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Home My WebLink About20020924_270.pdfDECISION MEMORANDUM TO:CO MMISSI 0 NER KJELLAND ER COMMISSIONER SMITH CO MMISSI 0 NER HANSEN JEAN JEWELL RON LAW BILL EASTLAKE LOU ANN WESTERFIELD LYNN ANDERSON RANDY LOBB DON HOWELL DAVE SCHUNKE RICK STERLING TERRI CARLOCK ALDEN HOLM BEV BARKER TONY A CLARK GENE FADNESS WORKING FILE FROM:LISA NORDSTROM DATE:SEPTEMBER 20, 2002 RE:IN THE MATTER OF IDAHO POWER'S REPORT ON TIME-OF-USE PRICING. In Case No. IPC-01-13 (the investigation of increased Idaho Power Demand-Side Management programs), the Commission directed Idaho Power Company and the Energy Efficiency Advisory Group (EEAG) in November 2001 to consider implementing a Time-of-Use (TOU) metering pilot program "using private contractors through a Request for Proposals (RFP) process.Order No. 28894 at 7. Although it did not set a deadline, the Commission further encouraged the advisory group to "consider installing time-of-use meters in new subdivisions and the feasibility of allowing existing customers to voluntarily install time-of-use meters and amortize the cost over multiple years.Id. In Case Nos. IPC-02-2 and -, the Commission reaffirmed this directive in the context of a May 2002 PCA Order that funded DSM programs. Specifically, the Commission directed Idaho Power and the Energy Efficiency Advisory Group to "evaluate and report to the DECISION MEMORANDUM Commission on the viability of a Time-of-Use residential metering program by September 12 2002.Order No. 29026 at 22. In compliance with this Order, Idaho Power submitted its Report on Residential Time-of-Use Pricing" on September 12 2002. IDAHO POWER'S REPORT ON TIME-OF-USE PRICING To assist in evaluating the feasibility of residential time-of-use metering, Idaho Power engaged the services of Christensen Associates. The Company describes Christensen Associates as "an economic consulting firm that has been providing consulting services to the energy industry for more than 25 years and is well known in the industry for its work with time-of-use and real-time pricing and market-based interruptible load programs." Report at A. Analysis 1. Conventional TOU Pricin!!:Traditional TOU pncmg has typically been characterized by two or three fixed price levels (e., peak, shoulder and off-peak) for two seasons (e., summer and non-summer). Id. at 5. If applied on a mandatory basis to residential customers, conventional TOU pricing would produce "very modest potential benefits.Id. at 23. The Report attributes this to the relatively small differential between average peak and off-peak wholesale costs (and resulting retail TOU prices), as well as the general lack of correspondence between average peak costs and the day-to-day variations in those costs. Although making TOU pricing voluntary produces "somewhat higher consumer benefits " this would result in "net revenue losses to Idaho Power due to customers self-selecting the TOU rate whenever it offers immediate bill (and revenue) reductions.Id. 2. Critical Peak TOU Pricin!!:This type of pricing allows the peak-period price to be increased to a higher than normal "critical" level in response to high-cost conditions in the wholesale market. Id. at 9. According to the Report , " Critical peak TOU pricing has the potential to produce substantial benefits.Id. at 14. Not only would it produce much larger demand reductions during the most important high-cost hours than does conventional TOU critical peak TOU pricing would allow higher net customer benefits due to the greater opportunity for benefits from load reductions during critical price periods. Id. at 23. The Report indicated that if made mandatory, critical peak TOU pricing could result in an annual customer benefit of more than $1 million. Id. More importantly, Idaho Power has the potential to avoid $12 million per year in carrying charges for capital investments in peaking facilities. Id. at 22. If offered on a voluntary basis, the Report stated that "careful rate design DECISION MEMORANDUM would be required to limit the extent of revenue losses from customer self-selection.Id. Under the assumptions used in Christensen Associates' analysis , a market share of 25% would produce load reductions of approximately 40 MW during critical price conditions. Id. at 23-24. A key factor limiting these potential benefits is the nature of the costs that would be avoided by customers' load reductions. Under the Report's base cost scenario, cost reductions fall short of revenue reductions - yielding a large net revenue reduction. Id. at 23. However cost reductions under the high-cost scenario exceed the revenue reductions, producing net gains to the utility. Id. B. Metering Capabilities According to the Report, the cost to Idaho Power of installing advanced interval metering equipment and modifying its billing systems to account for TOU pricing must also be considered. Id. at 32. The analysis