J A ESEARCH "SERV|CE UBRARYOF CONGRESS ONGRESSIONAL % TFIITIW O10 ollllli -1 o ssou 38 fil- 1 O5 miunllnn 5 ELECTRIC UTILITY TInEfOP-DA! PRICIBG~ (ARCHIVED--O4/02/79) ISSUE BRIEF HUHBEB IB77122 AUTHOR: Profozich, Russell J. Economics Division THE LIBBABY_0P CONGRESS CONGRESSIONAL RESEARCH SERVICE BAJOB ISSUES szsrzn DATE oaxsxnzmzn Q1gQ§[2§ Spams UPDATED guggggzg FOR ADDITIONAL IXPOBHATIOH CALL 287-5700 0522 CBS-- 1 1377122 upnurn-on/o2/79 *s§2§;2;%;:.;.;«;;.::.;92I. Electric utility time—of-day (TOD)s pricing involves pricing electrical service at different rates of charge during various periods of the day. The purpose of TOD pricing is to have electric utility rates more accurately reflect the costs of providing service 'to the various vcustomers on the utility's system. The costs of providing electrical service varies as the demand for service varies. During hours of peak ‘demand, when the utility typically uses its more inefficient generating capacity the cost of producing a Kwh or Kw of electricity is higher than at other ‘times yof the day. Time-of-day rates would reflect this cost differential (whereas the current form of pricing charges the same price for electrical service durings all times of the day) by charging rates that vary with the demand placed on the- system. As such, these rates would more accurately reflect the actual costs of providing service and thus the revenues collected by the utility would more closely match the costs of providing service. i The issues involved in establishing TOD rates include cost effectiveness ‘ (will the cost of required metering outweigh the benefits of this pricing technigue?); customer response (will shifting customer demand create a new system peak demand and utility revenue instability?); and should the Federal Government establish minimum standards for utility rates to encourage enactment of time-of-day rates at the state level? BACK§BQ2KD-l§Q.2QLLQl é§lLl5i§ jj &; j ‘:1 Electric utility rates in the United States have traditionally been based on average historical costs. The traditional approach is to establish a test hperiod - typically the most recent 12 month period - from which cost data is collected. A revenue requirement is then established which, allows the utility to recover its costs of providing service plus a fair rate of return on its investment. w * This revenue requirement is then allocated to the various customer classes - residential, commercial, industrial and wholesale - through a cost of service study. Rate schedules are devised to recover the established revenue requirement from each customer class. ' : There are many variations of the cost of service study, each of which is designed to allocate a portion of the cost of service to each customer class based on that particular customer class's contribution to the system peak demand. .Although this form of pricing takes into consideration the responsibility of each customer class to the system peak demand, it is basically a form of average cost pricing in that each, customer within the particular class pays the same rate of charge for service whether or not he consumes at the time of the system peak.y aany utilities have a seasonal rate differential that charges higher rates for consumption during the period when the system peak is likely to occur. Also,s large industrial customers are usually charged partially on the basis of the individual customer's maxinum demand. These pricing mechanisms are, however, merely variations of the sic average cost pricing method. v v r As a result of the rapid rise in electric futility costs over the past several years, and also due to the recent natioual concern with energy cas- 2 11377122 u1>nuE—ou/02/79‘ conservation, much interest has developed in the concept of electric utility time-of-day pricing. This interest is at both the state level (where utility commissions have jurisdiction over the majority; of ysales'»of ‘electric .and natural gas utilities), and the