A Fixed Cost Recovery Mechanism Proposal DISTRICT XI HUMAN RESOURCES COUNCIL NATURAL RESOURCES DEFENSE COUNCIL November 30, 2018
Fixed Cost Recovery Mechanisms: Background
A fixed cost recovery mechanism (FCRM), also known as a decoupling mechanism, breaks the link between electricity sales and a utility’s revenue. Traditional regulation fixes the price, and lets revenues float What is a Fixed up or down with actual sales. Cost Recovery FCRM or decoupling sets revenues, then lets prices float down or up with actual sales. Mechanism? FCRM relies on the approved revenue requirement from a rate case – and when sales deviate from rate case assumptions, rates are adjusted to collect the calculated revenue (no more and no less).
Under traditional regulation, a utility has an incentive to preserve, or better yet, increase sales volumes. Under current rate design, utilities recover embedded investment and labor costs in the kWh charge. If sales decline, revenue declines; if sales increase, revenue increases. However, a utility’s costs will remain relatively constant. Why do we Thus, an increase in sales results in an increase in profits, and any decrease in sales results in a decrease in profits. need to By removing this link between sales and profit, FCRM decouple? eliminates the disincentive a utility has to promote programs and/or technologies that reduce a utility’s sales (also known as a “throughput” incentive). While a critical step, decoupling is just one element or “leg” to support the implementation of a successful utility efficiency portfolio.
Numerous States Have Adopted Similar Mechanisms
Fixed Cost Recovery: Proposed Mechanism
• Human Resources Council, District XI and the Natural Resources Defense Council are considering whether to propose a fixed cost recovery (FCR) mechanism (also Our referred to as a “decoupling mechanism”) in the current Proposal NWE rate case. • The following slides detail our preliminary thinking of what the FCR mechanism would look like.
• 4-Year Pilot (Commission approval needed to extend). • NorthWestern would be required to file an electric rate case within 4 years after an order is issued authorizing the operation of the pilot. Our • Would cover all utility fixed costs (generation, transmission, and distribution) Proposal • Be applied to only the residential and GS-1 secondary, (Cont.) non-demand classes. • Will not “normalize” for weather. • Would use a “Revenue-Per-Customer” approach to determine and adjust allowed revenue for covered classes
• Rate case determines annual revenues associated with the utility’s costs by customer class. • The authorized revenue requirement would be divided by the number of customers to establish a monthly allowed How Revenue- revenue per customer value. Per-Customer • The RPC value would be multiplied by the actual number of Would Be customers each month to determine allowed revenue. Calculated • This would be compared to the revenue the utility actually collected. • Parameters would be adjusted and recalculated each time new base rates went into effect using the new approved revenues, test-period sales, and customer counts.
Each month, difference between allowed and actual revenue would be placed into a deferral balancing account. Deferrals would accumulate over a 12-month period, at which point the deferral balance would be divided by class How Deferrals sales to determine the FCR adjustment. Would Be If allowed revenue > the actual revenue, customers would Applied see a rate increase in the following year. If allowed revenue < actual revenue recovered, customers would see a rate decrease in the following year. The true-ups (rebates or surcharges) would be applied separately to each class through a volumetric charge.
To promote greater rate stability and prevent large, single rate increases, surcharges and rebates would be subject to a 3% “soft” cap. cap would be based on bills and calculated based on the average customer for the residential and small commercial classes. Any unrecovered balances or refunds are carried forward, with a carrying charge applied. Additional Comprehensive independent evaluation be completed at the Elements end of the third or fourth year of the pilot. Also considering requiring additional utility commitments that enhance customer benefits from the FCR mechanism, such as: expanding low-income programs implementation of specific new energy efficiency programs and/or the imposition of customer service quality standards.
As part of a settlement, PSE received approval to decouple both electricity and natural gas customers (UE-121697 and UG-121705). PSE also agreed to provide increased funding for low-income weatherization, increase the utility’s energy efficiency savings targets, and fund independent evaluations after the second and third years of the program. The evaluations found: Example: Puget Decoupling worked as intended. Adjustments were small and did not noticeably impact customer Sound Energy incentives to conserve energy. No significant difference in bill impacts for low-income residential consumers and non-bill assisted residential consumers. No evidence of adverse impacts on customer service or on the utility’s incentives to control costs or on operational efficiency. Decoupling supported “an organizational reality in which it is ok for staff to exceed savings goals and in which DSM and renewable energy are included in a positive organizational outlook.” “Decoupling for the [first] two years studied is, in a word, harmless.”
Decoupling does NOT shift risk from the utility to consumers • Reduces risk for consumers by… DECOUPLING • Reducing the risk of abnormally high utility bills due to extreme weather MYTH NO. 1: • Mitigates adverse bill impacts and energy affordability DECOUPLING concerns • Surcharges occur when the average customer consumes DOES NOT SHIFT less energy than projected, meaning bills are likely lower RISK TO than anticipated CONSUMERS • Rebates occur when customers have consumed more energy than projected – rebates help alleviate financial pain and energy security concerns
There is no evidence that decoupling reduces customer incentives to save energy. Decoupling adjustments have historically been very DECOUPLING small. MYTH NO. 2: Over the last decade one study found that most adjustments DECOUPLING (85% for electric) were within “a percentage point or two either up or down” DOES NOT Recent evaluations of decoupling in the Pacific REDUCE Northwest found that bill changes are small enough to INCENTIVES TO be within the normal fluctuations consumers expect SAVE ENERGY year by year with no evidence that consumers notice or respond to these small adjustments.
Basis of decoupling is to remove the link between sales DECOUPLING and profit MYTH NO. 3: The utility receives its revenue requirement and only its DECOUPLING revenue requirement DOES NOT AFFECT If a utility overestimates test year sales, the revenue A UTILITY’S requirement stays the same, but kWh rates decrease INCENTIVE TO If a utility underestimates test year sales, the kWh rate ESTIMATE FUTURE would increase, but because the revenue requirement stays the same, the utility would have to return excess SALES revenue to customers
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