California utility time of use rates

Wednesday, August 8, 2012

California regulators have upheld a decision to change the way many business and agricultural customers are charged for electricity.  Under the new structure, known as "time of use" pricing, customers will pay different rates for the energy consume depending on the real-time balance of supply and demand.

Historically, electricity consumers paid rates set by state public utilities commissions that, in the aggregate, allow utilities to recover their costs and make a reasonable rate of return on their investment.  Typically, these rates for energy have been fixed in advance, changing only when a utility files a new tariff or secures its regulators' approval to raise the rates.  Absent such a change, customers' retail rates remained fixed throughout the day and the year.

In recent years, real-time wholesale markets have developed across much of the United States.  The true cost of producing and delivering power varies in real time, depending on the balance of supply and demand.  If consumers demand more electricity, more and more expensive generating units are required to serve their load, resulting in an increase in the true cost of power.  Conversely, at night or during mild weather, decreased demand typically leads to a reduction in the real-time cost of power.  Real-time wholesale markets are designed to allow utilities and other wholesale buyers to respond to price variations, buying more electricity when it is less expensive or conserving power when prices rise.  Most retail customers like homeowners and businesses are not directly exposed to these real-time variations, instead paying the utility's fixed tariff rates.

This paradigm is starting to change in parts of the country.   In 2010, the California Public Utilities Commission ordered utility Pacific Gas and Electric Co. to implement a variable pricing structure for many of its business and agricultural customers by next March. The utility asked the regulators to allow customers to opt out of the time of use rates and back in to their previous fixed rates, pointing to its experience with customer complaints over a lack of an opt-out mechanism for smart meters.

Last week, the commission upheld its earlier decision, noting that evidence suggested that few customers would see increased bills as a result of the shift to time-of-use rates. Will more regulators and utilities shift customers to time-of-use rates?

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