Okay, folks, the kids are back in school, so in their honor we are all going to do a word problem!
Bob Rich lives in a sprawling subdivision of large, single-family homes. Bob has a pool and a hot tub and outdoor lights he keeps on all night. Bob’s four children have loads of electronic gadgetry, plus a habit of leaving windows open when the air conditioner is blasting. Needless to say, the Rich family uses a lot of electricity. But Bob doesn’t worry too much about his utility bill. It’s really not that much compared to all the other bills he pays; and fortunately, his wife is a hedge fund lawyer so he can afford it.
John Poore, on the other hand, lives in a small apartment and uses as little electricity as possible to save money. He works a low-wage job, and his best efforts to attract a wealthy spouse have not yet panned out. John uses air conditioning only on the hottest summer days. He switched out his incandescent lightbulbs for LEDs, caulked the cracks around his windows where air leaked in, and when his old refrigerator broke, he replaced it with an EnergyStar model.
Bob and John are both customers of Shenandoah Valley Electric Cooperative, in western Virginia. SVEC says its costs are going up, so it has been “adjusting” its rates. What would you expect the effects to be?
A) Bob’s bills go up more than John’s.
B) Both Bob and John’s bills go up by the same amount.
C) John’s bills go up more than Bob’s (and Bob’s might even go down).
You probably already figured out it’s a trick question. We’re dealing with a Virginia utility, so the answer can’t be (A) regardless of that being the obvious and rational answer.
Indeed, answer (A) is how most utilities operate: Every customer pays a small fixed fee, typically under $10, and the rest of the bill is determined by how much electricity the customer uses. People who use a lot of electricity pay the most. They are usually better able to afford it, but if they don’t like the size of their bills, they can turn off the lights in empty rooms, change their thermostat setting, invest in energy efficiency, or put solar panels on the roof. Conserving energy and adding renewable energy happen to be public policy priorities, so the incentives are aligned with the behavior society wants to encourage.
But SVEC notes that a lot of its costs aren’t dependent on how much electricity customers use; it has wires to maintain and so forth, plus it recently “invested” in a beautiful and spacious new headquarters that it swore wouldn’t mean rate increases (but, well, you know how that goes). SVEC says Bob and John benefit equally from all these investments, and wants their bills to reflect that. Early last year SVEC “adjusted” its rate structure to increase the fixed customer fee from $13 to $25 and decrease the rate per kilowatt-hour of electricity used. If you chose answer (C), you were correct!
This year, to raise more revenue, SVEC proposes to increase everybody’s fixed fee again, this time to $30. For customers who don’t use much electricity, that fixed fee could become the biggest charge on the bill, and one that can’t ever be reduced by any amount of energy conservation, efficiency or solar panels. They may also wonder whether $30 is just a stop on the way to even higher fixed fees that will further undercut their energy-saving investments.
SVEC didn’t need anyone’s approval when it almost doubled the fixed fee last year. But this year, the State Corporation Commission has to approve the additional changes, so customers finally have a chance to challenge them. Utilities around the state are watching what the SCC does. If SVEC gets approval to shift more of its costs away from customers who use a lot of electricity and onto those who use the least, other utilities will see that as a green light to do the same.
Utilities prefer fixed charges because they provide revenue certainty; left to their own devices, they will move as much of their revenue into the fixed-cost category and increase fixed charges as high as they can. Unfortunately, doing so creates an incentive for utilities to spend as much as possible on infrastructure costs that can be recovered through fixed rates. That will raise costs for everyone and produce a further perverse incentive for the utility to encourage energy consumption (and waste) in order to make maximum use of the infrastructure.
This isn’t the result anyone should want, and especially a nonprofit electric cooperative. More affluent, high-use customers will benefit from lower rates per kilowatt-hour, while low-income customers will be less able to control their bills, an inequity that flies in the face of Virginia’s efforts to limit the energy burden on low-income residents. And customers who are considering investing in energy efficiency or solar will find they are looking at a longer payback time, discouraging the energy-saving measures that Virginia strives to promote.
The SCC is holding a hearing today to consider SVEC’s proposed rate increase. The commission should reject SVEC’s efforts to raise fixed charges for customers and send the utility back to the rate-drawing board.
This article originally appeared in the Virginia Mercury on October 5, 2021.
So I will enter my minority opinion, which no one wants to hear. In order for SVEC to maintain it lines and pay its lineman a decent wages as well as other employees; it needs to have a certain amount of income, as more people go solar and they loss revenue; as they are not a generator only a retailer. There income comes from the markup of the electricity that is consumed. As a project manager I have to consider all stakeholders involved. If you expect them to deal with power outage and maintain the grid, they need the monies.
Ed, I’m afraid you missed the point. The issue is not whether SVEC needs additional revenue. The SCC will review the books and decide that. The issue is which customers get hit with a rate increase, the people who use the most electricity or the ones who use the least?
The people with solar are not contributing revenue to maintain the power grid the only way is to have an adjustment to the fees
I have argued within our group to deaf ears to work out some type of arrangement with the utility companies
Ed, there is a lot of research supporting the notion that solar adds benefits to the grid that utilities largely fail to value. But in any case, the coops reached a compromise for solar in 2019; they expanded net metering but are allowed to impose demand charges on solar customers. Their position was that this arrangement would turn them into supporters of customer-sited solar. So if opposition to solar isn’t behind the high fixed charges, what is it? I’d say it’s a reflection of how much easier high fixed charges make it for a monopoly to spend money, knowing they have a captive customer base. It makes leadership lazy.
Like any business, utilities have fixed and variable costs. The base rate more-or-less corresponds to fixed costs, and should remain low. Don’t forget that distributed solar also benefits the grid by lowering peak demand during the 7 warmest months of the year in VA, when it occurs in mid-to-late afternoon. Specifically targeting the base rate is not a financial survival strategy, but a way for utilities to prevent fair competition. If they raise the base rate too high, soon disgruntled solar customers will be in a position to cut their ties to the grid. Truly considering all stakeholders means treating the solar customers fairly, too. And fairly valuing what they bring to the grid as well.
Utility companies are a regulated monopoly under the mandate that they supply reliable power solar owners are fairly and justly compensated in net metering they are paid for their production because Solar can be a unreliable source they are still required to have spinning reserve which their supplier charges them I am a solar installer and have been for eight years
Bravo — for the article on increasing fixed rates for electric9ty. Thank you for highlighting this issue and its adverse effects. But it would be helpful to know your thoughts on what utility costs are appropriate to be included in a fixed charge — vs. what costs should be included in variable rates. Are you saying that ALL fixed rate charges are wrong/bad?