Regulated Utilities and Rate Design

[Pages:55]Regulated Utilities and Rate Design

Bill Graf

Moderator Partner Deloitte & Touche LLP

Regulated Utilities and Rate Design

Mark B. Lively

Consulting Engineer Utility Economic Engineers MbeLively@

Regulated Utilities and Rate Design Supplemental Prepared Remarks

Yesterday I heard Richard Stavros ask a question. I met Richard about 10 or 15 years ago when he was editor of Public Utilities Fortnightly (PUF) and published an article I wrote. 25 years ago, long before Richard got there, PUF published my first article, "Tie Riding Freeloaders--The True Impediment to Transmission Access," Public Utilities Fortnightly, 1989 December 21. I wrote "Tie Riding Freeloaders" as personal therapy after being on the next to the last flight of Pan Am 103. The last flight, the next day, crashed in Lockerbie, Scotland.

Mark B. Lively

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Regulated Utilities and Rate Design Supplemental Prepared Remarks

My PUF article discusses the concept of pricing unscheduled flows of electricity. If you have two electric utilities connected by a transmission line, there will always be some flow on the transmission line. Ask any power engineer. If the flow is unscheduled, it is called inadvertent interchange, as would be any deviation from any schedule. If there are 2 lines, owned by different economic interests, and we schedule power to flow on one of those lines, some power will flow on the other line. The unscheduled flow might be called low flow or parallel path flow. I say there needs to be a way to price inadvertent interchange and loop flow following economic principles which may not be in accord with normal accounting costs. I call the concept WOLF, for Wide Open Load Following.

Mark B. Lively

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Regulated Utilities and Rate Design Supplemental Prepared Remarks

Yesterday Walt Patterson of Chatham House advocated microgrids. This is where one of the two utilities is very small, perhaps even very, very small. In the extreme it might be a single residential customer, the concept of my slides. The electric industry in the U.S. started with microgrids. Sam Insul saw that by connecting microgrids with transmission, he could build bigger, more efficient power plants and shut down a slew of small inefficient power plants, which prior to automation had 24x7 staffing at each plant. Eliminating 24x7 staffing at dozens of power plants pays for a lot of transmission, as does a halving of fuel costs.

Mark B. Lively

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Regulated Utilities and Rate Design Supplemental Prepared Remarks

But Sam Insul didn't have something like WOLF pricing to pay for transmission, so he bought each microgrid, built the transmission, and formed utility holding companies, which grew into the electric utilities we have today.

Mark B. Lively

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Regulated Utilities and Rate Design Supplemental Prepared Remarks

I have written extensively about microgrids. I see they have the same issues as traditional utilities, including how to pay participants. In a fun article, I wrote about how a neighbor, think Heather Heard of Deloitte, was a greenie, with solar and wind mills, while I was a troglodyte with a dirty diesel. We connect our houses electrically. Where there is a huge renewable surplus, the transaction price is very low and I can shut down my diesel as being uneconomic. When there is a shortage, the transaction price is very high. This 7 year old article is "Microgrids And Financial Affairs Creating A Value-Based Real-Time Price For Electricity," Cogeneration and On-Site Power Production, September, 2007.

Mark B. Lively

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Regulated Utilities and Rate Design Supplemental Prepared Remarks

22 years ago, I helped Tampa Electric Company with its standby tariff, where customers paid a monthly fee in the form of a demand charge of sorts to TECo for TECo to stand ready 24x7 to provide backup to their microgrids. TECo's Bill Ashburn is my guest, my "plus one," at this conference. Walt Patterson's microgrids need such standby, but then so does any customer with alterative supplies, whether a home owner with solar or a gas customer with a heat pump. Having these part time customers pay for standby reduces the amount the utility must collect from "standard" customers, customers without alternative supplies. This rate change reduces the subsidies being paid by standard customers, subsidies which would otherwise overly encourage customers to make investments in uneconomic alternative supplies.

Mark B. Lively

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