Electric Utility Rate Design: The Move Toward Peak-Load Pricing

Energy conservation, especially as derives from improved efficiency of conversion and end-use, has become perhaps the only widely agreed upon part of our national policy for dealing with the current projected shortfalls between domestic fuel supplies and the nation's appetite for energy. One of the many strategies to bring about reduced energy consumption now under active consideration at both the federal and state level is the redesign of electric utility rate structures.¹ A particular problem affecting efforts to conserve electrical energy, however, is the cyclic nature of daily and seasonal electrical loads. Peak loads may not account for a large portion of total consumption over a year, but they are responsible for a disproportionate share of the capital and fuel costs and adverse environmental impacts of electricity generation. Utilities must expand their facilities to meet these peak demands, and construction and operation of additional fossil-fueled and nuclear power plants, transmission lines, and pumped storage facilities require large capital outlays and have obvious environmental effects. When completed, however, these new facilities, except for pumped storage projects which are always used for peak generation, are brought permanently on line and older, less efficient and more polluting equipment is shifted to peak load duty. Thus it is actually this older equipment which is used to meet demand at peak loads, with the undesirable features of inefficient fuel consumption and emission of higher levels of pollution.

The Environmental Defense Fund and others have long argued that one way to both conserve energy and to decrease unnecessary environmental degradation due to electricity generation is to introduce peak-load pricing into electric utility rate structures. This advocacy has finally begun to bear fruit, as the public service commissions of several states, most notably Wisconsin and also California and New York, recently have taken initial steps toward incorporation of peak-load pricing into electric utility rate structures.

Peak-load pricing refers to the redesigning of utility rates so as to make electrivity more expensive during daily and seasonal peak demand periods (in most areas of the nation 9 AM to 6 PM on weekdays, generally during the summer months) and cheaper at other times. This redesigned rate structure theoretically encourages customers to shift consumption to off-peak hours when the price is lower, thereby reducing the aggregate level of peak demand. Such a smoothing of the pattern of electricity consumption would result in the more efficient use of both fuel and generating facilities, and would give customers the option of lowering their electric bills simply by shifting the time they consume their normal use of electricity. It would also reduce the need for continual plant expansion by the utilities to meet increasing peak demand.

EDF has taken its fight for rate structure revision to [5 ELR 10085] the state commissions regulating public utilities, where virtually all the nation's rate structure decisions are made. During the last three years, EDF has intervened in rate increase hearings before public service commissions in Wisconsin, California, Michigan, and New York, and has made limited appearances elsewhere, arguing for substantial revision of current rate designs and institution of peak-load pricing. These interventions resulted in limited revisions of rate structures in New York and Michigan,² but the first real break on peak-load pricing came in 1974.

On August 8 of last year, the Wisconsin Public Service Commission, in what it referred to as "a 'national' test case of electric rate design," decided that "full peak-load pricing including different day- and night-time rates must, for large customers, be implemented without delay," and ordered Madison Gas & Electric Company to submit a feasibility study on various forms of peak-load pricing for all other users within 60 days.³ The Commission stated its belief that peak-load pricing is an effective way to obtain an efficient allocation of resources and to prevent wasteful use of electric energy, and in addition directed the Company to revise its rate schedule to include a winter/summer price differential. Other electric utilities in Wisconsin were given notice that the Commission intended to extend these reforms throughout the state.

Buoyed by this success, EDF pressed its peak-load pricing efforts by initiating proceedings on the broad issue of rate design. The organization filed a petition with the New York State Public Service Commission requesting the institution of a state-wide generic hearing on the question of peak-load pricing. In a separate petition, the seven major investor-owned electric utilities of New York submitted a remarkably similar request. On January 29, 1975, the commission granted these requests and instituted a proceeding to determine "to what extent the overlapping principles of incremental cost and peak responsibility pricing should be applied to sales of electric energy" and "in what ways, such as time-of-day metering, seasonal rate differentials, interruptible service, and the like, these principles may be applied."⁴ In so doing, the Commission stated its belief that each of these approaches may provide a fruitful basis for changes in rate design which serve the goals of energy conservation and the efficient allocation of resources while holding down the costs to service to the consuming public. Utilities operating within the state were directed to identify customers who now have meters capable of measuring demand load by the hour and to propose to the commission, "at an early time," peak hour rate designs for such customers.

