Don’t Be Afraid of Your Electricity Bill
Episode ID S2E07
July 27, 2022
As electric co-ops balance affordability and reliability, how should they price electricity? CoBank’s Teri Viswanath and Tamra Reynolds consider evolving rate design with respected author and renowned energy economist Dr. Ahmad Faruqui, and Allison Hamilton, director of rates and market design at NRECA. Then they follow with two co-ops’ very different but fascinating rate journeys, speaking with Mark Johnson, general manager of Flathead Electric Cooperative, Kalispell, Montana, and Ed VanHoose, president of Federated Energy Services Cooperative in Ohio.
Teri Viswanath: Here's a confession. I probably went paperless with my utility just to avoid being confused by all the fees. Sometimes they're called adjustments and surcharges that I couldn't just figure out and you know what? I'm not alone. Yes, I admit to having a deep-seated fear of my monthly electricity bill - I'm in good company. Welcome to Power Plays. I'm Teri Viswanath, your host and lead economist for power, energy, and water at CoBank. I'm joined with my co-host and CoBank Managing Director, Tamra Reynolds. Hey, Tamra.
Tamra Reynolds: Hello there. One of our featured guests on today's program, respected author and renowned energy economist Dr. Ahmad Faruqui, also admits that his monthly 15-page California utility bill is less than straightforward, making understanding and controlling his home electricity expenses difficult. Let's be clear, he is the foremost expert on this subject. If he finds it challenging, is there any hope for the typical consumer?
Teri: For the rest of us, right? Considering we tease Ahmad about being the godfather of rate design I think this is telling, underscoring the need for our electric co-ops to balance the need to bill consumers equitably and fairly, but also ensuring that their members have clear visibility and understanding of those charges. Right?
Tamra: Agreed. As our electricity supply becomes more variable, load flexibility needs to become more agile by responding to price signals and if those price signals are buried deep on page 14 of the bill, well that's just not going to happen.
Teri: Giving us a terrific tour of the current rate environment is Dr. Ahmad Faruqui and Allison Hamilton, director of rates and market design at NRECA. We follow up that conversation with two very different, but fascinating rate journeys with Mark Johnson, the general manager of Flathead Electric Cooperative out of Kalispell, Montana, and Ed VanHoose. He's the president of Federated Energy Services Co-op in Ohio.
Tamra: We jump into this podcast by asking Ahmad, why are electric rates quickly evolving? Here's his response.
Ahmad: The smart meter rollout is now reaching almost 100 million customers in the U.S., out of a total of roughly 140 million customers. Smart meters are now very widely deployed regardless of whether it's a co-op or a municipal or an IOU. However, what is not yet universally deployed is time of use rates. Use rates right now only allow 10% of the customers to be on them. Let me rephrase it.
Customers have a choice to pick time-of-use or not to pick time-of-use in most parts of the country, and only one out of ten have picked them because customers have the fear of the unknown. They don't want the price varying by time-of-use.
They think they will be harmed with a time-of-use rate. Enrollment in smart meters is way higher than enrollment in that time-of-use rate. It doesn't matter whether it's a co-op or a muni or an IOU. That's generally the challenge. Now co-ops are ahead in one respect though, most customers have a higher fixed charge to recover monthly cost than the IOUs, number one. Number two, many of the co-ops have demand charges, whereas very few IOUs have demand charges.
Allison: I think in terms of the evolution of rates, there's a lot of similarities between co-ops and other types of utilities. I think they face some different challenges than other larger utilities. For instance, they have less consumers per mile, so there's less density. They also have a different capital structure, so they operate at cost and if they have excess margins, they return that to their members. They have different metrics when it comes to rates, mostly based on solvency and debt covenants. Then they also serve 92% of the persistent poverty communities in counties in the U.S. That's another challenge that they have when they think about their rates.
Teri: Ahmad, as we think about really the cost now, it's shifted. We've got variable, zero-cost resources that are coming onto the grid, and we have 70% of the grid that is aging. We've had some changes in terms of cost. As we think about the rate design evolution, how does that influence where we're headed?
