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2 PNDRP The state of play ♦ The smart grid is being rolled out in many jurisdictions and the federal government has awarded utilities billions of dollars to expedite its deployment ♦ As most of these deployments have not focused on customer benefits, there has been a backlash among customers in some communities who see their monthly bills going up to cover smart grid costs without any commensurate benefits ♦ Customer concerns about costs, privacy and cyber security dominate the agenda of state regulators

3 PNDRP Retail pricing innovation is a means of engaging with the customer ♦ Customers, especially the new and emerging generation, are concerned about using energy wisely, having a smaller carbon footprint and lowering their utility bills ♦ However, for the vast majority of customers, the price of electricity provides them with very little information about how to achieve these objectives ♦ Most customer-side programs focus on providing rebates or creating standards and assume that electric rates cannot be touched ♦ Price matters in every industry except the electric ♦ Customer-side programs can be turbo-charged if complementary changes in electric rates accompany their rollout

4 PNDRP A classic example is inclining block rates ♦ About two-thirds of Americans today receive electric service on either flat or declining block rates ♦ The one-third that receive service on inclining block rates do not get much of an incentive to conserve from existing designs ♦ It has been shown that moderately inclining rates can boost energy efficiency levels at very low cost ♦ When coupled with time-varying rates, they can provide the best way to reward customers for using energy wisely and for encouraging them to invest in distributed generation and renewable energy options

5 PNDRP The full range of retail pricing options RateDescription Time-of-Use (TOU) Charges a higher price during all weekday peak hours and a discounted price during off- peak and weekend hours Super Peak TOU Similar to the TOU with the exception that the peak window is shorter in duration (often four hours), leading to a stronger price signal Inclining Block Rate (IBR) Customer usage is divided into tiers and usage is charged at higher rates in the higher tiers; meant to encourage conservation Critical Peak Pricing (CPP) Customers are charged a higher price during the peak period on a limited number of event days (often 15 or less); the rate is discounted during the remaining hours Variable Peak Pricing (VPP)Critical Peak Pricing rate with added variability CPP-TOU Combination A TOU rate in which a moderate peak price applies during most peak hours of the year, but a higher peak price applies on limited event days Peak Time Rebate (PTR) The existing flat rate combined with a rebate for each unit of reduced demand below a pre- determined baseline estimate during peak times of event days Real Time Pricing (RTP) A rate with hourly variation that follows LMPs, but with capacity costs allocated equally across all hours of the year Critical Peak RTP A rate with hourly variation based on LMPs and with a capacity cost adder focused only during event hours, creating a strong price signal at these times

6 PNDRP ,0001,2001,4001,6001,8002,000 kWh / Month Cents / kWh Average Customer Rate A Rate B Rate C Rate D Existing Flat Rate Four illustrative inclining block rate designs

7 PNDRP 7 Energy use could decline by up to 5.9 percent and customer bills by up to 9.1 percent

8 PNDRP 8 Price response mitigates the impact on high use customers by shifting the breakeven point -70% -60% -50% -40% -30% -20% -10% 0% 10% 20% 30% ,0001,1001,2001,3001,4001,5001,6001,7001,8001,9002,000 Customer Size Change in Monthly Bill No price elasticity With price elasticity Break-even point Tier 1

9 PNDRP Each rate offers a different value proposition to each type of customer Flat Rate RTP CPP VPP Inclining Block Rate Seasonal Rate TOU Less Risk, Lower Reward More Risk, Higher Reward Super Peak TOU PTR Potential Reward (Discount from Flat Rate) Increasing Reward Increasing Risk

10 PNDRP Utilities can evaluate these innovative rates against five criteria to configure their menu CriteriaDescription Simplicity & Ease of Understanding Will customers be able to quickly understand the rate? Is it actionable? Customer value proposition Does the rate provide customers with a significant bill savings opportunity? Retail-wholesale market connection Does the rate satisfy legislative and regulatory requirements regarding connection to the wholesale market? Incentive to reduce peak demand Is the rate expected to produce significant reductions in peak demand? Incentive for permanent load shifting Will the rate encourage customers to permanently shift load from higher cost hours to lower cost hours?

