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Time for Time-Of-Use Rates?
Energy Markets    April, 2003
by Ed Finamore, Valutech Solutions

Is PGE the beginning or end to serious discussion of time-of-use rates..

While the echoes of Puget Sound Energy's recent decision to scrap its residential time-of-use rate continue to reverberate throughout the utility industry, a wave of analysts and pundits has emerged with a mission to determine what went wrong with their program and then to forecast an end to time-of-use rate making as an effective demand response strategy. Let's save them all that time: because nothing could be further from the truth.

For those willing to step back and objectively examine the Puget Sound Energy situation, what they may actually be seeing is the end of an era of pseudo-intellectual romance with time-of-use rates during a period when the benefits of peak load shifting were not appreciated by the utility industry, the administrative cost of maintaining these rates was not fully considered and the actual cost of installing advanced metering equipment was the accepted responsibility of no one. But as all regular readers of this space know, metering does matter...

Many feel good solutions arising during industry deregulation have thus far avoided the ugly issue of who pays for the advanced metering and other costs necessary to implement load shifting, curtailment and other global demand response strategies. In Puget Sound Energy's case, they claim they apparently underestimated, or initially discounted, the administrative costs associated with their time-of-use program. With energy costs stabilizing, and upon failing to obtain adequate rate relief, they attempted to recapture these costs from the perceived beneficiaries of the rate. And the rest, as they say, is history.

During the period leading up to the PGE decision, interest among utilities in time-of-use pricing was considered mixed at best. Chartwell's 2002 utility survey revealed that approximately 31% of the utilities surveyed expressed at least some interest in time-of-use rates. However, with the nation's changing regulatory landscape and temporary easing of energy shortages, some feel that momentum has been shifting away from implementation of these kinds of programs. This short sighted view could lead to unfortunate delays in the implementation of the advanced metering systems that are needed to manage these rates, which could produce serious consequences if energy supplies again begin to tighten.

Utilities must realize that the cost to offer these rates should be weighed against the full range of benefits derived through their implementation; if not through improved system load factor or marginal profit, then as a vehicle for hedging the risk associated with the unpredictable cost of building additional generation or making unplanned off system energy purchases. Utilities must be willing to assign fair market value to load shifting programs in accordance with realistic risk management formulas used to calculate required future capacity margins and the projected cost of alternative energy sources that affect the supply side of the ledger. Steve Brown of Utility Automation recently outlined the relative "benefits" of PGE's on/off peak pricing differential, which did not appear to provide a sufficient incentive, as compared to other utilities' rates, for customers to continue to remain in the program. Not surprisingly, customers faced with higher costs rebelled when their load shifting efforts were not being sufficiently appreciated.

If time-of-use and other load management strategies were given sufficient consideration along with supply alternatives, then their real value would be reflected in the rates' variable pricing structures, and customers may then be willing to alter behavior and usage patterns to achieve meaningful energy cost savings. Patti Harper-Slaboszewicz, Sr. Energy Analyst with Frost & Sullivan concurs: "Unless utilities assign fair value for time-of-use pricing that actually rewards a customer's willingness to modify behavior patterns to achieve energy cost savings, time-of-use rates are destined for failure. The other key factor is for utilities to provide the equipment to automate the customer response as much as possible, for both large and small customers. And the energy industry cannot afford to wait until the supply picture again tightens to do the basic customer research necessary for effective design of these types of rates."

The State of California is proposing in its recent Working Group 3 Report (WG3) to conduct additional market research into the costs and benefits of time-of-use rates. If this and similar types of research are carried out, much more could be learned about the relative elasticities of energy demand and retail customer load shifting preferences to support development of effective time-of-use rates. Utilities could then begin to properly weigh the benefits of implementing load shifting programs, and may yet find that their value proposition will support installation of time-of-use metering.

For time-of-use rates to be effective, they must provide a real incentive to alter the customer behavior that drives energy consumption patterns. This can be achieved if utilities are willing to implement meaningful incentive based time-of-use rates and forgo some current revenue in advance of the day when they will need these programs to offset other less desirable alternatives.

Ed Finamore is founder and president of ValuTech Solutions, a management consulting firm specializing in utility automation systems and applications, including demand response and AMR. He can be reached at (412) 299-5684.


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