Ahmad: It'll continue to evolve, generation costs over the longer term are likely to go down because you'll see more and more renewable resources coming on like wind and solar that have much lower generation costs, but transmission costs might go up because some of those resources might be located quite far away. The mix of generation, transmission and distribution is going to evolve with time. It'll vary by utility as well, but some are closer to those renewable resources and some are not.
Some are more rural and have really far-flung networks, but those utilities’ transmission costs are going to be higher. Ultimately in any cost of service study, you have to boil it down to, does the cost vary by time of day, or does it not vary by time of day? Then you have to figure out whether it's worthwhile to create a time-of-use rate, that'll incentivize customers to shift their loads. If your cost do not vary by time-of-use, why would you bother customers to move things around?
But if there is a huge variation, your load curve is very peaky in the hot summer afternoons, then it makes sense to do time-of-use, and if then you have 10% of the hours of the year with really extreme weather conditions, then you need dynamic pricing. All of these require --as you've correctly indicated --a cost of service study and most utilities have not been doing those studies for years. They're using studies that were done 5, 10 years ago. They need to start doing them more frequently because the cost structure is changing fast.
Teri: That's a great point, Ahmad. Allison, from your perspective, and particularly with the co-ops, I've seen a transition myself over the last 15 years working with them and the way that they look at rates and we're starting to see time-of-use really creep in, particularly for those utilities that are trying to figure out how to accommodate electric vehicles. What do you have to say about that?
Allison: I think we've seen different approaches to electric vehicles. As Ahmad mentioned, it boils down to, what's your cost structure. We've seen some co-ops that are looking at time-of-use rates, for instance, Cobb EMC outside of Atlanta. They have more of a suburban population and they have a night flex rate that has an overnight low time-of-use rate than the first 400 kilowatt hours are free for the month.
Then we have other co-ops like Roanoke in Virginia that implemented a subscription rate because what happened was they talked to their consultant. They said, we want to encourage managed charging, EV charging overnight and EV adoption, we're looking at time-of-use rate, but then the consultant came in and said, but that doesn't really work with your cost structure. Let's look at these numbers again and what they landed on was a subscription rate.
Ahmad: The thing that is lacking today, which we need to do more of besides of course doing the cost of service study more frequently is customer outreach. We need to understand whether the customers would even find these new rates acceptable or not. There are more and more customers who are saying, I want simplicity, I don't want complications. I just want to lower my bill.
Yes, I do want to pair the amount that I'm due, but don't make me solve mathematical equations to figure out my bill. We have to simplify the bill. We have to really talk to customers to figure out what works for them and what doesn't work for them. We just can't push our ideas onto them and expect them to fall in line.
Allison: Cooperatives in general are very good at communicating with their members. They have smaller communities. They're involved in the communities and one of the things that they've told me in the past is they had these focus groups, they had community meetings to talk about a new rate and what their members would say, well, we don't understand and, or we're angry about it. They would say, look at the numbers. We're going to show you the numbers and now you understand why this is why we're changing the rate to say a residential demand charge and really, if they communicated that very eloquently to their members, they understood it. And they said, okay, we're on board with this.
Teri: Really appreciate having you both on the program today. Thank you so much.
Tamra: Teri. I want to echo a couple of really important points made in our discussion with Ahmad and Allison, and that is the need for more frequent cost assessments and customer outreach.
Teri: I was struck by the fact that only about 10% of electricity users are on a time-of-use program and even though we had a pretty significant penetration of smart meters, well, customers are really not getting the benefit of that technology because they simply don't understand or perhaps are suspicious of this rate design.
Tamra: Which brings us to the discussion with our co-op managers. I specifically asked both Mark and Ed to give us a quick understanding of the communities they serve. We know that cost of service is tailor-made to the unique matchup of supply and demand for any given system. It depends on the generation resource mix, but also delivery, system density, and individual load profiles of the members.
Teri: Here's our conversation with Mark Johnson from Flathead Electric.
Mark Johnson: Our co-op is growing significantly. We just went through 72,000 meters. When I started at the co-op 23 years ago, we had about 47,000 meters so we're growing at a pace of about 2,000 meters a year. We've got about 56,000 members in our utility and we serve five counties in Northwest Montana and also a small area in Southeast Montana down in the Cook City Elk Basin area, which is a lot of people don't realize, but when we acquired PacifiCorp’s service territory in Montana, we also acquired that area and we've served it ever since so it's been an interesting ride in my 23 years, a lot of changes over those years.
