Creating the right retail rate environment for energy conservation and energy efficiency.

• Author: Blake, Marry

"We're in the business to sell electricity." And sell it we do.

For many years, energy consumption has been good for business. The more energy we sell, the greater our revenues. So for many years, energy consumption has been encouraged, with low fixed "customer charges" and energy rates that included "declining blocks." The more electricity a member used, the cheaper it got.

In addition, for the past thirty years, growth, both in the number of customers and in usage per customer, has been a good friend to most cooperatives. The old maxims that "Growth is good for business" and "There are few problems that you can't grow your way out of" proved to have a great deal of validity. When cooperatives are growing, retail rates that don't properly reflect cost causation and that deviate from accepted ratemaking principles still may recover enough of the cooperative's fixed cost and margin to meet the cooperative's financial obligations and avoid financial difficulties.

But what if cooperatives stop growing? What if usage per customer begins to decline and the decline is sufficiently large that it offsets any growth in the number of customers, so that the cooperative's overall growth rate is negative? Are there rate designs that cooperatives can adopt that would protect their finances and treat customers fairly regardless of whether growth was positive or negative? These are important questions that cooperatives must consider as the business environment that they face begins to change.

The "Perfect Storm"

Increases in the cost of constructing new generation plant, the adoption of state and federal renewable portfolio standards, transmission line expansion to accommodate renewable energy, the implementation of carbon cap and trade legislation and fuel price increases are creating, in many areas of the country, a "perfect storm" that is significantly increasing wholesale and, as a consequence, retail electric prices. Customer reaction to these price increases is fairly predictable. Customers want to conserve and use electric energy as efficiently as possible as the price of electricity increases. Indeed, in response to a national call for energy conservation, many customers are responding, not just because of increasing prices, but also because they hear the message that conservation is "the right thing to do." Add to this the energy efficiency standards that are being considered in both state and federal legislation and reduced usage per customer is headed our way. And these retail electric price increases and efficiency standards are not the only factors providing an incentive for customers to conserve and use energy more efficiently. Customers today are facing price increases for medical care, food, gasoline and a host of other products that they use, which put pressure on their budgets and put them in a frame of mind to save money wherever they can, including on their electric service.

Cooperatives have the opportunity to anticipate these significant changes and proactively respond to them in ways that help their members reduce their energy bills while maintaining the financial strength of the organization. Rate design can play a big role in this response by creating the proper retail rate environment for energy efficiency and conservation, and by providing incentives for customers to take actions that will make them less costly for the cooperative to serve, while avoiding negative impacts on the cooperative's finances.

One of the major challenges that cooperatives face is how to effectively manage and recover a cooperative's "fixed costs." These are the costs that are present due to the fact that a customer is being served, and they do not increase or decrease based upon how much energy a customer uses or doesn't use. These "fixed costs" include poles and wires, cooperative buildings, transformers and everything else a cooperative needs to serve its members, no matter how much energy that customer uses. A significant portion of the costs for both G&T and distribution cooperatives are fixed. For a G&T cooperative, almost all of the costs of its generation and transmission plant are fixed costs. For a distribution cooperative, almost all of the cost of its distribution facilities is a fixed cost.

For years, many cooperatives did not pay specific attention to fixed cost recovery in rates. So long as...