national "level ,(where the Federali Energj Regulatory Commission -— ‘formerly the Federal Power Commission - has jurisdiction over wholesale electric utility rates and interstate transmission of natural gas). Establishing a national energy policy involves the’ issue of utility rate reform as a means of encouraging energy conservation, environmental protection, and reduced reliance on imported oil. Time-of—day rates_would charge different prices for electrical services during various periods of the day. The highest charges would be enforced during the hours of maximum demand on the system, or’ peak period, and the lowest charges during periods of low demand, or off-peak period which is usually at night and on weekends. «Host utilities would also have an intermediate rate for the times of day when demand is somewhere between. the. two extremes, this is usually called the shoulder period. "The purpose of TOD rates is to have those customers who are consuming at. the times of maximum demand pay the ‘increased costs of providing that service. Since many generating« and transmission facilities are built primarily to serve peak demand, but which sit idle during most other periods, the theory behind TOD rates is to charge peak—demand customers much of the cost of providing this service. Time-of-day rates also encourage energy conservation, since consumers would be provided an economic incentive to transfer a part of their on-peak consumption to off-peak periods when charges are lower. This benefit derives from the fact that peak period generating facilities consume more fuel per unit of output than do facilities designed to provide off-peak demand. Another benefit to TOD rates is occasioned by the fact that if consumers respond to the peak-off—peak price differential by moving a part of their consumption to periods of low system demand, th. utility may have to provide.fewer peak period facilities. In the long run, this would result in lower rates to consumers, since utilities would invest in less plant and equipment than otherwise would be the case, and in less environmental impact since fewer facilities would be built and operated. There are several. difficulties associated with the initiation of time-ofrday rates. first of all, if TOD rates were initiated for all customers onya utility's system, new metering equipment would have to be installed for the vast majority of customers. This would result in a largev investment for the utility company - several millions of dollars — which may far exceed the benefits derived from this form of pricing. A method of avoiding this expense that has been tried in several states is to require TOD rates only for the largest customers on the system. These are relatively few customers who account for a large percentage of total demand, most of whom already have installed the necessary metering equipment. A second difficulty of TOD rates is the possibility that the shifting of demand from peak to off-peak periods (by customers wishing to take advantage of the lower, off-peak rates) may cause a new system peak during a period of previously low demand. This situation would result in revenue instability .for the utility and a constantly changing price structure. This difficulty might be avoided by careful analysis of infornation available from Federal Government experiments in TOD pricing, which have been in operation for the past several years, and by a carefully designed rate structure on behalf to‘ the utility. A A third difficulty with TOD rates may appear if this form of pricing his initiated only in a particular state or region of the country. lf TOD rates cns- 3 1377122 UPDATE-on/02/79 result in a substantial price increase for industry within the selected-state or region, industry may relocate if it is unable to - or, chooses not to s shift-a portion of its denand to offépeak periods to*take advantagefi of“ the ‘over rates. This problem is a part of the argument used to justify Federal