Utilities across the Midwest and the nation in recent years have sought to hike the fixed portion of their customers’ bills, in what some observers interpret as an attempt to compensate for stagnant or flagging electricity sales and head off competition from solar.
Two such proposals are now pending before the Missouri Public Service Commission.
Kansas City Power & Light (KCP&L), one of the major utilities serving the state, is seeking to boost the fixed portion of customers’ monthly bills from $9 to $25, which would make it one of the higher fixed rates among 28 investor-owned utilities in the Midwest, according to a survey of rates done by the Environmental Law and Policy Center.
KCP&L’s proposal is included in a rate case filed with Missouri’s Public Service Commission on Oct. 30, 2014.
The Empire District Electric Co., which serves the southwestern part of the state, is seeking to increase the monthly fixed charge by about 50 percent, from $12.52 to $18.75.
The company also has proposed to increase the cost per kilowatt hour by approximately 1/3 of a cent. A customer using 1,000 kilowatt hours per month would pay an additional $6.23 in fixed charges, and roughly $3.80 in additional variable charges.
The balance between the fixed and variable components of the bills has “gotten out of whack,” according to a cost-of-service study done by an engineering firm, said Amy Bass, Empire Electric’s director of corporate communications. “With this case, we’re trying to mitigate the distortion that has occurred over the years.”
Courtney Hughley, KCP&L’s corporate communications manager, said, “One of the reasons we want to make that change is there were some things we were recovering in the energy charge, which is the variable cost. We wanted to be more transparent about what was being recovered, so we moved those into the fixed charge.
“The new rate design we are requesting will more closely align the way costs are incurred with the way revenue is recovered on our customers’ bills.”
‘The big buckets’
Hughley explained that the fixed customer charge “includes things like meters, poles, wires — things that are going to be in place if you use a little energy or a lot of energy. The service line from the distribution line into your home. It includes customer service. We have to have customer-service folks in place.
“These are the big buckets.”
As part of the request to almost triple the fixed charge, she said, “we shifted some things. We pulled some things out of the energy charge and put them into the (fixed) customer charge.”
Asked for examples of those costs, she said, “I can’t tell you exactly what that means. When you pull things out of the fixed and put them in the variable, each customer is going to have a different scenario.”
Brad Klein, a lawyer who challenged three Wisconsin utilities that recently sought — and won – higher fixed charges, sees it as a way for utilities to ensure their profits at the expense of customers, particularly those who use small amounts of energy.
“The utilities are seeing a future where there is eroding load growth due to efficiency and distributed generation,” said Klein, a senior attorney in Chicago for the Environmental Law and Policy Center.
“They’d like to shift the risk of those reduced sales from shareholders to customers. By increasing fixed charges, they’ve basically insulated shareholders from reduced load growth.
“On the other side of the coin, the customers will have vastly reduced control over their energy bills. They’ll lose the ability to reduce their bills by reducing energy use. That’s what I think is motivating these proposals.”
And he expects to see them for some time to come.
“We’re seeing this strategy on a more frequent basis, and I anticipate we’ll see more of these proposals,” Klein said. “It’s going to be really important to scrutinize utilities’ rationale and the data supporting it.”
‘A short-term perspective’
In November, the Wisconsin Public Service Commission approved three utilities’ requests to increase their fixed charges for electricity, not quite doubling the fee in each case with the resulting fixed charge at between $16 and $19 per month.
In about a dozen states, utilities are seeking, or have recently been awarded, increases in the fixed portion of customer bills. Central to the debate is just what qualifies as a fixed cost, and what belongs in the variable-cost basket. The most obvious variable cost is the price of fuel. The more heating or air conditioning you use, the more coal or natural gas many utilities must purchase to power their plants.
If you look far enough down the road, Klein said, “all costs are variable.”
“The flaw in the utilities’ case is that it takes such a short-term perspective. They look over one or two years, and say these are all fixed costs, all wires and all power plants are fixed, without taking into consideration how those costs can change in the future, and how dependent they are on signals you send to customers.
“If you could design a system for the future and give people signals about how much energy they are using, you would need less generation in the future. You would need smaller wires, less infrastructure. If we give people incentives to conserve and to use distributed generation, we will have a smaller electrical system, a more-efficient system, and a system that is less costly. That will reduce peoples’ bills in the future.”
Shifting more of the cost of electricity to the fixed portion of the bill puts a disproportionate financial burden on people with low incomes, Klein said, and also ignores some fundamental principles of rate-making.
The correlation between low income and low energy use isn’t consistent, Bass said.
“Some of those with lower incomes are actually higher users because of lack of insulation,” she said.
‘Going in the wrong direction’
Klein said that rates should advance larger, long-term social goals.
“By raising fixed charges, utilities are going in the wrong direction in terms of customer behaviors that we want to promote for the future. When you raise that fixed component, you are essentially penalizing efficiency and renewable energy, and reducing the level of control any customer has over their bill. You can’t change a fixed bill through behavior.”
At the hearings this past fall about raising fixed costs in Wisconsin, Klein said, several former state regulatory commissioners said that rate increases should be based not on whether a given cost qualifies as “fixed” or “variable,” but on “the goals and behaviors you want to promote through rate design.”
The way to discourage energy consumption is to hike the cost per kilowatt hour, he said.
If, on the other hand, “what you want is to to discourage people from efficiency and investment in renewable energy and to make low-income pay more, you should increase the fixed charges.”
The Kansas City Power & Light rate case is ER-2014-0370 and the Empire rate case is ER-2014-0351, you can search by docket number here for more information.
The Environmental Law and Policy Center is a member of RE-AMP, which publishes Midwest Energy News.