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A TOU Rate Primer

A TOU Rate Primer. Art & Science of TOU Rate Design. Robert Levin rl4@cpuc.ca.gov Retail Rate Design Section July 30, 2014 Energy Division . Guiding Principles* Especially Relevant to Developing TOU Rates. 2. Rates should be based on marginal cost;

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A TOU Rate Primer

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  1. A TOU Rate Primer Art & Science of TOU Rate Design Robert Levin rl4@cpuc.ca.gov Retail Rate Design Section July 30, 2014 Energy Division

  2. Guiding Principles*Especially Relevant to Developing TOU Rates 2. Rates should be based on marginal cost; 3. Rates should be based on cost-causation principles; 5. Rates should encourage reduction of both coincident and non-coincident peak demand; 9. Rates should encourage economically efficient decision making; *From Assigned Commissioner’s Ruling issued November 26, 2012 in R.12-06-013

  3. Why Does the CPUC Base Rates on MC? Quote from a 1981 CPUC decision adopting MC-based rates: • We have chosen marginal costs as our foundation for [electric cost] allocation and rate design.  We have used marginal costs to promote economic efficiency and to provide the greatest good for the greatest number.  (D.93887 (1981), emphasis added.) • TOU rates reflect this idea, with the further refinement  that marginal costs vary predictably by time of day, weekday/weekend, and season.

  4. Marginal Cost Review • What is a Marginal Cost?:Marginal costs may be defined as the change in total cost which results from a change in output. The result of using marginal cost in rate setting is that the rate equals the cost of producing one more unit, or the savings from producing one less unit. (D. 92749, p. 62) • Ideally, MC-based rates: • reflect cost causation (Guiding principle #3) • result in socially optimal levels of consumption (assuming “externalities” are priced in) • encourage economically efficient decision making (Guiding principle #9). • The “flip side” of cost causation is cost avoidance • Thus, marginal costs and avoided costs are closely related

  5. Time-of-Use (TOU) Rates • TOU rates attempt to capture the predictable time-variations in marginal cost with a minimum of complexity. • Marginal generation costs vary by • season, • day type (weekend/holiday versus weekday), • time of day.

  6. Like Hours are Grouped Together Most summer hours are off-peak Current TOU Period Definitions Summer Peak Summer Off-Peak Part-peak

  7. TOU Period Definitions Are Likely to Change x Current TOU Period Definitions Future??? SummerTOU Period Definitions Summer Peak Summer Off-Peak Part-peak

  8. Decomposition of Rates D.13-10-019 (pp.7-8) discusses decomposition of rates into the following 3 components: 1. Marginal costs of providing service • Energy • Generation Capacity • Distribution Capacity 2.Nonbypassable charges (“NBCs”) 3. Headroom This decomposition of costs is useful for constructing TOU rates

  9. Step 1: Start with Marginal Energy Costs8,760 hourly marginal energy costs are grouped into 5 TOU periods Building a TOU Rate

  10. Step 2: Add Marginal Generation Capacity Costs Building a TOU Rate Most Generation Capacity Cost is Assigned to the Summer Peak Period With capacity costs, summer peak/off-peak Gen. MC ratio is typically about 3 to 1 or greater

  11. Building a TOU Rate Step 3: Add Marginal Distribution Capacity Costs Distribution MC is not time-differentiated in this illustration.

  12. Step 4: Add Nonbypassable Costs Building a TOU Rate NBCs cannot be discounted and must be allocated uniformly to all time periods (see, D.07-09-016, COLs 1& 2, p.35).

  13. Building a TOU Rate: Final Result Step 5: Add Remaining Nonmarginal Costs Final rate summer peak/off-peak ratio is typically about 2 to 1 or greater

  14. CPP vs. TOU • In a TOU rate, Gen. Capacity Costs are spread over 600-800 hours, typically resulting an a rate component of about 10-15 cents per kWh. • In a (pure) CPP rate, those costs are compressed into 60-80 hours, typically resulting in a rate component of about $1.00 to $1.50 per kWh. • To preserve economic efficiency, revenue should not be shifted between TOU periods.   Therefore any revenue collected by CPP rates during events should logically be offset from peak period TOU rates only.

  15. Goals of TOU Rate Design (1) Relevant guidance from ACR: • Rates should be based on marginal cost; • Rates should be based on cost-causation principles; • Rates should encourage economically efficient decision making; • Rates should encourage reduction of both coincident and non-coincident peak demand; This suggests that headroom costs be allocated in proportion to the marginal costs; • Rates should be relatively high in peak and semi-peak periods • Rates should be relatively low in off-peak periods: How low? Off-peak rates must collect at least (1) off-peak energy costs + (2) off-peak marginal distribution costs + (3) Nonbypassable costs.

  16. Goals of TOU Rate Design (2) More Relevant guidance from ACR: • Rates should be affordable (avoid rate shock); • Rates should be understandable (avoid unneeded complexity); • Rates should provide customer choice; • Rates should be accompanied by appropriate customer education and outreach; This suggests that TOU price differentials be increased gradually (to avoid rate shock), and TOU rates should have no more than two tiers (or a single tier with a baseline credit) (to avoid unneeded complexity) Arizona utilities have successfully offered two or more distinct TOU options. This strategy could promote customer choice.

  17. Concluding Facts • The CA Energy Action Plan II (EAP II) identifies Demand Response (DR),along with energy efficiency, as the State’s “preferred means of meeting growing energy needs”. • TOU is (Non-Event-Based) DR (according to both the CPUC & CEC)* • Arizona Public Service has 53% residential enrollment in opt-in TOU • Salt River Project has 30% enrollment in opt-in TOU • Both AZ utilities have been actively promoting TOU for 25 years • The large CA IOUs have less than 5% residential enrollment in any TVR. *See, 2013 CEC IEPR p.73; D.08-04-050, Attachment A, p.80

  18. APPENDIX • x

  19. Single-Tier CA Residential TOU Rates (Summer) *Proposed in A.13-12-015, with a $16 per month customer charge **Limited enrollment experimental rate, EV loads only

  20. Single-Tier CA Residential TOU Rates (Winter) *Proposed in A.13-12-015, with a $16 per month customer charge **Limited enrollment experimental rate, EV loads only

  21. Arizona Residential TOU Rates (Summer)

  22. Residential TOU Program Summary

  23. Residential TOU Program Summary-References • See the 2013 Load Impact Evaluation of Pacific Gas and Electric Company's Residential Time-based Pricing Programs, Nexant, Inc., April 1, 2014. • From a presentation by Dr. Stephen George, National Town Meeting on Demand Response and Smart Grid, Washington, D.C. , May 21, 2014 • Id. • Id. • Loren Kirkeide, “Effects of Three-Hour On-Peak Time-of-Use Plan on Residential Demand during Hot Phoenix Summers”, Electricity Journal, May, 2012 • Id. • Information provided by Chuck Miessner, Pricing Manager APS, April 29 & 30, 2014 (emails to Elise Torres & Robert Levin) • Id. • Faruqui, Ahmad, and SanemSergici. “Arcturus: International Evidence on Dynamic Pricing.” Elsevier, Electricity Journal, 26, no. 7 (2013), as updated June 11, 2014 (per e-mail communication from Dr. Faruqui to Robert Levin). • Id.

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