A number of states are discussing retail electric and gas distribution rates based on demand considerations. It may come as a surprise, to some, that demand rates are not new at all to the public utility industry.
According to my 1917 edition of Public Utility Rates by Harry Barker, the concept of a multi-part tariff was first introduced in 1892.
Dr. John Hopkinson in England gave an address to the Junior Engineering Society. His two-part demand and energy rate is still known as the Hopkinson Demand Rate.
Around 1896, another British engineer Arthur Wright produced his hour’s use or Wright demand rate. It provided for a number of energy block prices.
In 1900, Henry Doherty published a paper Equitable, Uniform and Competitive Rates. It proposed split charges based on demand and customer factors, introducing the customer charge.
At the time Barker was writing his text, electric ratemaking converged on two schemes. A unit charge method. A flat rate method.
The unit charge method involved measuring the service provided. And having the payment based on some usage characteristic.
The flat rate method consisted of charging the customer an agreed monthly sum. It had some relationship to expected (but not measured) usage.
The chief advantage of the flat rate was the avoidance of metering investment and meter reading costs. It was thought at the time that this would make service more economic, especially for small use customers.
A third scheme was later established based on split rates. It was an extension of the unit charge scheme but carried out to, in Barker’s words, a logical extreme.
The resulting two-part or three-part rate designs included a charge based on the customer’s maximum demand, an amount proportional to metered service, and sometimes a separated third part covering the customer costs as those proportional only to the number of customers.
Barker made this observation in 1917:
“While the multi-part tariff may be wholly logical, it may be so complex and unintelligible to the customer that he cannot check up his bill by any instrument on his premises and this may create a fundamental prejudice against the utility.”
Modern electronic and Internet-based measuring and metering equipment (as well as the emerging Internet-of-things) will likely remove the customer information deficit cited by Barker in 1917 as a problem with multi-part rates.
By the way, Harry Barker noted in 1917 that the unit charge system was called the European plan. While the flat rate scheme was known as the American plan.
Public Utilities Fortnightly features the top writers and opinion-leaders in utility regulation and policy such as Branko Terzic. See his column “Innovation and Capital Recovery” in the November 2016 issue.