Teri: Let's talk a little bit about those changes, I guess, with regard to Flathead's evolution of rates. Where did Flathead start and where are you today in terms of rate design for your members?
Mark: When I started, we had just acquired PacifiCorp and so we were working through what rate design made sense when you try to incorporate two different rate designs. PacifiCorp's theory obviously as an investor-owned utility is a low-basic charge, high energy charge on the residential side. We at Flathead had a high basic charge and a lower energy charge and so we've transitioned and integrated all of our residential and our industrial and commercial rates all together, obviously now.
We've been through a number of gyrations in that time. Just to give you a quick rundown, on the residential side, we have a basic charge, a three-tiered energy charge. It's an inclining block, three-tiered energy charge, and then a demand rate. Then on our commercial and industrial rates, depending on the size of it, we have really a total of eight rate classes. Our most recent change was adding demand to our residential rate, and then a few years ago we added time-of-use energy to our extra-large general service or industrial in our irrigation rate.
Teri: Yes, and I think the nuance being is that you had through that acquisition, you had a whole different framework to work with. Attempting to get to one standard so that it looked like one standard rate.
Mark: Yes, it's not been easy. I can tell you that, especially on the residential side. When we had the difference between the basic charges of-- At that time, it was $5 and $16. We moved everybody to $21 and lost six of nine board members and a general manager. Rates, if you don't think they have an impact on the leadership at the co-op, think again, because we've seen what can happen if you don't design it appropriately.
Teri: Yes, you have to walk a fine line sometimes. I think just going back to the two most recent adjustments, let's talk about those. The time-of-use for those two classes of C&I and then the time-of-day rate or the demand rate you talked about for residential.
Mark: What triggered most of the decisions was the change in the way the Bonneville Power Administration billed us. When we looked at how Bonneville has changed its billing practices on the wholesale side, we knew that we had to make some changes. The first thing we did was went to our industrial and extra-large general service customers and said we're having this impact on a wholesale basis and we're looking at a couple of rate designs, and we've gone and talked to multiple utilities around the country on how to deal with time-of-use on the commercial and primarily on the industrial side.
Went to them and said this is what we're planning on doing. We held some meetings with our industrial and extra-large general service customers, talked about the benefits for them of time-of-use where giving them more control over their rates and their usage, and honestly, in a lot of industrial and extra-large general service capacities, they don't have control over when they consume energy but if they do, it gave them the opportunity to control their rate.
Your commercial members they're in tune to what's going on financially. They understand the data. They're easier to talk to. Doing your best to communicate with your residential members is a tough task, but we felt like this rate design made a lot of sense for a couple of reasons. The first was the rate design itself on the time-of-day demand basically it only applies Monday through Friday, 7to 10:00 AM in the morning and 5 to 8:00 PM in the evening, no weekends, no federal holidays.
By not using a non-coincidental demand on our residential members, it allowed them control. They could do the same thing as our commercial industrial customers could do which is shift usage off those peak period times and give them more control than they'd have previously. One of the limiting factors on our residential side is we adopted AMI two-way communicating meters back in the early 2000s. We were out in front of that particular change that has obviously been now much more popular in our industry.
The meters that we had at that time when we put them in didn't allow for a lot of data storage within the meter itself. The fact that we put out over 60,000 meters, we weren't going to change meter types or meter structures anytime soon because we had limitations and it was just too expensive to redo all of that. We used a system through meter data management NISC which allowed us to design this custom time-of-day demand program for our residential members.
So far, initially, people were skeptical of it. I can't honestly say that residential members will ever understand what demand is. I mean, we've tried every possible way to explain demand and yet, we've had it in place now five years and even at our last annual meeting I was still getting questions about what is demand. I don't understand it. This we just announced our fourth straight year of no rate increases but we do every year have a rate design change on our residential where we're raising the demand rate and lowering the energy rates at the same dollar amount.