performed by Christensen Associates did not include any cost component for the metering equipment necessary to record usage by time period. A standard time-of-use meter records usage during the time-of-use periods and its data retrieved monthly during the Company s standard meter-reading process. The alternative, an automated meter reading (AMR) system, is read remotely via the power lime or radio frequency and can be collected at will, allowing customers to receive more timely information. The average cost to install a standard time-of-use meter for a residential customer would be abut $145 per customer, or approximately $47 million for all residential customers system-wide. Id. The incremental cost of the TOU meter compared to the standard meter now installed for residential customers would result in an increased charge to customers of about $1 a month. !d. The latest cost estimate to install an AMR system across Idaho Power s service territory is approximately $72 million. Id. e. PCA Implications The Report advocates that any power supply related benefits from time-of-use pricing should flow through the PCA in a manner that is fair and equitable to customers and the Company. Assuming that a time-of-use scenario that successfully addresses the potential revenue attrition problems could be constructed, a time-of-use scenario "cannot be beneficial to Idaho Power without a modification to the manner in which reductions in power supply costs which result from customers ' load shifting are treated in the Power Cost Adjustment (PCA) mechanism.Id. at 32-33. Under the current PCA methodology, 90% of the reductions in power DECISION MEMORANDUM supply costs that accrue as a result of customers shifting load from the on peak to the off-peak period are passed through to customers as a benefit. Thus, Idaho Power is able to retain only 10% of the benefit but absorbs 100% of the reduction in revenue. The Report states that PCA treatment of benefits resulting from reduced power supply expenses "must be addressed to remove the negative impact to Idaho Power s earnings in order for time-of-use pricing to have the opportunity to be viable.Id. at 33. D. Energy Efficiency Advisory Group According to the Report, input from the Energy Efficiency Advisory Group indicates support for implementing pricing that requires customers to pay what it costs to receive service. Id. at 34. The Group was more supportive of increasing the charges for the standard tariff service and making both the standard service and time-of-use service optional than it was making time-of-use mandatory. !d. The Report states that the EEAG believed that it would be more sensible to pursue a demand response program than a time-of-use program at this time given the investment in metering equipment that would be necessary to accommodate a wide-scale time-of-use program.Id. The EEAG did not support mandatory time-of-use pricing for new subdivisions and housing developments, nor did the EEAG support cost shifting of additional meter-related costs to non-participants. !d. Conclusions Some of the new types of time-of-use pricing, particularly the critical peak TOU structure, may have potential viable pricing options for residential customers at some point in the future. The cost of installing standard time-of-use meters, which would not allow for the critical peak" design, does not appear to be economic given the potential benefits that might accrue from load shifting given the relatively small loads of residential customers. Until such time as an AMR system is available on Idaho Power s system, and a PCA methodology is devised to remove the native impact on Idaho Power s earnings due to the unequal treatment of the revenues and expenses impacted by load shifting, residential time-of-use pricing is not economically viable. Id. at 35. STAFF RECOMMENDATION Staff would like an opportunity to respond on the Company s report and believes that other interested parties would also. Therefore, Staff recommends that the Commission process DECISION MEMORANDUM this case under Modified Procedure with a period for comment. Recognizing that the Commission could process this case under a variety of case numbers, Staff has no preference as to whether the Commission seeks Time-of-Use Pricing comments in Case No. IPC-01- (Idaho Power s open DSM case), Case No. IPC-02-8 (Idaho Power s pending Integrated Resource Plan), or initiates a new case. COMMISSION DECISION 1. Does the Commission wish to allow interested parties the opportunity to comment on Idaho Power s Time-Of-Use report? If so, does the Commission wish to process this case through: Case No. IPC-01-13 (Idaho Power s open DSM case), Case No. IPC-02-08 (Idaho Power s pending Integrated Resources Plan), or initiation of a new case? 2. Does the Commission wish to take any other additional action based on this report? 1) rvv&i~ jj. ;aD~ N-;;-rdstrom M:IPC TOUreporUn DECISION MEMORANDUM