Some utilities are rushing to raise fixed charges. That would be bad for the economy and your utility bill

Blog Post | December 04, 2014 - 3:08 pm
By Seth Nowak, Senior Analyst

Slow growth in electricity demand (or, in some places, flat or declining sales) and growing numbers of customer photovoltaic systems are creating concern among utilities about their ability to adequately recover the costs associated with producing electricity. In response, there has been a disturbing trend around the country of utilities proposing to simply raise monthly “fixed charges,” or the charges we pay to the utility just for being a customer. For residential customers, utilities currently charge about $5-$10 per month for fixed customer charges, but some utilities are proposing to raise those to $20 dollars per month or more.

The problem with raising fixed charges

This is a problem for several reasons. First, it limits our control as customers over energy costs in our homes and businesses. If a higher portion of your utility bill is fixed, any actions you take to use energy more efficiently will have less impact on your total bill. That makes wasting electricity less expensive.

Second, higher fixed charges raise several equity concerns. For example, it penalizes those who have already successfully invested in energy efficiency, and raises costs on those customers who use less electricity in the first place, such as those who live in apartments and small businesses.

Third, weakening the incentive to invest in efficiency isn’t just bad news for our individual pocketbooks; it’s also bad for the economy and the environment. Investing in energy efficiency doesn’t just save us money. It creates jobs and lowers pollution.

Instead of raising fixed charges when crafting rate structure proposals, utilities should financially reward people and businesses that are saving energy. If they weaken the incentive to invest in efficiency, customers will pay more money and waste more energy over time. For example, in a study for the Kansas Corporation Commission, researchers found that increased fixed charges in Kansas would increase electricity use by 1.1 – 6.8%, varying by utility and season. To put this in perspective, even in the midpoint of this range, the increases in electricity use are greater than all the energy savings from all energy efficiency programs in an average state. In other words, such a move is likely to cancel out all the energy saved by energy efficiency programs. Or worse, at the high end of the range, it could increase energy use to about three times as much as we’ve been saving.

Some groups have been arguing that fixed charges are necessary in order to avoid a dreaded “utility death spiral,” a scenario in which declining sales require utilities to raise rates so that they can recoup their costs, and these rising rates would drive additional customers to leave the system and invest in technologies like solar panels. That fear, however, has been greatly exaggerated. ACEEE took a look at three different scenarios and found that even in the most extreme case, which includes levels of energy efficiency now being achieved in only a few states, plus the use of solar electric power that eventually uses nearly all available roof space, national electricity sales decline about only 10% by 2040 (not enough, in our opinion, to cause a death spiral). In a more likely scenario, sales are essentially flat, and utilities that have relied on rising sales to fuel profits will need to pursue new business models if they want to see profit growth.

Better solutions

That being said, we recognize the need to design utility cost recovery and rates in a way that ensures that grid costs are fully and fairly recovered. No matter the approach, cost recovery and rate design should be based on comprehensive analysis and maintain strong price signals to encourage efficient use of energy.

First, revenue decoupling, where utility profits are no longer tied to the quantity of energy sales, is an important regulatory foundation that encourages energy efficiency. Frequent rate cases and financial reserves are additional ways to address revenue stability, as outlined in a recent policy brief by the Regulatory Assistance Project.

If rate design changes are still needed in addition to decoupling and frequent rate cases, there are better alternatives to higher fixed charges for all customers. For example, there are demand charges, time-of-use rates, or minimum bills:

  • Demand charges are based on each customer’s contribution to the peak demand, such as on a hot summer day when lots of us are running our air conditioners at the same time (these are well-established for business customers and more recently have been explored as options for certain residential customers).
  • Time-of-use rates are those that make the usage rate we pay for electricity lower during times of low demand, such as in the middle of the night, and higher when there is more demand.
  • Minimum bills apply to the small number of customers below a certain low threshold of usage and guarantees the utility a minimum annual revenue from these customers.

Whatever features are included in their plans, utilities would be wise to conduct a careful analysis of the estimated impacts of its proposed rate design changes on its customers’ energy consumption and energy bills. Simply raising fixed charges would be a huge shift in energy policy—there are already two dozen proposals from utilities to regulators around the country—and a change of this magnitude calls for careful analysis. Utilities shouldn’t take away customers’ ability to control their electricity bills or dilute the benefits that energy efficiency brings to the nation.