Rate Design. June 30, Laurie Reid, Ontario Energy Board

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1 Rate Design June 30, 2014 Laurie Reid, Ontario Energy Board

2 Overview 1. The Ratemaking Process 2. Generally Accepted Ratemaking Principles 3. Conclusions 2

3 The Ratemaking Process Rate Design is Phase 3 of the standard three phase ratemaking process used by most regulators, commonly referred to as: Rate-base rate-of-return regulation, or Cost of service regulation Revenue Requirement Cost Allocation Rate Design 3

4 Customer Classes and Cost Allocation Customers are defined by size and load profile From To Sample Customer - 49 kw Residential, Corner Store, Most Farms kw Monster home; 20 unit multi-res; Commercial garage; Large dairy farm or greenhouse kw Supermarket kva Home Depot or Small machine shop kva Costco or 30 floor condominium kva Auto parts manufacturer or 2300 Yonge St 5000 And above kva TD Centre; Hospital; UofT; Stelco 4

5 Customer Classes and Cost Allocation Residential Hotel 5

6 Cost Allocation and Customer Classes G TS Sub-transmission Customer DS Primary Customer Distribution Transformer Retail Customer Transmission (e.g.,230 kv) Sub-transmission (E.g.,44 kv) Secondary Distribution E.g.,120 V Primary Distribution (E.g., 32/4.8kV) Transmission System Distribution System 6

7 Generally Accepted Ratemaking Principles Legislative mandate for regulation: Just and reasonable In the public interest Electricité de France monopoly tariff development, Pierre Massé and Marcel Boiteux, 1950s Those who incur costs should pay them So that they understand the value The Principles of Public Utility Rates, James C. Bonbright, 1961 Balance of generally accepted ratemaking principles Capital attraction The Economics of Regulation: Principles and Institutions, Alfred E. Kahn, 1970 Some things aren t monopolies anymore and should be competitive 7

8 Common Rate Design Fixed and Variable 8

9 Bonbright s Principles: Effective Straight fixed/variable Recovering the fixed costs in a fixed charge (most of distribution) Revenue for a class divided by the number of customers in the class Recovering the variable costs in a variable charge (fuel costs for generation, losses, etc.) Based on variable cost Capital attraction and certainty for investment 9

10 Bonbright s Principles: Stability Revenue stability for utility Cash flow short term debt Deferral or variance accounts interest Rate stability for ratepayer Complaints Budgeting Bad debt for utility Higher fixed charge 10

11 Bonbright s Principles: Static efficiency Maximizing use of system Peak capacity is product Ramsey pricing Promotional pricing to customers with elastic demand Generators don t pay Economic development rate Off-peak rate 11

12 Bonbright s Principles: Appropriately priced Internalities Costs and benefits Power Quality (kva rates) Distributed generation Externalities Promoting green energy (carbon tax) Social programs (lifeline rates) Economic development (seasonal rates, rural) 12

13 Bonbright s Principles: Fair Cost causality Rates or Charges Cost drivers: customer numbers or demand No intergenerational subsidies Used and useful or Work in Progress Beneficiary pays Least cost option First past the post 13

14 Bonbright s Principles: No undue discrimination Equals treated equally New or existing customers Postage stamp rates: urban / suburban / rural Limitations of metering Due discrimination Maximizing use of system Unfair 14

15 Bonbright s Principles: Dynamic Efficiency Incent the behaviour that you want to induce Excess capacity 45 Limited capacity

16 Bonbright s Principles: Practical and Simple Simplicity Certainty Feasibility of Application California 2 zones 4 seasons 12 usage tiers 16

17 Bonbright s Principles: Free from controversy Avoids political interference 17

18 4. Conclusions Traditional small volume customer rate designs did not correspond to cost drivers Advanced metering provides an opportunity to improve link between cost drivers and rates Rate design can be used to enhance regulatory principles/objectives including: Economic efficiency Conservation Distributed Generation But change creates winners and losers 18

New York State Gas Ratemaking Concepts

New York State Gas Ratemaking Concepts Thomas G. Dvorsky Director, Office of Gas and Water New York State Department of Public Service Thomas_Dvorsky@dps.state.ny.us June 2007 Gas Ratemaking Topics Rate