A Fixed Cost Recovery Mechanism Proposal DISTRICT XI HUMAN - - PowerPoint PPT Presentation

A Fixed Cost Recovery Mechanism Proposal

DISTRICT XI HUMAN RESOURCES COUNCIL NATURAL RESOURCES DEFENSE COUNCIL

November 30, 2018

Fixed Cost Recovery Mechanisms: Background

What is a Fixed Cost Recovery Mechanism?

 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 up or down with actual sales.  FCRM or decoupling sets revenues, then lets prices float down or up with actual sales.  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).

Why do we need to decouple?

 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.

 Thus, an increase in sales results in an increase in profits, and any decrease in sales results in a decrease in profits.

 By removing this link between sales and profit, FCRM 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

Our Proposal

• Human Resources Council, District XI and the Natural

Resources Defense Council are considering whether to propose a fixed cost recovery (FCR) mechanism (also referred to as a “decoupling mechanism”) in the current NWE rate case.

• The following slides detail our preliminary thinking of

what the FCR mechanism would look like.

Our Proposal (Cont.)

• 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.

• Would cover all utility fixed costs (generation,

transmission, and distribution)

• Be applied to only the residential and GS-1 secondary,

non-demand classes.

• Will not “normalize” for weather.
• Would use a “Revenue-Per-Customer” approach to

determine and adjust allowed revenue for covered classes

How Revenue- Per-Customer Would Be Calculated

• 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 revenue per customer value.

• The RPC value would be multiplied by the actual number of

customers each month to determine allowed revenue.

• 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.

How Deferrals Would Be Applied

 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 sales to determine the FCR adjustment.  If allowed revenue > the actual revenue, customers would 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.

Additional Elements

 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.

 Comprehensive independent evaluation be completed at the 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.

Example: Puget Sound Energy

 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:

 Decoupling worked as intended.  Adjustments were small and did not noticeably impact customer 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 MYTH NO. 1:

DECOUPLING DOES NOT SHIFT RISK TO CONSUMERS

 Decoupling does NOT shift risk from the utility to consumers

• Reduces risk for consumers by…
• Reducing the risk of abnormally high utility bills due to

extreme weather

• Mitigates adverse bill impacts and energy affordability

concerns

• Surcharges occur when the average customer consumes

less energy than projected, meaning bills are likely lower than anticipated

• Rebates occur when customers have consumed more

energy than projected – rebates help alleviate financial pain and energy security concerns

DECOUPLING MYTH NO. 2:

DECOUPLING DOES NOT REDUCE INCENTIVES TO SAVE ENERGY

 There is no evidence that decoupling reduces customer incentives to save energy.  Decoupling adjustments have historically been very small.

 Over the last decade one study found that most adjustments (85% for electric) were within “a percentage point or two either up or down”

 Recent evaluations of decoupling in the Pacific Northwest found that bill changes are small enough to be within the normal fluctuations consumers expect year by year with no evidence that consumers notice or respond to these small adjustments.

DECOUPLING MYTH NO. 3:

DECOUPLING DOES NOT AFFECT A UTILITY’S INCENTIVE TO ESTIMATE FUTURE SALES

 Basis of decoupling is to remove the link between sales and profit  The utility receives its revenue requirement and only its revenue requirement  If a utility overestimates test year sales, the revenue requirement stays the same, but kWh rates decrease  If a utility underestimates test year sales, the kWh rate would increase, but because the revenue requirement stays the same, the utility would have to return excess revenue to customers