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Home My WebLink AboutMemo - Mail Packet - 12/26/2017 - Memorandum From Lance Smith Re: Utility Revenue - Time-Of-Use (Tou) ImplementationUtilities electric · stormwater · wastewater · water 700 Wood Street PO Box 580 Fort Collins, CO 80522 970.221.6700 970.221.6619 – fax 970.224.6003 – TDD utilities@fcgov.com fcgov.com/utilities M E M O R A N D U M DATE: December 20, 2017 TO: Mayor Troxell and Councilmembers FROM: Lance Smith, Utility Strategic Finance Director THROUGH: Darin Atteberry, City Manager Kevin R. Gertig, Utilities Executive Director RE: Utility Revenue Risk - Time-of-Use (TOU) Implementation Staff recently presented residential TOU rate ordinance options at the November 7 th and November 21 st Council meetings. An option passed 4 – 3, which supports moving electric heat customers to a TOU rate and all other residential customers to the TOU+tier rate in October 2018. After second reading, questions around the impacts and risks to utility revenue from making a change in rate structures have arisen. This memo is intended to address those concerns. 1) There is concern that the best-bill guarantee made the pilot study results not credible. It should be noted that for customers on the piloted rates, the best-bill guarantee did not reduce their incentive to conserve. The on-peak charge on TOU was greater than the tier 3 charge on tiered rates and the off-peak charge on TOU was less than the tier 1 charge. As a result, these customers had a substantial financial incentive, more so on TOU than under tiered rates, to adjust their daily electricity consumption, regardless of the best-bill guarantee. Furthermore, any necessary credit provided was given at the end of the 12 months, not on each monthly bill. Consequently, staff does not expect customer usage patterns to differ significantly from what was observed in the pilot because of the best-bill guarantee. Finally, the study was designed to separate the impact of the study design, including the best-bill guarantee, from the intended effects using standard statistical techniques. DocuSign Envelope ID: 6FD960E3-0EF8-4648-9E5D-6F1CFDBC90BF 2) There is concern that the TOU rate structure will not generate adequate revenue. Staff held a 12-month TOU pilot study in 2015 and 2016 to measure the impacts of a TOU rate structure. One of the four objectives was specifically around ensuring adequate revenue is generated after accounting for the impacts of transitioning from a tiered rate structure to a TOU rate structure, along with changes in energy consumption and demand impacts. The study showed a statistically significant 2.5% reduction in energy consumption overall from the existing tiered rate structure. This resulted in a 2% reduction in bills for the average customer, and hence revenue to the utility (electric heat customers saw a 1.9% increase in cost). Lower consumption offsets the utility’s wholesale expense, which is passed through to the customer, and therefore has little impact on the utility’s operating income. 3) What risks exists to the utility from a much larger load shift from on-peak to off-peak than was realized in the pilot study? The risk is minimal given the study design along with the large sample size and duration of the pilot study. On average, residential customers use 16.6% of their total consumption during the on-peak hours (on an annual basis, varies by season). The pilot study showed there was a 0.4% shift in total consumption from on-peak periods to off-peak periods. The 99% confidence interval for this shift is from 0.08% to 0.8%. Current Rate New Rate Bill Impact % Bill Impact ($/month) Tiered Rate TOU + tier -1.9% $ (1.38) All-Electric Homes TOU 1.8% $ 2.44 Solar Net Metering TOU + tier 0.0% $ 0.07 DocuSign Envelope ID: 6FD960E3-0EF8-4648-9E5D-6F1CFDBC90BF If the residential class avoids ALL on-peak hours and shifts usage to off-peak (extreme boundary condition) the utilities revenue from that energy does not go to zero. This is due to the way the rate structure was developed.  The utility still collects the off-peak energy charge  The utility still collects the fixed monthly charge  The utility still collects the distribution portion of the energy charge What is impacted is the demand portion, i.e. the additional energy charge included during the on- peak hours, which equates to roughly 20% of the total residential revenue. But, because of the way the retail rate is structured, any reduction in revenue to the utility is offset by lower wholesale costs, therefore having minimal impact on the need for future rate increases. 