EDF's long-standing intervention in rate hearings before the California Public Utilities Commission recently also has begun to produce results. On March 5, 1975, the Commission staff recommended and the Pacific Gas and Electric Company agreed that the Company submit by April 15 proposals for testing the effectiveness of time-of-day metering in shifting electricity consumption from peak-load to off-peak periods for both residential and large industrial customers⁵ A decision by the Commission on whether to order the Company to undertake an experimental program of peak-load pricing is expected in July.

Shortly before April 15, however, EDF's position in the California hearing concerning Pacific Gas and Electric received support from the Federal Energy Administration. EDF had pointed out to FEA Administrator Frank Zarb that a witness in the proceeding who appeared in behalf of the General Services Administration, the Department of Defense and the California Manufacturers Association had stated that he was opposed to implementing peak-load pricing and that he appeared as a witness for the federal government. Correcting the impression that this witness was voicing federal energy policy, FEA intervened in a state public utility commission hearing for the first time and filed a brief with the California Commission urging the adoption of both daily and seasonal peak-load pricing as being in furtherance of national energy policy. FEA commended the Wisconsin approach of implementing immediately time-of-day rates for large volume users for whom the extra metering costs would be trivial. To buttress these arguments, the brief cited the example of two European systems — in England and Berlin — where peak-load pricing and load management have substantially smoothed daily usage patterns. FEA also estimated that 500,000 barrels of oil per day and $120 billion in generating plant expansion can be saved in the United States by 1985 by implementing peak-load pricing and other load management and demand control procedures.

Additional movement on the federal level toward acceptance of peak-load pricing can be seen in the Federal Power Commission's recently published revised proposals for the submission of rate design information in connection with rate schedule filings for wholesale power sales. In its original proposal published last year,⁶ the FPC evidenced an awakening concern for the possibility of increased energy conservation and more efficient resource allocation through the redesign of electric rate structures. In February of this year, the agency revised its proposed rules to call for submission [5 ELR 10086] of information relating to the method used in arriving at the cost of service allocated to the sales and service associated with each proposed rate.⁷ This data would be required to include computations showing "the demand responsibility of the service, and explaining the considerations upon which such responsibility was determined (e.g., coincident or non-coincident peak demands….)."

The shape of the final rate schedule information rules, not yet promulgated by the FPC, will be quite important since the Commission, through its control over the resale policies of the Bonneville Power Administration, can exert leverage over a large number of utilities in the Pacific Northwest. The FPC also has authority over the Southeastern and Southwestern Power Administrations, and can by its example indirectly influence the Rural Electrification Administration of the Department of Agriculture, which has substantial regulatory power in rural areas, to move toward rate redesign according to the concept of peak-load pricing.

At a time of growing fuel and resource scarcity, failure to allocate the higher capital, fuel, and environmental costs of on-peak electricity use to those customers who create the peak demand is no longer tolerable. Electric rate structures which include peak-load pricing would clearly indicate to energy customers the true costs of peak usage and would encourage efforts by the consumer to reduce consumption during peak demand periods. This aggregate reduction would in turn decrease the need for construction of environmentally damaging fossil fuel and nuclear generating facilities, and would limit the use of inefficient and pollution-producing older generating equipment at peak periods. The promise of these benefits in the face of chronic energy and resource shortages should bring about a growing receptivity among federal and state regulatory agencies to the concept of electric rate redesign in the direction of peak-load pricing.

1. See Comment, Electric Utility Rate Structure and Energy Conservation: The FPC Proposes Rules for the Submission of Rate Design Information, 4 ELR 10096 (July 1974).

2. In Re Consolidated Edison Co. of New York, Opinion No. 72-6 (Mar. 29, 1972); In Re Detroit Edison Co., Case No. U-3910 (Interim Order Mar. 30, 1972): In Re Consolidated Edison Co. of New York, Opinion No. 73-31 (Sept. 6, 1973); In Re Detroit Edison Co., Case No. U-4257 (Interim Order Sept. 12, 1973).

3. Application of Madison Gas & Electric Co., No. 2-U-7423 (Aug. 8, 1974).

4. Order Instituting Proceeding on Rate Design for Electric Corporations, Case 26806 (Jan. 29, 1975).

5. Application of Pacific Gas & Electric Co., Nos. 54279, 54280, 54281 (Mar. 5, 1975 at Transcript p. 8622).

6. 39 Fed. Reg. 15510 (May 3, 1974); see also Comment, supra n. 1.

7. 40 Fed. Reg. 7681 (Feb. 21, 1975).