ininum standards for electric utility rate setting since it is argued that individual states would not initiate this forn of pricing out ‘of fear of causing local industry to relocate to another section of the country. A number of state utility commissions, however, have already initiated TOD pricing for large customers of the utilities within their jurisdiction. Also, the impetus provided by TOD rates for companies to relocate would depend on the ability of industry to take advantage of the lover off-peak rates. the relation of electricity costs to total costs of production, and the ability of industry to pass the higher costs on to its customers. L§§l§LA$lQ§ P.L. 95-617 (H.R.i4018) National Energy Act. Establishes national energy goals for 1985. Establishes minimum rate standards for electric utility rates. Directs regulated electric utilities to‘ provide rates which Ado not discriminate against solar electric generating systems. Heguires State regulatory authorities to prescribe methods for determining the cost of service. Declares that such methods shall reflect differences in cost-incurrence for each electric consumer attributable to daily and seasonable time of use of such service. Reported to House from the Committee on Ways and deans with amendment (H.Eept.'9S—429) on June 16, 1977.’ Measure called up by unanimous consent in ouse on July 18, 1977.‘ heasure considered in House on July 18, 1977. measure passed House as .anended on July 18,p 1977.7 Referred “to Senate Committee on Finance on July 20. 1977. Committee on Finance discharged in Senate on Oct. 5, 1977. Placed on calendar in Senate on Oct. 5, 1977. ueasure called up by unanimous consent in Senate on Oct. 6, 1977. measure considered in Senate on Oct. 6, 1977. heasure passed Senate as amended. inserted provisions of S. 2114 as amended and icertain provisions of H.R. 8444. House agreed to senate amendment with an amendment on Oct. 13, 197". Conference scheduled in House and in Senate on Oct. 13, 1977. Conference report filed in Senate, 5. Bept. 95~1292, on Oct. 6, 1978. Conference report considered in Senate on Oct. 7, 1978. senate agreed to conference report. roll call tufie (76-13) on Oct. 9, 1978. Conference report filed in House, H. Rept. 95-4750, on Oct. 10, 1978. House agreed to conference report, roll call #932 (231-168) on Oct. 1Q, 1978. neasure enrolled in House on Oct. 1&, 1978. measure enrolled in Senate on Oct. 31, 1978. Beasure presented to the President on Oct. 31, 1978. Signed into law on Hov. 9, 1978 (P.L. 95-617). H.R. 277 (Drinan, et al.) Electric Utilities Bate Reform Act of 71979. Directs state and ‘local electric utility regulatory authorities to implement and maintain rate ischedules which distribute cost to consumer classes in accordance with ronsunption patterns. Requires that rate schedules accurately reflect g1ong—run incremental costs of service and price differentials between ionsuner classes reflect actual documented differentials in cost ofi service. itroduced Jan. 15, 1979; referred to the House Interstate and Foreign _pnnerce Committee on Jan. 15, 1979. cas- 4 1377122 opnnrn-on/O2/79§ U.S. Congress. Rouse. Committee on Banking, Finance and Urban Affairs. The Rational Energy Act. Hearings before the Subcommittee on Housing and Community Development, on R.R. 6831, R.B. 4757, H.R. 3981 and H.B. 3128, 95th Congress, 1st Session, Ray 23, 28, 25, 26 and June 1, 1977; Washington, U.S. Govt. Print. Off., 1977. 1135 p. 0.5. Congress. House. Committee on Interstate and Foreign Commerce, Subcommittee on Energy and Power. Electric Utility ,Rate Reform and Regulatory_Improvenent, Part 1. Hearings, 94th Congress, 2d Session, on H.R. 12461, H.R. 2633 and R.R. 2650 '(Titles VII and VIII), H.R. 6696, B.R.'10869, H.R. 11049,“ H.R. 11475, H.R. 12848, H.R. 12872 (and all identical, similar, and related billS)..March 30, 31, and April 1, 2, 5, 7, 8, and 9, 1976, Washington, U.S. Govt. Print. Off., 1976. 1137 p. “Serial No. 90-127.