Theoretically, if you consumed electricity from one year to the other you would have virtually no impact in your overall rates because we're raising demand and lowering energy. Our industrial members have been really happy and extra-large general service members have been really happy with the time-of-use design because it does give them some flexibility that they didn't have. I would say our residential members, I don't know if they're satisfied. I don't know that you could say that because they don't understand demand but I think they understand why we're trying to do it if they've paid attention and looked at what we've provided them from an educational perspective.
Tamra: Are there any lessons learned that you'd like to share with other co-op managements and boards as they start to look at maybe evolving their rate structure or trying to do something similar to what you guys have done. Any pro tips for those out there that want to make the change and don't know where to start or how to get there?
Mark: I would definitely recommend talking to other utilities. There's enough demand implementers around and time-of-use rate implementers out there that you don't need to go it alone. The other piece that I think is super important is communication and education, without that you're bound for failure, at least some level of failure.
Teri: Mark, I think that's just great advice. I think this world is getting more complex. Our bills can be more complex to best reflect the changing dynamic you spoke to so I appreciate those insights. Really enjoyed your comments today and having you on the program, thank you so much.
Mark: Thanks to you guys for having me on. I really appreciate the opportunity.
Teri: Tamra, it was fascinating to hear the generalized differences between investor-owned utility rates and co-ops.
Tamra: The fact that IOUs generally have a low base charge, but high energy charges is usually the opposite for co-ops. The challenge of the IOU acquisition by Flathead was to merge these two very different rate designs and socialize the framework with the broader membership.
Teri: Ed VanHoose from Federated is the GM for two electric distribution cooperatives that have very different, but distinct membership composition or low density. The challenge for Ed was to design an equitable program based on time-of-use rates. The Federated program has been established for about seven or eight years now and we get to hear about Ed's experience with member outreach. Here's that discussion.
Tamra: Ed, we're really excited to talk to you today about a number of things focused on rate designs and what you are doing at your cooperatives. First, I want you to give us a background and overview of who your co-ops are and what service territory, all the background details that folks like to know about when they talk about their co-ops to other people?
Ed VanHoose: Sure, well just to start with I'm the president of Federated Energy Services Cooperative which we call FESCO, that makes me the general manager for two electric distribution cooperatives, North Central Electric Cooperative and Lorain-Medina Rural Electric Cooperative. It's a federated which is unique among the electric cooperative utilities. We share a lot of different services, management being one of them, but pretty much any office-type function is shared and therefore, has a real cost benefit to our members. North Central is about 9,600 to 10,000 meters so it's relatively small cooperative and Lorain-Medina runs anywhere from 16,000 up to 20,000 in that general vicinity.
We are located in Northeastern Ohio, and I would say north central obviously from the name there. We have primarily residential like most rural co-ops do, but we do have quite a bit of commercial load as well and industrial load. Our demographic is very widely varied. One of the real interesting things about the federation though is our density, so like most rural co-ops our density is much lower than what you would get in the cities obviously. North Central in Ohio is the lowest density co-op in the state, and Lorain-Medina is the highest density co-op in the state and yet we manage both so provide some unique challenges that you wouldn't necessarily get.
Some of our more notable loads would be, at North Central we have a mining operation, a steel operation. We have an industrial load that does all of the interior injection molding for the new Ford Bronco so that's cool, that's built here on our lines. Then at LMRE what's really interesting even though we're in Northeastern Ohio where it gets pretty cold, we have the largest greenhouse in North America.
Teri: You've got a really varied landscape for your members. Let's talk a little bit about your co-op's evolution of rates over the past couple of decades for these members.
Ed: Sure. Like most co-ops back in the day when we were founded, there was a self-read, metering was pretty basic and there were even cards that were mailed in. I think there's actually still a few in the country that are still even at that point. Then after that, you move and we moved to AMR which is just having the meters be read automatically in some mechanical meters. Then eventually to AMI which is where we're at right now.
When we install AMI metering and the communication infrastructure that comes along with that, it enabled us to then start taking a look at some more advanced rate structures and in particular for us, the time-of-use rate structure. That's what we've done. It's universally applied. That's unique too. We don't have a different type of rate structure for each individual class. Now that doesn't mean the rates aren't different per class, because they obviously are because there's different characteristics of each class. You have some differences there, but we do have time-of-use rates for everyone.
