I have 2 unanswered questions that have been bothering me for a while on this topic:
1. How exactly does the utility get paid for its infrastructure? As far as I know, all their revenue comes from selling electricity at set prices/kwh. I don't see a line on my bill for infrastructure. So when everyone talks about how the utilities make a profit on infrastructure but not operating costs, I've never heard an explanation for how they actually do it? They just get one single rate for power, not separate rates for infrastructure vs operations. 2. People keep talking about how this pricing model is a problem, but I haven't heard anyone come up with a better system. I've heard people mention "Performance Based" pricing, but never an explanation of what exactly it is, how it would work, and how it would solve the problem. I'd love to see these questions answered, maybe in a future podcast?
For #1, every utility bills slightly differently, but generally there are separate delivery/distribution and energy charges. They are both price/kwh. The delivery/distribution charge is the infrastructure price that gets set in rate cases and includes the utility's ROE (return on equity), the profit that the commission sets.
The left side that says "supply" is what I just called the "energy charge." The "energy charge" is often a different line for the cost of electricity that gets "trued-up" annually, meaning it's a price/kwh but every year the utility shows the commission its actual cost of electricity and then either refunds or surcharges customers based on whether that price/kwh was too high or too low.
The right side that says "delivery" is the cost of doing business, including infrastructure and all other costs. The "basic service charge" is a fixed monthly charge for fixed costs like your meter and billing, and the "delivery charge" is the price/kwh infrastructure + profit line (it also includes maintenance, salaries, CEO stock options, property taxes the utility pays, lawsuit payouts both to and against the utility - all of their non-fixed costs, including the cost of compensating wall street (the ROE and the cost of debt)).
Performance based regulation would not change that customers are charged on a price/kwh basis; it would change what happens in the process of setting what the price/kwh is. Rather than just looking at all of the costs and dividing them by the total sales to get a price/kwh, the utility would have to increase or decrease the price/kwh depending on whether it hit certain performance metrics - thus its income would increase or decrease depending on how it performed rather than just how much it spent.
Great episode! I've often wondered how all these great DER ideas get validated by regulatory agencies so we aren't wasting rate payers money. I worry the transition to renewable power gets sidetracked by rising energy bills at the same moment renewable power has become cheap.
The discussion of prudence wasn't entirely correct from a legal perspective - as a legal matter, the Commission can absolutely disallow rate recovery of expenditures/investments where there were better or cheaper alternatives, or where the utility's implementation was overly self-interested, such as if Pier LaFarge's idea is implemented to maximize utility profit rather than maximizing grid benefits. The current actual practice of many Commissions may be to only ask whether the utility paid a fair market price for a widget, but that's for political and ideological reasons (and prior Volts guest Charles Hua has a solution for that!).
From a legal perspective, commissions have broad discretion to determine the contours of "prudence" - including whether an alternative expenditure would have been better and/or whether an investment was made that was contrary to policy or Commission order (see Hempling, Regulating Public Utility Performance at Chapter 6.C). Commissions have even broader discretion to determine what constitutes "just and reasonable rates," and even prudent expenditures can be disallowed from rates (Duquesne Light Co. v. Barasch).
While many states have a "rebuttable presumption of prudence" where non-utility parties have to present at least some evidence of imprudence, Minnesota specifically rejected that approach in 1987 (416 N.W.2d 719), giving their commission even greater authority than some other states. And evidence of imprudence could plausibly include evidence that the utility was maximizing profit rather than maximizing grid/societal benefits.
One of the reasons an investor controlled utility may set cost/hour of downtÑ TIME higher than MISO may be due to the utility paying standard reliability credits which are given daily to all customers. Along with that, in contracts with larger customers who have “critical” activities there may be special contracts that may charge the utility due to loss of production or implementation of expensive alternatives of powering.
We are transitioning to an electrostate. This suggests we need to be considering distributed solutions, such as microgrids, rather than the centralized utility model. If we fail at this, we will be eating the dust of those who succeed. I have post on this: https://jgill5862.substack.com/p/the-convergence-is-the-electrostate.
I was just listening to a pod where an exec from an Aussie distribution grid was interviewed. He said they only got 6.5% return on their invested capital. Somehow they seem to still get funded.
Interesting anecdote about the Minn regulators granting Xcel some big spending against the advice of all their staff. I think it's hard for regulators to deny spending on "reliability," "safety" etc., that is hard but not impossible to quantify, and looks bad when there might be a failure and the utility could say, "We asked for money to fix that 5 years ago." I had a pal on a city council and she said they found it almost impossible to deny requests for more equipment, wages, pensions from the police and fire departments in a similar way.
Probably folks with electrical medical devices should have the juice and 10+ hours of battery backup paid by health insurance. The insurance companies found it cheaper to pay for oxygen concentrators instead of tank delivery (a form of stored energy), but that leaves millions of folks with a need for a very high level of reliability and some high electric costs.
