Ohio utility seeks to double its fixed distribution charges

In response to an increasing number of customers installing solar power or opting for energy efficiency measures, American Electric Power has asked Ohio regulators to increase the share of distribution charges that all its utility customers must pay, regardless of how much electricity they use.

AEP Ohio has seen a jump in its solar net metering customers from 286 in 2011 to 983 currently, said company spokesperson Terri Flora. The company’s website says it serves nearly 1.5 million total customers.

“This increase in net metering customers is currently resulting in a shift of the recovery of fixed costs from net metering customers to non-net metering customers,” Flora said, explaining the rationale for the proposed change.

While the proposal is “revenue neutral,” according to Flora, clean energy advocates say it would more than double customers’ fixed distribution charges. That, in turn, decreases incentives for energy efficiency and solar energy.

“When you raise the fixed customer charge, what you’re doing is you’re taking control out of the customer’s hands to control their own bills by using less electricity,” said Rob Kelter at the Environmental Law & Policy Center.

A ‘huge change’

Electricity bills for Ohio consumers have two parts: a charge for regulated distribution services provided by the utility in their geographic area, and a generation charge for electricity supplied competitively by either the utility or another company.

Some charges on the distribution part of the bill are made regardless of how much electricity a customer uses. From the customer’s perspective, it’s a charge for having service available, regardless of how much or how little is used from the grid.

The rest of the distribution charge varies with the amount of electricity used by the customer. So, the more electricity that’s used, the higher the total distribution charge.

From the AEP’s perspective, though, “virtually all distribution costs are fixed costs,” Flora said.

“AEP Ohio is only proposing to move a portion of [those] costs into the fixed customer charge,” she continued. “Our average cost is $27.24 per customer, and we are proposing a customer charge of $18.40.”

That would be more than twice the current fixed charge of $8.40.

Approval of the proposal would be a “a huge change” in Ohio regulatory policy with “big ramifications for customers,” Kelter said.

‘The right price signal’

Regardless of what the average cost for all distribution services is, customers don’t all use the same amount of electricity.

“The people who use the most electricity should have the highest bills,” Kelter said. “The current system of charging people per kilowatt/hour for their electricity — for their generation and to some extent for their distribution — sends customers the right price signal.”

Just five years ago, the Public Utilitites Commission of Ohio approved an increase in the fixed charges from $4.52 to the current level of $8.40. The fixed customer charge currently brings in about 31 percent of AEP Ohio’s revenue, Flora noted. If approved, that share would incease to 68 percent of the total distribution revenue.

As the fixed portion of an electric bill goes up, customers who use less electricity or produce some on their own save less.

“Homeowners and business owners who are investing in energy efficiency and renewable energy to reduce their energy usage and carbon footprint should be rewarded rather than penalized,” said Steve Melink at Melink Corporation in Cincinnati. “This is exactly the direction we need to head as a society to become more strategically competitive, reduce pollution and healthcare costs, and reduce the long term costs and risks of climate change.”

“Customers that choose to participate in energy efficiency programs will continue to have the opportunity to save and see the same benefits of their lower usage related to the generation, transmission and other portions of their electric bill,” Flora said, noting that the company remains committed to its energy efficiency programs.

With a smaller share of the total bill dependent on usage, though, the payback period for investments in clean energy would be longer.

“With a high fixed charge, the value proposition of energy efficiency — that it lowers your bill — is lost,” or at least substantially diminished, explained Trish Demeter at the Ohio Environmental Council.

In her view, AEP’s proposal to increase the fixed charge “will have that result, and negate some of the great effort that the company has had in advancing innovative energy efficiency programs.”

Slowing down solar?

The proposal could also discourage growth in solar energy, according to advocates. Although Flora asserts that “net metering customers receive a credit on their generation rate which is more valuable than the market value of the energy they are providing back to the system,” Melink disagrees.

“Net metering actually helps the utilities by reducing peak demand during the middle of the afternoon,” he said.

Solar energy’s net benefits to society also include zero-emission energy, Kelter noted.

Beyond that, Melink said, increasing the fixed portion of the distribution charge for customers who use less electricity from the grid would unfairly “penaliz[e] customers who are part of the solution” for increasing clean energy and “reeks of crony capitalism.”

“Customers who use less electricity use the wires less that carry the electricity,” said Melink. “Therefore, they should pay less than other customers who are using the wires more.”

“Airlines do not charge me when I am not flying on their planes in order to cover their fixed costs,” Melink continued. “Utilities should not charge me when I am not using their wires either.”

‘A long hard look’

At this step, AEP and the challengers are waiting for the PUCO to set a schedule for discovery, testimony and a hearing.

AEP originally wanted all of that done by now, with a decision to follow less than a month from now. Although that’s not likely, challengers want to make sure the company’s plan doesn’t get rushed through without full consideration of all the facts and consequences.

“We need to make sure that there’s time in this proceeding to create a full record that really takes a long, hard look at this issue,” Kelter said.

In his view, that consideration should include a review of the rate of return allowed to the utility. “When you’re talking about increasing the fixed customer charge, you’re talking about guaranteeing the utility cost recovery,” Kelter explained. “And you’re thereby reducing their risk.”

“When you drive down the risk to the utility, you should also lower their return on equity,” Kelter added. “It’s really common sense.”

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