4) How would any unanticipated revenue shortfall be addressed? With any rate structure (even with the current tiered rate), there is always a need to make minor adjustments from year-to-year as consumption patterns and revenue requirements change for a particular rate class. Staff updates the cost-of-service (COS) model every two years to account for any changes that may occur. The same will remain true under a TOU rate structure. Any additional shifts in demand or reductions in energy consumption, outside of what was measured in the pilot study, would be monitored and accounted for with future incremental adjustments. 5) Is there risk of revenue shortfall greater in a TOU rate structure than under the existing tiered rate structure? No. The retail rate structure in Fort Collins has been driven by the wholesale rate structure for many years, well before the TOU rate structure was brought forward in recent years. On the commercial side, the coincident demand charge is directly passed through to large commercial and industrial customers, based on Platte River’s coincident peak hour. This not only occurs in Fort Collins, but also in Loveland and Longmont, and is fairly common with other utilities across the country. A TOU rate uses essentially the same methodology, but it spreads these costs over 4 – 5 hours during the day, depending on the season, for each weekday of the month, rather than a single hour of the month. DocuSign Envelope ID: 6FD960E3-0EF8-4648-9E5D-6F1CFDBC90BF The current tiered rate structure charges 70% of the residential customer’s consumption less than the full costs of providing them the energy. This has not resulted in these customers using more energy, but it does expose the utility to the potential change in behavior from the 30% of consumption in which customers are paying more than the cost to serve them, in particular those years that have higher seasonal volatility driven by weather. A TOU rate structure eliminates this exposure. 6) Is the on-peak to off-peak ratio unusually high? A 3 to 1 ratio is definitely not out of the norm. In fact, you only need to look to neighboring utilities such as Poudre Valley REA, Xcel Energy, and United Power to find ratios hovering around 2.5 to 1 or greater. Oklahoma Gas & Electric hovers at 3 to 1, and certainly, there are other utilities with higher ratios, such as Sacramento Municipal Utility District, which is roughly 4 to 1 during their super on-peak window. Summary Staff is confident there is no significant risk to a revenue shortfall by implementing a TOU rate structure. This rate structure does offer customers another way to lower their monthly utility bill in a way that operating income is not impacted. Beyond reducing overall consumption, they can also avoid on-peak hours and consume energy during the off-peak, which both provide lower monthly bills. Doing so has minimal impact to utility revenue and any necessary adjustments, due to consumption pattern changes, would be done the same as they are today, through incremental adjustments to cost-of-service models. If Council is interested in other ways to identify and mitigate potential revenue risk, staff has identified the following options: 1) Continue discussions to increase the fixed charge (and decrease variable charges) to more closely match the utility’s fixed costs and reduce the risk of collecting fixed costs through variable charges 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Current Charges Utility Perspective Combined Wholesale Perspective Residential Electric Utility Charges vs. Expenses Demand Charge Energy Charge Distribution EnergyCharge Fixed Charge Variable Expenses Fixed Expenses Fixed Expenses Variable Expenses DocuSign Envelope ID: 6FD960E3-0EF8-4648-9E5D-6F1CFDBC90BF 2) Hire a consultant (estimated at $15,000) to review TOU pilot study results and provide feedback on assessed risks from an industry perspective. As always, Staff is available to answer any additional questions that Council may have and is willing to meet or talk with those whom have voiced concerns with the residential TOU rate implementation in October 2018. Staff has contacted a consultant that can provide a review of the pilot study and TOU impacts. Staff will await further direction from Council before proceeding. Cc: Mike Beckstead, Chief Financial Officer DocuSign Envelope ID: 6FD960E3-0EF8-4648-9E5D-6F1CFDBC90BF