Residential Rate Structures Educational Forum Welcome

1. Residential Rate Structures Educational ForumWelcome

2. Educational Forum Goals • Educate the public about rate structure options. • Describes the positives and negatives of various rate structure approaches. • Provide information about residential energy usage based on income.

3. Agenda • 5:30 p.m. Welcome and Introduction of Guests – Brian Morgan, Board President • 5:40 p.m. Presentation – Residential Utility Rate Design Options • Mike Bull, Director of Policy and External Affairs – Center for Energy and Environment with Mark Beauchamp, President – Utility Financial Solutions, LLC • 6:15 p.m. Residential Rate Structures - Realities • Mark Kotschevar, General Manager and Peter Hogan, Chief Financial Officer • 6:30 p.m. Questions and answers about the presentations • Moderated by Krista Boston, Director of Customer Relations • 6:55 p.m. Summary and Next Steps • 7:00 p.m. Adjourn

4. Presenters Presenter • Director, CEE Policy and External Affairs • Former Senior Policy Advisor for Gov. Tim Pawlenty • Former Senior Resource Planner for Xcel Energy • Former Senior Regulatory Analyst, MN PUC Presenter • President: Utility Financial Solutions • Providing rate consulting services to over 700 electric utilities in 40 states, Canada, Guam, Barbados, & Bermuda • Instructor for Cost of Service and Rate Design for the American Public Power Association • Speaker at national and regional state conferences Mike Bull Mark Beauchamp • CEE Contributor • Manager, CEE Regulatory Policy • Former Senior Regulatory Analyst and Local Energy Policy Manager for CenterPoint Energy • Former Business Analyst for CapX2020 Audrey Partridge

5. Overview • Introductory Material • Rate Designs without Advanced Metering • Flat Rate with Monthly Customer Charge • Inclining Block Rates • Revenue Decoupling • Rate Designs with Advanced Metering • Time-of-Use • Residential Demand Charges (Three-Part Rate)

6. What is Rate Design? • Rate Design is the process of translating a utility’s revenue requirements – the utility’s costs of providing service – into the prices paid by customers • Which costs? • Costs that are variable in the short term (“variable costs”) • Wages, taxes, fuel, etc. • Costs that are sunk or may be variable only in the long term (“fixed costs”) • Investments in utility infrastructure, etc.

7. Bonbright’s Objectives of Rate Design • Recovers the utility’s total revenue requirements • Fairly distributes the burden of meeting total revenue requirements among customers • Promotes consumption at the level that is economically justified by costs incurred and benefits received and does not encourage wasteful use of utility services

8. Bonbright’s Principles of Rate Design • Be forward looking – reflect long-run marginal costs • Focus on usage components of service that are most cost/price-sensitive • Be simple and understandable • Recover system costs in proportion to how much customers use and when they use • Give customers appropriate information and the opportunity to respond by adjusting usage • Where possible, be temporally and geographically dynamic

9. Today’s Challenges and Opportunities for Utility Rate Design • Evolving Resource Mix • Cost of new utility-scale renewables can be lower than embedded wholesale costs of traditional generation • Low to flat customer demand growth • Customer-sited opportunities • Distributed solar • Energy Efficiency • Smart Appliances/Technologies • Electric Vehicles • Needs of Low-Income Customers • Economic Development

10. Rate design and cost-shifts • There is no perfect rate design -- utility rates are rife with cost shifts that serve as inter-class and intra-class cross-subsidies • Several common cross-subsidies that do not reflect costs of service include: • Setting the same rates for single family and apartment dwelling customers • Setting economic development or other discounts for industrial customers • Allowing most customers to pay average “energy” rates that do not reflect the cost of energy generated on peak • Net metering for those customers with rooftop solar • Providing discounts to low-income customers

11. Residential Rate Design Options Without Advanced Metering: • Flat Rate with Monthly Customer Charge • Inclining Block Rates • Revenue Decoupling With Advanced Metering: • Time-of-Use • Residential Demand Charges (Three-Part Rate)

12. Rate Designs without Advanced Metering Infrastructure Flat Rate with Monthly Customer Charge Inclining Block Rates Revenue Decoupling

13. Rate designs w/o AMI 1. Flat Rate w/ Monthly Customer Charge Description • A flat “volumetric” rate design charges customers per unit of energy used, at the same rate for all units. The volumetric rate may be adjusted seasonally • Flat rate designs usually include a fixed monthly customer charge that applies to each customer in a tariff class • This design is the most common rate design for residential rates in the U.S.

14. Rate designs w/o AMI 1. Flat Rate w/ Monthly Customer Charge Considerations • Simple and transparent to customers and other stakeholders. Simple to administer • Fixed charge provides utility revenue certainty – higher fixed charge = more revenue certainty • Tension around whether fixed charge should be: • solely based on “customer-related costs” such as costs of billing and collection, meters and service connections or • include minimum distribution component (substation to home) • A low volumetric rate w/ high fixed charge can send price signal for customers to use electricity less efficiently • Reduces the value of EE and DG to the customer, reduces incentive to install EE/DG measures • May result in the utility investing in more infrastructure to serve excessive demand • Treats all kilowatt-hours equally – peak, off-peak; no price signal to shift usage

15. Rate designs w/o AMI 2. Inclining Block Rates Description • Inclining Block Rates are designed to charge customers a higher per-unit rate as their usage increases over certain “blocks” or thresholds within a billing cycle • Example: A three-tier inclining block rate would identify three blocks of consumption (0 kWh-150 kWh, 150 kWh-250 kWh, and 250 kWh and up) and assign a progressively higher rate to consumption in each block

