Pricing Reform for the Local Disco: Setting Rates That Will Support Distributed Generation

 

How to replace the bundled utility tariff with a rational design for access, throughput, and congestion.

The seemingly imminent diffusion of distributed fossil technologies such as microturbines and fuel cells is motivating regulators to reexamine an area they have long ignored-the pricing of electric distribution services. This issue, explored in March in Washington, D.C. at a meeting of stakeholders from the National Association of Regulatory Utility Commissioners, has become more complex, given the potential for bypass by distributed generation (DG) technologies.

Consider the traditional two-part tariff for the regulated and bundled sale of electricity. It consists of a variable or volumetric energy charge (based on usage in kilowatt-hours), coupled with a fixed monthly customer charge. Regulators traditionally have set the energy charge at levels that significantly exceed marginal costs, which curtails demand. That pleases the conservationists. Consumer advocates also have tended to favor an overloaded volumetric charge, because it creates a subsidy that allows regulators to reduce the fixed monthly customer charge-all the better, they believe, for helping low-income users.