HomeMy WebLinkAboutA004 - report by Gregory Vitale, Energy Economist on electric utility Ames Electric- Running Uphill
It's tough running at the rear of the pack trying to keep up, let alone closing the gap. But, that
is what the Ames municipal electric utility has been doing the last few years as energy
markets changed dramatically; the needed transmission line upgrade from Ankeny remains
well behind schedule and worse, with no end of the delay in sight; the downtown plants
continue to age without a final decision on how to meet Ames' future energy needs; and the
window is closing on an opportunity to purchase capacity from Alliant's proposed
Marshalltown plant, which is likely to be one of the last major coal plants to be built in Iowa
for years; Alliant just filed its advanced rate making principles with the Iowa Utilities Board.
On top of all of this, the cost of providing all electricity, peak and non-peak, is going up
(even before an anticipated carbon tax is imposed). That is why the base rate increase of 8%
has been proposed and why the energy adjustment is proposed to increase by 5%. Yet, the
price customers pay continues to decline the more they consume. This is just the opposite of
the cost of supplying electricity. Ames electric prices are out of synch with the costs to
produce or acquire electricity; and, in the process, demand is stimulated causing us to incur
even higher costs, especially in the summer.
The Iowa Utilities Board, which regulates for-profit electric utilities in the state, recently
addressed Interstate Power's (IPL)electric declining block structure. Though the Iowa
Utilities Board has limited jurisdiction over municipal, their comments are germane.
The energy landscape has changed with recent trends in electricity and natural gas
prices. The Board believes it is more important than ever to promote energy
efficiency as a way to mitigate the effect of general price increases and better utilize
valuable resources. In promoting energy efficiency,utilities need to take new looks at
their rate designs to make sure that their rate designs are consistent and promote
energy efficiency.
In this case, IPL's target rate design for the summer months is not consistent with the
energy efficiency message that has been sent to residential customers. It is
counterintuitive and confusing to customers to have a summer rate design with
declining block rates while messages regarding the importance of energy efficiency
and reducing peak demand are being constantly sent by the utility, Board, and others.
The message a declining block rate sends to residential customers on a summer peak
day is that the more you use, the cheaper each subsequent kWh will be. This is the
wrong message to send to residential customers.
The Board will reject IPL's summer declining block approach and adopt Consumer
Advocate's proposal for a flat summer target rate design. A flat rate is consistent with
the message the Board is sending regarding energy efficiency to residential
customers. On a going-forward basis, the Board believes rate design for all customer
classes should be reevaluated and specifically consider the impact of the rate design
on energy efficiency and the energy efficiency messages being sent to the particular
customer class.
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However, this change represents a significant change in IPL's current summer
residential rate design. Therefore, IPL will be required to phase-in the summer
residential rate design change relatively evenly over all steps of the residential
equalization process and should recalibrate its first step residential rate proposals in
this case accordingly.
The Board will accept the three-step declining block rate structure as proposed by
IPL for the winter months. The analysis presented by IPL shows significant load
factor improvements with increased levels of kWh usage,which means demand costs
decline on an average per-kWh basis as usage increases. The rate structure does not
send a confusing message on energy efficiency in the winter months, when cost
pressures for reducing peak demand are not as great(Iowa Utilities Board In Re:
Interstate Power and Light Company Final Decision and Order(Issued April 28,
2006)Docket No. RPU-05-3 (TF-05-211, EEP-02-38)pp. 14 - 15)
The upshot: Ames is out of synch with(1)price signals that reflect the cost of supplying
electricity and in the process increase demand for electricity; (2)Ames' efforts and
expenditures to encourage energy efficiency; and(3) Ames' Cool Cities Initiative.
There is no reason to delay adjusting rates to better reflect costs. Both short-run and long-run
costs of providing electricity are increasing. That, after all, is why the proposed 8%base rate
and the 5% additional energy adjustment increase are needed. It is not necessary to undertake
a class cost of service study to set rates that better reflect the increasing costs of providing
electricity before the declining blocks are phased out, at least for the summer months and for
the residential and small commercial customers.
The proposal for phasing out the declining blocks, at least for the summer and the residential
and small commercial customers, is modest. The municipal utility, Seattle City Light, for
example, has gone much further than this and has an inclining block structure. With these
clear price signals, it is no wonder that Seattle has been very successful in implementing its
Cool Cities initiatives.
In Iowa, MidAmerican Energy has had a flat summer rate for its low volume customers for
years. At the least, this is what Ames should have begun to phase in at its last rate increase.
Ames needs to be revisiting its declining price structure and the cost of supplying electricity
disparity- a disparity that is growing even wider as indicated by the proposed price increases.
Closer to home, Ames' water rates are currently being proposed to reflect the high cost of
obtaining water in peak months with increasing blocks for the low volume customers and flat
rates for higher volume customers. By restraining demand through appropriate prices, the
water utility will be able to keep its costs lower longer as customers begin to respond to the
prices that better reflect the cost of supplying water.
What is sound and works for water also works in other markets like food, gasoline and
electricity too. Prices track costs. To do otherwise, would be to go bankrupt in more
competitive markets. Prices that track costs send the right price signals to customers,restrains
unnecessary demand and better limit future costs by delaying or minimizing any needed
supply expansions.
Ames is very fortunate to have bright, able and hard working citizens as reflected in Steven
Chapman's recent Ames' Tribune's Letter to the Editor on this subject, volunteer boards,
municipal staff, city council and mayor. Put the power of markets to work, send price signals
now that better reflects the cost of supplying electricity and that will lower the costs of
acquiring a reliable future supply, enhances the city's energy efficiency programs and
messages and better conforms to Ames' Cool City Initiative.
Gregory Vitale, Energy Economist
2510 Pierce Ave, Ames, IA
515-281-4215 (day)
515-663-9251 (eve)