“ Electric Utility Rate Reform and Regulatory Inprovement, Part 2. Hearings, 94th Congress, 2d Session, on H.R. 12061, H.R. 2633, H.R. 2650 (Titles VII and VIII), H.R. 6696, H.R. 10869, R.B. 11ua9, H.R. 11075, H.R. 12872 (and all identical, similar, and related bills), Earch 30, 31 and April 1, 2, 5, 7, 8 and 9, 1976, Washington, U.S. Govt. Print. Off., 1976. 2029 p;- “Serial No. 90-128.? ‘ U.S. Congress. VRouse._ Committee on Interstate and Foreign Commerce, subcommittee on Energy and Power. national Energy Act, Part 1. Bearings, 95th Congress, 1st Session, on H.B. 6831, H.R. 687, H.B. 1562, H.R. 2088, H.B. 2818, H.R. 3317, R.R. 366u, .H.R. 6660, and all similar and identical bills, may 9, 10, ~11 and 16, 1977, Washington, U.S. Govt. Print. Off., 1977. 979 p. “Serial No. 95-22.“ ‘ 1 . ---- Rational Energy Act, Part 2. Hearings, 95th Congress, 1st Session, on H.B. 6831, H.R. 687, H.R. 1562, R.R. 2088, H.R. 2818, R.R. 3317, R.R. 3664, H.R. 6660, and all similar and identical bills, Ray 12, 13, 17 and 18, 1977, Washington, U.S. Govt. Print. Off., 1977. 1490 p. “Serial No. 95-23.‘ ----- Rational Energy Act, Part 3, Volume 1. Hearings 95th Congress, 1st Session, on H.R. 6831, R.R. 687, H.R. 1562, E.R. 2088, H.R. 2818, H.R. 3317, R.R. 3664, R.R. 6660, and all similar and identical bills, Ray 19, 20, 23 and 20, 1977, iashington, 0.5. Govt. Print. Off., 1977. 735 p. ‘Serial No. 95-20a.’ ---- Rational Energy Act, Part 3, Volume 2.1 Bearings, 95th Congress, 1st Session, on H.R. 6831, H.R. 687, R.R. 1562, H.R. 2088,1 H.R. 2818, H.R. 3317, H.R. 366a, R.R. 6660, and all similar, and identical hills, may 19, 20, 23 and 20, 1977, Washington, U.S. Govt. Print. Off., 1977. 1910 p. ‘Serial No. 95-24b.‘ 0.5. Congress. Senate. Committee on Coamerce. Electric Utilityp Bate Reform and Regulatory Improvement. Hearings, 94th Congress, is; CRS- 5 1577122 UPDATE-04/O2/79 2d Session, on S. 1666, S. 2208, S. S. 3310, and S. 3311, April 27 and 28, 2502, S. 1976. 2747, S. 3011, Washington,» 1U;S.¢§O3fiQ‘RriPt,fiQff.}.1926@h.fl§2,p,_aPSe£ial}fl0-,9Qt7?3“ Congress. Senate.i Ccnmittee on Energy and Natural’ Resources, Snbconmittee on Energy Conservation and Regulation. Public utility rate proposals of President Carter‘s energy program (Part E. of S. @369). Hearings, 95th Congress, 1st session on S. 122, S. 1300, S. 3363, S. 1364, S. 1469 (Part E). September 20, 1977, Washington 8.5. Govt. Print. Off., 1978, zuu p. Publication 80. 95-420, Part 3. n 2 P 7 Congress. Senate. Committee on Government Operations. 3 Subcommittee on Intergovernmental Relations. The Utilities Act of 1975.» Hearings, 93th Congress,-1st Session, on,‘ 594 April 32, 15 and 17, 1975. Washington, 8.3. Govt.i Print. Off., 1975. 595 p. P §§§Q§E§_g§D CONGRESSIOHAL nocgggggg Bonse._ Report no. U.S. U.S. ‘“r—— The Electirc Utility Sector: .House. U.S. Govt. Print. Off., 2d session. Conference report to accompany E.B. #038. I978. 121 p. House. Report no. 95~1750) Congress. fiashington, (95th Congress, Ad Hoc Committee on Energy. Rational 8444. Washington, D.S. Govt. (95th Congress, 1st Session. House. report on H.B. 1977, 620 p. .95-543). Congress. Energy Act; Print. Off., 'Congress.' House. Committee on Interstate ana foreign Commerce. national Energy Act; report to accompany H.B. 6831. Washington, 0.5. Govt. Print. Off., 1977, 376 p. (95th Congress, 1st Session. House. Report No. 95~u95, Part 4). Congress. Senate. Committee on Energy and Batnral Resources. Public Utilities Regulatory Policy Act of 3977; report g to accompany S. 2114. fiashington, U.S. Govt. Print. Off., 1977, #8 p. (95th Congress, 1st Session. Senate. Report Ho. 95—4&2). 22§_2Q§AL-§§§EB3§CE 50UBC§§ Library of Congress. Congressional Besearch.service. Electric Utility Bate Reform, by Alvin Kaufman and Barbara Daly, February 14, 1977. Washington, 1977. 29 pp. Concepts, Practices and Problems, by Alvin Kanfsan and Douglas E. Jones, February 24, 1977, iashington, 1977. 40 p. o cw \r‘Jz!-'i:tE*5§3~%H3,’&sE3"a“ON U N ‘l'“\/ QTY ST. LOU-E13 - MO. .