Teri: Just so we understand, when was the time that you converted to that time-of-use? Roughly, when did that take place?
Ed: It's been seven to eight years back now. It's been in place for quite a while. I know there are co-ops who are looking at this right now. I would encourage them to really look at doing it. I would say on the residential side, over the last seven-eight years, we probably haven't seen a huge shift in behavior. There are some people who take it very seriously, but on the commercial and industrial side, it does have a pretty big impact on them and also enables you to have a conversation with them about their rate structures and what they can do, kind of empowers them.
They have the ability to make some decisions on their own to adjust their business practices to be able to shave off some of their electric bill. When you have an electric bill that can total sometimes in the millions of dollars on the commercial on an annual basis, you can have a real impact on their bottom line.
Tamra: Ed, what factors were important for your co-op to evaluate when designing that type of rate structure for the C and I customers?
Ed: Typically when you're looking at rate structures, there's a lot of factors that go into it. Rate setting's more of an art than a science. You always have some initial math that goes into it. What you're always trying to do, and what we were always trying to do is to find ways to reduce the cross-subsidization between the different rate classes so that a cost driver is actually the cost payer. At the local level by going to time-of-use rates, we can take the energy usage and make it more of a true pass through and then we can set our fixed costs to be what it really should be at the distribution level to cover the cost locally.
Those are really most of the factors that we look at. Now, we do an annual adjustment to these rates. We look annually at what has occurred after the past 12 months to see what is going on with each individual load and particularly those large consumers that may be their own rate class. We will take a look at all of those usages, make sure that nothing has changed over the past 12 months, and adjust accordingly for what has happened to their usage in the past year.
Teri: Let's talk a little bit more about the communication. Without a pilot program, we've got to be transparent and so what does that communication cycle look like?
Ed: Leading up to the time-of-use rate changes, there was a massive communication effort to make sure everybody on the lines understood what was about to happen to their bills. Now that was a multitude of different types of channels. We use NISC, so we have smart hub. There were notifications that went out in that. We have our magazine like most do. There was a lot of communication that went out on that. Social media wasn't as prevalent at the time but it was still used for these types of purposes.
There were even ads put in the newspaper and there were radio advertisements. After this was all adopted, the communication continued and it still does to this day. At least quarterly, we're putting something out there about the time-of-use rates and what people can expect and trying to encourage people to take advantage of them because honestly, it's a win for them as well. If they will just do a minor shift in their behavior, they can see a cost reduction on their bill.
Teri: Yes. That's really interesting, Ed. Can you explain more about how you got to what that right number is and how you're looking at that as co-ops and utilities in general, go into this next building phase for infrastructure?
Ed: It's pretty typical part of rate development that you're continually always looking at the fixed charge component. Over time, the strategy universally has been to move that fixed charge component to cover what the local distribution costs actually are. Now, of course, those numbers are inevitably going to be higher than what people have normally seen because traditionally, co-ops have put a lot of those fixed components into the variable costs in the kilowatt hour charge, and that isn't necessarily proper to do so because then you're cost-shifting from one member to another, and the different member rate classes are not actually paying their fair share at the local cost.
Tamra: Ed, we really appreciate what you pulled together for us today. Great information about what you guys are doing, and it sounds like you're really thoughtful and doing the right things for your members. Thanks for sharing today.
Ed: Great. It's good to talk to you guys.
Tamra: Ed points out that the main goal in rate design is to find ways to reduce the cross-subsidization between the different rate classes. In essence, making sure that the cost driver is actually the cost payer, but to do so in a very transparent manner so that members understand their bill and how they can save money.
Teri: The fact is consumer electricity bills are becoming increasingly complex as major cost of service components --that is generation, transmission, and distribution -- are replaced, reinforced, and possibly envisioned. Making sure that cooperatives stay ahead of the cost curve and bringing their membership along is an absolute imperative.
Tamra: Yes, I agree. Well, that wraps up our program, tune in next month for our back-to-school edition where we get on the electric school bus, speaking with an electric bus manufacturer, the Beneficial Electrification League, and of course, an electric co-op that's making a difference in their community. Join us then.
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