The Utility Death Spiral is Rubbish

These days, its common to hear renewable energy scenesters talk about the utility death spiral. At Energy Tariff Experts, we are confident that there is no death spiral. There may be some stress, but certainly no death spiral. In this post, we'll explain why this is the case.

It all begins with rate design. If you are a huge energy geek, you must read "Principles of Public Utility Rates" by James Bonbright, which is basically the foundational work on rate design. In essence, rates should be aligned with the costs of service and the various cost drivers in the system should be identified with rates constructed to charge for the costs that users impose on the system. Unfortunately, many utilities have rates that are a muddled mess, (at least from a cost accounting perspective), and do not reflect the true costs of providing service. Many rate structures exhibit serious cross subsidization and free ridership run amok. Rates based on kWh exemplify this as the marginal cost of distribution is driven by demand, not usage. 

Utilities must size the distribution infrastructure to be able to meet peak demands, even if those peaks occur once a year. The larger the sizing, the more expensive it is. Demand charges capture these costs, but kWh charges do not.

Utility rate design is an exercise in cost accounting and proper rates will reflect the cost to provide service, regardless of whether the system is summer peaking, winter peaking, or has lots of distributed generation or none. The graphic below provides a simple way to think about how utility costs should be captured in rates.

Utility Cost Drivers.png

As the graphic shows, utility costs can be grouped into those that are nearly fixed, vary with peak demand, and those that vary with usage. Utility cost items should be associated with utility charge types (monthly customer charges, demand charges, and usage charges) based on the degree to which customer behavior influences the utility cost to serve. For instance, the costs for the meter should be recovered in the customer charge since the cost to the utility to own and operate the meter do not change based on usage. The costs for the local distribution circuit should be recovered through demand charges, since it must be sized to accommodate the maximum rate of customer consumption.

When people talk about the utility death spiral, they incorrectly assume that the utility rate structure is static and based upon kWh. This is a misconception. Historically, utilities have billed in kWh because electro-mechanical watt hour meters were inexpensive and demand capable meters or interval meters (MV-90 bro) where too expensive to use for small commercial or residential customers. As a result, the legacy rate designs we see today are holdovers from times when utilities could only economically measure kWh for small customers.

As SmartMeters slowly become ubiquitous, the ability to measure and bill for consumption by time of use, seasons, or by peak demand becomes possible for small customers. Although utility rate designs only get a refresh once every two decades (or longer), distributed generation is forcing many utilities to take a serious look at their rate designs. While some have proposed ham-handed fees such as standby charges (which are totally lame) others are looking at increasing the ratio of fixed monthly charges and demand relative to usage charges. While people might push back at this, many other utilities have gone in this direction. Your cell phone bill is no longer based on the number of minutes you use, your cable bill is a fixed monthly charge, your telephone landline (if you still have one) is mostly fixed. Expect electricity rates to move in the direction of fixed charges as DG becomes more prevalent. 

Those foretelling the death of the electric utility also forget that utility regulators need to ensure the financial health of the regulated electric utilities since most states have a regulatory framework that ensures reasonable rates of return provided service quality metrics are met. As a result, regulators will grant utilities their revenue requirement even if the rate base is shrinking. The loss of one massive customer is much more damaging to a utility that 1,000 cuts from distributed generation (see BGE's Sparrow's Point Rider for proof)

While utilities can move to change their rate designs, albeit with painfully slow regulatory lag, some people say that we'll see a mass defection of customers similar to what has happened to the landline phone companies. This is complete nonsense because while a few large sophisticated consumers may install micro-grids, 99% of customers will not. Furthermore, for those of you talking about mass defection from the grid, go off grid.......I dare you..........because I know you won't leave since you like electricity to be there reliably when you need it.