Customers Interrupted

Utilities that are short on capacity and operate in a stable regulatory environment may be able to extract value from interruptible rates.

 

Regulated utilities have struggled for a long time to determine the value of an interruptible rate. As deregulation developed, many utilities moved away from interruptible rates that are disconnected from energy markets and started offering tariffs with dynamic pricing tied to the markets. Demand bidding and real-time pricing are two examples of the latter approach. The low prices in today's wholesale electric markets have resulted in a reduction in the value of the retail market-based rates for both the utility and the customer.

Utilities that are short on capacity and operate in a stable regulatory environment may still be able to extract some value from interruptible rates. The value of the interruptible rate hinges on delaying the need for capacity at a cost that is less than the cost of adding and operating the supply-side resource. To achieve this goal, the interruptible rate tariff must establish prices for both capacity and energy that reflect market prices.

What We Know So Far

Dr. Hans E. Nissel, in a June 1983 Public Utilities Fortnightly article, argued that interruptible customers do not contribute to a utility's peak demand because they represent no capacity cost. He proposed that the only cost for a utility to provide nonfirm service is energy and customer cost. In the end, he concluded that it was reasonable for interruptible customers to contribute to the capacity cost of the power pool construction and operation for firm service, since it makes nonfirm service possible.