11 PNDRP Scoring the rates – an illustration Simplicity Value Proposition Retail- Wholesale Connection Peak Reduction Load ShiftingScore Description Super Peak TOU Provides incentive for permanent load shifting with strong price signal CPP Simple, focused rate for targeted reductions during top load hours CPP/TOU Provides combined incentive of load shifting and demand response PTR Residential rate produces no immediate “losers”; potentially most applicable for low income residential customers; interruptible tariff could be used for C&I RTP Conveys variability in hourly LMPs CP RTP CP RTP provides additional curtailment incentive beyond LMP during top load hours Degree to which criterion is satisfied: 3 = High 2 = Medium 1 = Low

12 PNDRP The pure CPP rate provides a strong demand response signal Customers pay a flat rate for all kWh every day unless a critical day is called On critical days during the critical peak period customers pay a premium for all kWh used The critical peak price is equal to the cost of capacity plus the average critical peak LMP Spreading the off-peak discount over all non-critical hours of the year provides a cost savings to customers

13 PNDRP The CPP-TOU rate ties more closely to actual system costs than the pure CPP rate Every day is divided into peak and off-peak periods Customers pay lower rate for off-peak usage and higher rate for peak period usage On critical days during the critical peak period customers pay a premium for all kWh used The critical peak price is equal to the cost of capacity plus the average critical peak LMP The low off-peak rate provides heating customers with an opportunity to save as compared to a flat rate

14 PNDRP Like the CPP rate, the CPP-TOU rate has lower rates in most hours of the year

15 PNDRP The PTR is a mirror image of the CPP and pays customers to reduce peak demand Customers pay the default rate for all kWh used; if they make no changes in their usage they continue to pay the default rate with no extra costs (“carrot only” approach) On critical days customers can earn a rebate reductions in usage below an estimate of what they otherwise would have consumed (their “baseline” calculation) The rebate amount is equivalent to the critical peak price of the CPP and the CPP-TOU Baseline calculation method and where customer payment originates are important issues to resolve

16 PNDRP All these rates can yield substantial amounts of demand response – illustrative case PTR impacts are shown for the average low-income residential customer

17 PNDRP The CPP-TOU rate will produce the greatest amount of permanent load shifting – illustration A slight increase in non-event peak demand could occur under the CPP due to the discounted price during these hours

18 PNDRP Bill savings are larger for customers with flatter load shapes – illustration

19 PNDRP Low income customers have demonstrated significant price responsiveness in recent experiments Low income customer response ranges from 22% to 214% of the average customer

20 PNDRP Up to 88% of low-income customers could experience bill savings when enrolled in a CPP-TOU rate – illustration

21 PNDRP References Faruqui, Ahmad, “Inclining toward efficiency,” The Public Utilities Fortnightly, August Faruqui, Ahmad, Sanem Sergici, and Jenny Palmer, The Impact of Dynamic Pricing on Low Income Customers, The Institute for Electric Efficiency, June pdf Faruqui, Ahmad, Ryan Hledik and Sanem Sergici, “Rethinking pricing: the changing architecture of demand response,” The Public Utilities Fortnightly, January Faruqui, Ahmad, Ryan Hledik, and Sanem Sergici, “Piloting the smart grid,” The Electricity Journal, August/September, Faruqui, Ahmad and Sanem Sergici, “Household response to dynamic pricing of electricity– a survey of the experimental evidence,” January 10, Journal of Regulatory Economics, Forthcoming. FERC, “A National Assessment of Demand Response Potential,” June 2009,

22 PNDRP Biography Ahmad Faruqui is an expert on how the smart grid affects electricity customers. He has performed cost-benefit analysis of smart grid programs for utilities in two dozen states and testified before several state and provincial commissions and legislative bodies. He has designed and evaluated some of the best known pilot programs involving dynamic pricing and in-home displays and his early experimental work is cited in Bonbright’s canon. During the past two years, he has assisted FERC in the development of the “National Action Plan on Demand Response” and in writing “A National Assessment of Demand Response Potential.” He co-authored EPRI’s national assessment of the potential for energy efficiency and EEI’s report on quantifying the benefits of dynamic pricing. He has assessed the benefits of dynamic pricing for the New York Independent System Operator, worked on fostering economic demand response for the Midwest ISO and ISO New England, reviewed demand forecasts for the PJM Interconnection and assisted the California Energy Commission in developing load management standards. His most recent report, “The Impact of Dynamic Pricing on Low Income Customers,” has just been published by the Institute for Electric Efficiency. The author, co-author or editor of four books and more than 150 articles, papers and reports, he holds a doctoral degree in economics from the University of California at Davis and a bachelor’s degree from the University of Karachi, Pakistan.