Prepared By:

Kenneth C. Goeke

Demand Analysis Office

Energy Forecasting and Resource Assessments Division

CALIFORNIA ENERGY COMMISSION

INTRODUCTION

1. CEC Staff believes that a basic principle behind restructuring is increased economic efficiency.

2. Changes in rate design are a necessary element in increasing economic efficiency.

3. Efficient rate design requires that prices paid by the consumer more closely reflect the marginal costs of the services provided.

4. A multi-part tariff is one mechanism by which efficient pricing can be implemented.

5. CEC Staff is requesting that the Ratesetting Working Group includes analysis of multi-part tariff designs as part of its agenda.

6. "In the past, we have supported the concept of establishing a [fixed] customer charge for residential customers, based on arguments that such a charge would provide more accurate price signals to domestic customers regarding their usage. In particular, we expressed the belief that a customer charge is fairer to customers because it reduces the subsidies built into the current energy charge method of collecting residential customer costs"

Basis For A Multi-Part Tariff

1. Generation of electricity, transmission, distribution and customer service components are distinct services and in a restructured world will be provided by different entities.

-- Rate design should guide customers, through the use of price signals, to consider the cost of the service being purchased, be it the commodity, customer services, or access.

2. The Power Exchange price will reflect the marginal cost of generation and should be passed through to consumers in a volumetric charge.

-- If all the unbundled services continue to be collected based on volumetric charges consumers will face inefficient price signals and continue to make distorted choices concerning their energy use.

-- For example, cogeneration may seem to be economically viable when the customer is faced with a marginal rate of 12 cents per kWh. However, such a choice is uneconomic when the cost of generation being avoided is really much lower.

-- Propane heat may seem more economical when the customer is faced with a marginal rate of 12 cents per kWh. However, such a choice is uneconomic if the seasonal marginal Power Exchange price is much lower.

3. Customer service costs do not vary with usage and should be recovered in the fixed portion of a multi-part tariff.

-- If it is decided to further unbundle distribution services, fixed charges in the multi-part tariff would provide clearer price signals to customers and suppliers as to the costs of these components than would a volumetric charge.

4. Most of the costs associated with distribution are fixed and the service being provided is access.

-- A charge which reflects the fixed nature of distribution costs is an efficient pricing mechanism with which to recover these costs.

-- The fixed charge should be allocated based on non-coincident peak load, representing the costs customers impose on the local distribution system.

-- Some mechanism would be needed to signal distribution constraint. Therefore, a portion of distribution cost recovery may need to reflect the opportunity costs of congestion.

5. A multi-part tariff reduces the perverse effect that existing rate designs have on the incentives of regulated utilities and their affiliates to provide energy efficiency services.

-- As long as marginal rates exceed marginal costs utilities will incur a loss when their customers conserve more energy.

-- Under proposed CPUC PBR ground rules such losses would not be passed through under automatic adjustments like ERAM and traditional rate of return "true ups".

-- Unattractive Alternatives:

a. Recover loss UDC revenues through the public surcharge.

b. Reduce the amount of services the UDC provides, especially energy efficiency services.

Concerns in Implementing a Multi-Part Tariff

1. To the extent the fixed portion of the tariff prevents customers, who might otherwise realize benefits in excess of marginal costs, from hooking up, it would detract from overall economic efficiency. Therefore, there might be justification for lower fixed charges for low income customers on efficiency, rather than on equity grounds.

2. How should the fixed costs be regulated to minimize cross-subsidies and x-inefficiencies.

3. How can prices in a multi-part tariff reflect distribution congestion.

4. How should the delineation between fixed and variable parts of the tariff be influenced by geographic density and housing type--multi-family versus single family homes.

5. Should customers who employ energy efficient services be allowed to switch to a more favorable fixed tariff schedule?

6. Assembly Bill 1890 calls for the CTC to be collected in a volumetric charge and phased out over a short time period. As rates move close to marginal costs due to the reduction of the CTC, how can a multi-part tariff be phased in to further align rates with marginal costs.