electricity rates should be designed in a way that maximizes consumer choice and control and also protects vulnerable consumers.

●Utilities should be fairly compensated for the services they provide to consumers, and consumers should be fairly compensated for the services they provide to the grid.

●Electricity rates should preserve the consumer incentive to use electricity wisely and invest in energy efficiency by continuing to collect transmission and distribution costs primarily through variable rates instead of moving toward higher fixed monthly charges.

●Electricity rates should support and equitably treat the development of clean energy resources.

Specifically, we recommend that:

  1. Rates for generation, transmission and distribution should remain unbundled.
  2. Utilities should avoid reliance on fixed charges and minimum bills, which limit consumer options. Fixed charges should be limited to the cost of keeping a customer connected to the grid, such as metering, billing, and the service drop.
  3. Rates for all three components should, increasingly over time, send price signals to customers that are forward looking and reflect long term marginal costs. This includes options such as moving to time-varying rates (TVR) and real-time pricing (RTP).
  4. In the long run, customers who provide a range of products and services to the electric system, such as distributed energy resources (DER), should be charged and credited at rates that reflect the granular costs and benefits.
  5. Distribution rates should allow distribution utilities to fully recover prudently incurred embedded costs including allowing for a reasonable opportunity for utilities to realize their allowed return on equity for used and useful investments. To that end, decoupling mechanisms should be developed and adopted that make distribution utilities at least financially neutral as to increased energy efficiency, demand response, and deployment of distributed energy resources that may decrease volumetric sales. Decoupling mechanisms, and possibly performance-based incentives, should be designed to motivate distribution utilities to operate in an efficient and optimal manner.
  6. As soon as is feasible, customers, such as those who choose to participate in pilots or as early adopters of RTP for generation services and who have metering functionality that at least provides hourly interval data, should be able to opt-in to alternative transmission rates that reflect directly or indirectly a pass through of wholesale market charges based on monthly hour of coincident peak demand thus more accurately quantifying the benefits DERs provide to the transmission system.

Explanation: Wholesale transmission costs are already decoupled from volumetric sales and provide a strong long-term marginal cost (or price) signal at the wholesale level. Transmission revenue requirements, based on embedded costs that are largely fixed in the short-term, are apportioned to load based on monthly coincident peak demands that drive long-term investment (marginal cost) in transmission capacity. However, retail load has no access to or ability to respond to these strong wholesale market price signals.[5]

  1. As wholesale market prices for generation (including power, capacity and ancillary services) already reflect marginal costs (both short term and long term to varying degrees) and are based on real time load, customers, particularly early adopters, should be enabled the option to receive and respond to those real time prices, as soon as possible. New Hampshire statutory policy has called for this to be a customer choice option for more than 20 years, and yet today it is still only available, as a practical matter, to large C&I customers. A key to enabling this option for small customers and more large customers may be to enable such customers to take advantage of recent market innovations that allow for low cost, feature rich smart metering as described below.
  2. Advance meters may be deployed strategically to ensure and enable consumer benefits. For example, AMI may be geographically targeted based on grid needs, rolled out based on customer size, or installed whenever old meters are retired. While the business case for widespread or universal deployment of AMI by utilities is being developed, electricity consumers across all classes of customers should be enabled to choose TVR across all three rate components to the extent competitively available technologies allow, including third party revenue grade smart meter deployment that allows secure collection, storage and retrieval of granular interval data that enables RTP and all other TVR options.[6]
  3. Utility deployment of AMI should enable the collection and use of data that is at least as granular as may be anticipated to be available to load in wholesale markets (five-minute intervals).[7]
  4. For C&I customers that are early adopters and currently have demand charges for distribution rates, a revenue neutral alternative demand charge differentiated on whether it is on-peak or off-peak --or simply based on coincident peaks -- should be developed and made available.
  5. For C&I and residential customers that are early adopters but don’t currently have demand charges, alternative revenue neutral TOU distribution rates should be developed and made available.
  6. Significant rate innovations, such as time-of-use rates or demand charges, should be implemented on a phased and strategic schedule. Consumers should be given time to fully understand the new rate system before it goes into effect. The experience of early adopters and perhaps structured pilots of various TOU distribution and transmission rate alternatives should help inform the business case for universal AMI deployment and the shape and pace of transition to smarter rates. Smart rate options, including the use of smart meters, should start on an opt-in basis and likely evolve initially to an opt-out basis for larger C&I customers, and then to smaller C&I customers. Eventually a transition to an opt-out or even universal application of TVR and smart rates for residential customers should be considered, provided there is strong customer education, features and technologies that enable meaningful response to TVR price signals, and adequate protections for low-income customers.
  7. Adequate protections for low-income customers may include consideration of smart rates which do not disproportionately shift costs towards low-use customers with relatively flatter load shapes.[8]These customers may have less discretion in their power usage and thus reduced capacity to save money by shifting usage/load depending on TOU price (though some bill reductions may be realized through lower non-peak rates absent any shift in load by these customers). The costs of transitioning towards smart rates, for example by deployment of smart meter technologies, could be collected not solely through the customer charge portion of the bill, but rather through some adjustments to volumetric rates (i.e. a usage-based allocator, not a per-customer allocator). If the cost of AMI and other technology deployment were to be allocated solely through increases to the per-customer charge, then low-income and other low-use customers may be less likely to realize net bill savings through any corollary reductions in individual or system-wide peak usage/costs on that portion of the bill. Costs within classes of customers could be borne by those who benefit from the deployment of the new smart meters or other technologies. Shadow-bills for all residential customers and bill protections for low-income customers (such as an EAP-participant customer automatically being charged for the lower of the two potential bills) could be considered as additional consumer protections in any transition to a widely or universally deployed opt-in or opt-out smart rate design.
  8. For new customer-generators that don’t opt-in as early adopters of proposed TVR/RTP metering and rate options, new net metering tariffs being developed in DE 16-576 need to work with existing metering and billing systems. The Acadia Center’s attached paper on “Reforming New Hampshire Net Metering Credit,” dated July 11, 2016, outlines a charge and credit structure that highlights potential next steps in refining net metering rate design for such customer-generators. Any reforms should ensure that prices fully reflect grid-wise costs and benefits, including environmental benefits and the value of avoided energy, capacity, transmission and distribution costs, along with time-specific and locational value where possible.

CONCLUSION: Intelligent rate design options that better incorporate and communicate real time and marginal costs and benefits of energy use and energy services are a key tool in achieving the expected benefits of Grid Modernization as laid out in the Scoping Order:

●Improving the reliability, resiliency, and operational efficiency of the grid.

●Reducing generation, transmission, and distribution costs.

●Empowering customers to use electricity more efficiently and to lower their electricity bills.

●Facilitating the integration of distributed energy resources.

These recommendations are intended to help maximize those benefits.

1

[1]“A Primer on Rate Design for Residential Distributed Generation,” Edison Electric Institute at 1 (February 16, 2016).

[2] “A Troubling Trend in Rate Design: Proposed Rate Design Alternatives to Harmful Fixed Charges” by Southern Environmental Law Center, pp. 5-6, (December 2015), emphasis added and footnotes deleted.