I have 2 unanswered questions that have been bothering me for a while on this topic:
1. How exactly does the utility get paid for its infrastructure? As far as I know, all their revenue comes from selling electricity at set prices/kwh. I don't see a line on my bill for infrastructure. So when everyone talks about how the utilities make a profit on infrastructure but not operating costs, I've never heard an explanation for how they actually do it? They just get one single rate for power, not separate rates for infrastructure vs operations. 2. People keep talking about how this pricing model is a problem, but I haven't heard anyone come up with a better system. I've heard people mention "Performance Based" pricing, but never an explanation of what exactly it is, how it would work, and how it would solve the problem. I'd love to see these questions answered, maybe in a future podcast?
For #1, every utility bills slightly differently, but generally there are separate delivery/distribution and energy charges. They are both price/kwh. The delivery/distribution charge is the infrastructure price that gets set in rate cases and includes the utility's ROE (return on equity), the profit that the commission sets.
For example, NYC's Con Edison has their bill breakdown here: https://www.coned.com/en/accounts-billing/your-bill/how-to-read-your-bill/sample-bill-residential
The left side that says "supply" is what I just called the "energy charge." The "energy charge" is often a different line for the cost of electricity that gets "trued-up" annually, meaning it's a price/kwh but every year the utility shows the commission its actual cost of electricity and then either refunds or surcharges customers based on whether that price/kwh was too high or too low.
The right side that says "delivery" is the cost of doing business, including infrastructure and all other costs. The "basic service charge" is a fixed monthly charge for fixed costs like your meter and billing, and the "delivery charge" is the price/kwh infrastructure + profit line (it also includes maintenance, salaries, CEO stock options, property taxes the utility pays, lawsuit payouts both to and against the utility - all of their non-fixed costs, including the cost of compensating wall street (the ROE and the cost of debt)).
For how the price/kwh gets determined, see "Revenue Requirements 101" and "Rate Setting Overview" here: https://www.nasuca.org/resources/regulatory-basics-courses/
Performance based regulation would not change that customers are charged on a price/kwh basis; it would change what happens in the process of setting what the price/kwh is. Rather than just looking at all of the costs and dividing them by the total sales to get a price/kwh, the utility would have to increase or decrease the price/kwh depending on whether it hit certain performance metrics - thus its income would increase or decrease depending on how it performed rather than just how much it spent.
Great episode! I've often wondered how all these great DER ideas get validated by regulatory agencies so we aren't wasting rate payers money. I worry the transition to renewable power gets sidetracked by rising energy bills at the same moment renewable power has become cheap.
The discussion of prudence wasn't entirely correct from a legal perspective - as a legal matter, the Commission can absolutely disallow rate recovery of expenditures/investments where there were better or cheaper alternatives, or where the utility's implementation was overly self-interested, such as if Pier LaFarge's idea is implemented to maximize utility profit rather than maximizing grid benefits. The current actual practice of many Commissions may be to only ask whether the utility paid a fair market price for a widget, but that's for political and ideological reasons (and prior Volts guest Charles Hua has a solution for that!).
From a legal perspective, commissions have broad discretion to determine the contours of "prudence" - including whether an alternative expenditure would have been better and/or whether an investment was made that was contrary to policy or Commission order (see Hempling, Regulating Public Utility Performance at Chapter 6.C). Commissions have even broader discretion to determine what constitutes "just and reasonable rates," and even prudent expenditures can be disallowed from rates (Duquesne Light Co. v. Barasch).
While many states have a "rebuttable presumption of prudence" where non-utility parties have to present at least some evidence of imprudence, Minnesota specifically rejected that approach in 1987 (416 N.W.2d 719), giving their commission even greater authority than some other states. And evidence of imprudence could plausibly include evidence that the utility was maximizing profit rather than maximizing grid/societal benefits.
One of the reasons an investor controlled utility may set cost/hour of downtÑ TIME higher than MISO may be due to the utility paying standard reliability credits which are given daily to all customers. Along with that, in contracts with larger customers who have “critical” activities there may be special contracts that may charge the utility due to loss of production or implementation of expensive alternatives of powering.
Fascinating stuff. I wonder if they have tried to do a benchmark with other countries distribution regulation?
We are transitioning to an electrostate. This suggests we need to be considering distributed solutions, such as microgrids, rather than the centralized utility model. If we fail at this, we will be eating the dust of those who succeed. I have post on this: https://jgill5862.substack.com/p/the-convergence-is-the-electrostate.
I was just listening to a pod where an exec from an Aussie distribution grid was interviewed. He said they only got 6.5% return on their invested capital. Somehow they seem to still get funded.
Interesting anecdote about the Minn regulators granting Xcel some big spending against the advice of all their staff. I think it's hard for regulators to deny spending on "reliability," "safety" etc., that is hard but not impossible to quantify, and looks bad when there might be a failure and the utility could say, "We asked for money to fix that 5 years ago." I had a pal on a city council and she said they found it almost impossible to deny requests for more equipment, wages, pensions from the police and fire departments in a similar way.
Probably folks with electrical medical devices should have the juice and 10+ hours of battery backup paid by health insurance. The insurance companies found it cheaper to pay for oxygen concentrators instead of tank delivery (a form of stored energy), but that leaves millions of folks with a need for a very high level of reliability and some high electric costs.