Rate Design June 23, 2015 Laurie Reid

2 Overview 1.A little bit of physics 2.The Ratemaking Process 3.Generally Accepted Ratemaking Principles 4.What’s happening in Ontario 5.Conclusions

3 1. A little bit of Physics Electricity - Sinusoidal Waves

4 Electricity - Sinusoidal Waves

5 Real, Apparent and Reactive Power Inductance Leading

6 Real, Apparent and Reactive Power Inductance Leading Capacitance Lagging

7 Real, Apparent and Reactive Power Inductance Leading Capacitance Lagging Matching Steady State

8 Real, Apparent and Reactive Power Inductance Leading Capacitance Lagging Matching Steady State

9 2. The Ratemaking Process  Rate Design is Phase 3 of the standard three phase ratemaking process used by most regulators, commonly referred to as:  Rate-base rate-of-return regulation, or  Cost of service regulation

10 Customer Classes and Cost Allocation Customers are defined by size and load profile FromToSample Customer -49 kWResidential, Corner Store, Most Farms kWMonster home; 20 unit multi-res; Commercial garage; Large dairy farm or greenhouse kWSupermarket kVAHome Depot or Small machine shop kVACostco or 30 floor condominium kVAAuto parts manufacturer or 2300 Yonge St 5000And above kVATD Centre; Hospital; UofT; Stelco

11 Customer Classes and Cost Allocation Residential Hotel

12 Cost Allocation and Customer Classes Transmission System

13 3. Generally Accepted Ratemaking Principles Legislative mandate for regulation: –Just and reasonable –In the public interest Electricité de France monopoly tariff development, Pierre Massé and Marcel Boiteux, 1950s –Those who incur costs should pay them –So that they understand the value The Principles of Public Utility Rates, James C. Bonbright, 1961 –Balance of generally accepted ratemaking principles –Capital attraction The Economics of Regulation: Principles and Institutions, Alfred E. Kahn, 1970 –Some things aren’t monopolies anymore and should be competitive

14 Current Ontario Tariff for Low-volume Consumers

15 Bonbright’s Principles:

16 Bonbright’s Principles: Effective

17 Bonbright’s Principles: Effective Straight fixed/variable –Recovering the fixed costs in a fixed charge (most of distribution) Revenue for a class divided by the number of customers in the class –Recovering the variable costs in a variable charge (fuel costs for generation, losses, etc.) Based on variable cost –Capital attraction and certainty for investment

18 Bonbright’s Principles:

19 Bonbright’s Principles: Stability

20 Bonbright’s Principles: Stability

21 Bonbright’s Principles: Stability

22 Bonbright’s Principles: Stability Revenue stability for utility –Cash flow → short term debt –Deferral or variance accounts → interest Rate stability for ratepayer –Complaints –Budgeting → Bad debt for utility Higher fixed charge

23 Bonbright’s Principles:

24 Bonbright’s Principles: Static efficiency

25 Bonbright’s Principles: Static efficiency Maximizing use of system –Peak capacity is product Ramsey pricing –Promotional pricing to customers with elastic demand Generators don’t pay Economic development rate Off-peak rate

26 Bonbright’s Principles:

27 Bonbright’s Principles: Appropriately priced

28 Bonbright’s Principles: Appropriately priced Internalities –Costs and benefits Power Quality (kVA rates) Distributed generation Externalities –Promoting green energy (carbon tax) –Social programs (lifeline rates) –Economic development (seasonal rates, rural)

29 Bonbright’s Principles:

30 Bonbright’s Principles: Fair

31 Bonbright’s Principles: Fair

32 Bonbright’s Principles: Fair Cost causality –Rates or Charges –Cost drivers: customer numbers or demand No intergenerational subsidies –“Used and useful” or “Work in Progress” Beneficiary pays –Least cost option –First past the post

33 Bonbright’s Principles:

34 Bonbright’s Principles: No undue discrimination

35 Bonbright’s Principles: No undue discrimination Equals treated equally –New or existing customers –Postage stamp rates: urban / suburban / rural –Limitations of metering Unequals treated unequally Due discrimination → Maximizing use of system → Unfair

36 Bonbright’s Principles:

37 Bonbright’s Principles: Dynamic Efficiency

38 Bonbright’s Principles: Dynamic Efficiency

39 Bonbright’s Principles: Dynamic Efficiency Incent the behaviour that you want to induce Excess capacity Limited capacity

40 Bonbright’s Principles:

41 Bonbright’s Principles: Practical and Simple

42 Bonbright’s Principles: Practical and Simple Simplicity Certainty Feasibility of Application California –2 zones –4 seasons –12 usage tiers

43 Bonbright’s Principles:

44 Bonbright’s Principles: Free from controversy

45 4. What’s happening in Ontario Ontario Tariff for Residential Consumers

46 Implementing the New Rate Design Approach The Board has directed the transition to fully fixed distribution rates for residential electricity customers 1.Over 4 years 2.Equal adjustments every year Next step: Electricity Commercial and Industrial –Valuing connection; capacity; and distributed resource –Cost driven; customer controlled; and forward looking

47 5. Conclusions  Traditional small volume customer rate designs did not correspond to cost drivers  Advanced metering provides an opportunity to improve link between cost drivers and rates  Rate design can be used to enhance regulatory principles/objectives including:  Economic efficiency  Conservation  Distributed Generation  But change creates winners and losers

48 nlDoQhttps:// nlDoQ