Electricity is so indispensable to modern life, you might call it “priceless.”
But what is the value of those electrons that flow into the myriad appliances and devices we rely on? What is the right rate to charge consumers that will create enough revenue to continue to deliver safe, reliable, and affordable power?
The traditional elements of rate-making were never simple volumetric charges. It’s a formula that’s part art and part science, designed to return the co-op’s cost of operation. Under that model, consumers pay pennies per kilowatt-hour, plus service charges. The more they use, the more they pay.
That equation is now being flipped and tossed around because of broad shifts in the power industry, including:
- Leaps in utility technology;
- Grid modernization and advanced metering;
- Aggressive federal and state regulations and power portfolio requirements;
- Stagnant or declining sales;
The rise of cost-effective renewables, the success of energy efficiency, and wider availability of distributed energy resources;
- The emergence of an increasingly sophisticated class of consumers with better tools to monitor and control their use of electricity.
“We are looking at fundamental changes in pricing because we are looking at changes in fundamental ways people and cooperatives acquire and use energy,” says Gary Pfann, NRECA’s director of executive and staff education. “It’s become much more complex.”
Pfann, an engineer who served early in his career as a rate analyst at the Iowa Association of Electric Cooperatives, leads power supply classes at NRECA’s Robert I. Kabat Management Internship Program for co-op executives and CEOs at the University of Wisconsin. He says technological advances, primarily in metering, are driving the potential for shifting the philosophy of rate structures.
Rich electricity-use data supplied by modern meters provides a much clearer picture of actual loads at specific times that precisely correlate to the cost of power in markets. This clarity, Pfann says, is moving rate-making from average cost-based toward the actual real-time value of electricity.
Pricing for value
While the concept is emerging in the industry, it was anticipated more than 50 years ago by James Bonbright, a Columbia University economist and chair of the New York State Power Authority. His 1961 book, Principles of Public Utility Rates, is regarded as a seminal blueprint for rate-making.
“The value of any given class of service will be different for different customers and also different for various amounts of service delivered to any one customer,” he wrote.
Consumer to consumer, the value does vary, Pfann says. The load curve of a household with an electric car and controllable devices would be vastly different from a mobile home, a traditional residence with 20-year-old major appliances, or a home newly equipped with rooftop solar.
Sensitive to this dynamic, co-op CEOs and boards are reconsidering how they structure flexible rates against costs and are offering choices for services and prices as consumer-members’ needs evolve, Pfann says.
“Philosophically, our country was founded on the concept of choice,” he says. “With the choices, consumers can make decisions about their relationship to the co-op and how they use utility services.”
Flexible pricing options are centered on various forms of time-based rates, which seek to minimize peak use costs for the cooperative.
The subscription model
One evolving approach to rate structuring is subscription pricing, says Allison Hamilton, NRECA senior principal for markets and rates. She says this method is a “truly customized fixed monthly rate” tailored to each consumer.
The monthly subscription is based on a rate reflecting a consumer’s historical load profile and the costs of serving that account over a certain period. The subscription can be tiered to reflect various choices and options.
In such an approach, electricity becomes less of a commodity for the consumer and more of a service, Hamilton says. And revenue stability offered by a fixed monthly rate can help co-ops reduce risk and better plan for the future.
A recent report published by NRECA and Navigant Consulting found that “customers like the simplified choice and predictability of subscription pricing, and they especially like avoiding the discomfort of knowing they are being charged for each incremental unit of usage.”
According to the report, this trend could not come at a better time as the cost of serving the next incremental unit of usage is declining due to zero-marginal-cost renewables and low natural gas prices.
To consumers, a subscription approach would look much like the options that phone and internet companies offer customers, says Steve Collier, director of smart grid strategies at Milsoft Utility Solutions.
“These days, everyone with a smartphone is familiar with various rates for services,” he says. “You can easily see and understand what you’re getting.”
Changing rates, changing conversations
Because traditional approaches to rate design are rapidly becoming insufficient in serving consumer needs and expectations, Collier says, utilities must be intent on offering products and services consistent with value.
That could mean re-evaluating the monthly lump-sum pricing of their main product.
“Nobody buys anything in this manner,” Collier says. “Why should it be different with utilities?”
Utility and data technologies are progressing so quickly and in so many unanticipated ways, any approach to rate structuring must be flexible and sensitive to changes in power markets, he says.
However, movement toward drastically revamped rate structures will likely come at a slower and more manageable pace than the technologies that are driving it, says Mike Keyser, CEO of BARC Electric Cooperative in Millboro, Virginia. He’s led the 13,000-member co-op in the heart of the Shenandoah Valley since 2010.
“Despite what we hear, I don’t think it’s true that all customers want—or need—such precise rate data to make usage decisions,” he says. “We need to simplify the way we talk to consumers about pricing.”
As an example, he mentioned BARC’s experience in launching Virginia’s first community solar array in 2016.
To pay for it, the co-op created a subscription-based model, and instead of selling it to consumers with kilowatt-hour formulas, they offered the power in fixed-price “solar energy blocks.”
He said he deliberately avoided the term “kilowatt- hour” to help consumers better understand what they were buying. The simplicity of the subscription model, and a simplified pricing structure, made it a natural choice as a hedge against energy cost hikes, and the local demand pushed sales.
“Before we put in the first post for a panel, we were already sold out,” recalls Keyser, a former Seattle lawyer who had previously been the CEO of the American Samoa Power Authority.
BARC’s website uses graphics and charts to show consumer-members how each portion of their electric rate relates to the co-op’s energy sales, expenses for power and operations, and margins.
Keyser notes that as co-op leaders evaluate their rate structures, careful thought should also be given to how it’s presented to members.
“If the consumer is to become a more active participant, we have to talk about rates in easy-to-understand ways,” he says. “We have to find more effective ways to have these conversations.”