16. Rate designs w/o AMI 2. Inclining Block Rates Considerations • Inclining block rates encourage efficient use of electricity • Low income advocates support inclining block rates, arguing that low income customers tend to be low usage customers • May be difficult to design blocks to be cost-based • High usage customers may subsidize low usage • Block rates can be confusing to customers and require customer education • Customers must have timely access to their consumption data to avoid being surprised by higher than expected bills

17. Rate designs w/o AMI 3. Revenue Decoupling Description • Revenue decoupling separates the link between utility revenues and how much energy the utility sells, ensuring utility revenues equal the amount determined to be needed • Regulators determine the amount of revenue a utility may collect each year • Actual revenues are trued up to this allowed revenue amount via an annual surcharge or refund, adjusting the rates for the following year up or down • Usually built on a standard rate design

18. Rate designs w/o AMI 3. Revenue Decoupling Considerations • Provides revenue certainty for the utility regardless of fluctuations in sales volumes • Decoupling supports energy efficiency efforts • Decoupling removes the negative revenue impacts to the utility of energy efficiency and customer-owned distributed generation • Revenue decoupling mechanisms are relatively complicated • Consumer advocates can view decoupling with suspicion, in that it shifts risks from the utility to ratepayers • May exacerbate existing cost shifts • Does not affect price signals sent to customers

19. Rate Designs with Advanced Metering Infrastructure Time of Use Rates Demand Charges (Three Part Rates)

20. Rate designs w/ AMI 1. Time-of-Use Rates Description • Time-of-use rates are designed to recognize differences in a utility’s cost of service and marginal costs at different times (hours, days, seasons) • Time-of-use rates charge different prices according to a pre-set schedule. Prices are higher during peak time and lower during off-peak times • The concept is to send a significant price signal (e.g. an on-peak rate that is 3x or 4x off-peak) in order to get customers to shift usage to times when system costs are lower and to reduce peak demand

21. Rate designs w/ AMI 1.Time-of-Use Rates Considerations • Time-of-use rates align utility costs and revenues better than flat rate models • Time-of-use rates send more accurate price signals and encourage more efficient energy usage than traditional flat rates • Over time, time-of-use rates may flatten the utility’s demand curve and reduce system costs by avoiding or deferring investments • More complicated for the customer - requires significant customer education • May harm customers that cannot shift energy usage as easily as others • Often an initial TOU rate has bill protection mechanisms for low-income customers • Time-of-use rates can be designed to encourage off-peak charging of electric vehicles

22. Rate designs w/ AMI 2.Demand Charges (Three-Part Rate) Description • A demand charge can be added to an existing fixed charge and volumetric rate to capture costs caused by the customer’s peak demand • Demand charges assign a cost to a customer for the strain that customer places on system resources • Demand charge can be “coincident” or “non-coincident” depending on whether the charge is for the customer’s contribution to system peak or for the customers’ own peak

23. Rate designs w/ AMI 2.Demand Charges (Three-Part Rate) Considerations • Demand charges allow the utility to recover the costs of serving peak loads • More fairly allocate costs as opposed to averaging into volumetric rate • Coincident demand charges help to better match actual costs incurred to prices charged • Non-coincident demand charges do not send price signals to customers to shift usage to lower cost times • But accounts for all of the costs the customer imposes on the system (not just on system peak) • Customer peak can fluctuate monthly or be “ratcheted” -- set customer peak at highest point in a pre-determined period for several billing cycles • Ratcheting can stabilize revenues from customers with large swings in demand • Once demand peak is set, no incentive to conserve • Can be confusing to residential customers; rarely used in the residential context

24. Key Sources • National Association of Regulatory Utility Commissioners (NARUC). (2016, November). Distributed Energy Resources Rate Design and Compensation. • https://www.naruc.org/rate-design/ • Zummo, Paul and James Cater. (2016, November). Rate Design Options for Distributed Energy Resources. American Public Power Association. • https://www.publicpower.org/system/files/documents/ppf_rate_design_options_for_der.pdf • Lazar, Jim and Wilson Gonzalez. (2015, July). Smart Rate Design for a Smart Future. Regulatory Assistance Project. • http://www.raponline.org/wp-content/uploads/2016/05/rap-lazar-gonzalez-smart-rate-design-july2015.pdf • Lazar, Jim. (2013, April). Rate Design Where Advanced Metering Infrastructure Has Not Been Fully Deployed. Regulatory Assistance Project. • www.raponline.org/document/download/id/6516/

25. Rate Changes - Realities • Any rate structure must cover the costs. • Changes to rate structures are a balancing act. • Any rate structure change would require a multi-year plan including technology investments and public education. • Changes to the rate structure have the potential to create winners and losers.

26. Customer Usage by Census Track Question: Does income impact use? Average Monthly Use Year Ended Nov 2017: 615Kwh/Month

27. Customer Usage

28. Customer Usage

29. Customer Usage Summary • Homes in the first block of the Census tract have lower average kWh usage. • Lower income customers have varying usage patterns: • Mobile Homes, Electric Heat, Age of Housing • Non Cost based rate structures have unintended cost shifts. • Distributed generation, Electric Vehicles

30. Next steps • The Board will continue discussing the subject of rate structures. • Staff will gather information on the capabilities and limitations of our existing metering infrastructure. • No change in rate structure is planned for 2019.