DRAFT UNITED ILLUMINATING RATE DESIGN DECISION

You asked for a summary of the Department of Public Utility Control's (DPUC) draft decision in docket, which addresses the rate structure of United Illuminating (UI) as required under PA 05-1 June Special Session. The decision is available online at www. state. ct. us/dpuc. DPUC will soon issue a final decision in this proceeding and a draft decision on Connecticut Light & Power rate structure pursuant to this act.

PA 05-1, June Special Session, requires UI and Connecticut Light & Power to implement mandatory time of use (TOU) rates for its large commercial and industrial customers. As a result, these customers will be charged more for electricity consumed during peak periods, and less for consumption that occurs in off-peak periods. The act requires the companies to offer optional TOU rates for other customers, optional interruptible and load response rates for large customers, and optional seasonal rates for all customers. It imposes several other obligations on the companies.

The draft decision implements these provisions. In addition, although the act requires that only large commercial and industrial customers be placed on mandatory TOU rates, the draft decision requires residential customers with higher than average demands to move to such rates over several years.

The draft decision also addresses several issues not covered by the act. These include real time pricing (a more sophisticated version of TOU rates) for large commercial and industrial customers; the “demand ratchet,” which reflects peak demands in the determination of commercial and industrial rates; the timing of peak periods under TOU rates; and demand metering for residential customers.

Section 13 of PA 05-01, June Special Session, requires each electric company to take certain actions regarding the design of electric rates. Specifically, section 13(a) requires implementation of:

1. mandatory three-period TOU rates for customers greater than 350 kilowatts (kw) by January 1, 2007;

2. optional interruptible or load response rates for these large customers;

3. optional seasonal and TOU rates for all customers; and

4. a proposal to establish TOU rates through a procurement plan, revenue neutral adjustments to rates, or both.

Section 13(b) of the act requires the companies to issue, from March 1, 2006 through December 31, 2006, comparative analyses to customers with a maximum demand of at least 350 kWs demonstrating the effect of mandatory three-period TOU rates on the customer at its current levels of consumption.

Section 13(c) of the act required each company to file an application with DPUC by November 1, 2005 to implement mandatory seasonal rates for all customers effective April 1, 2007. Section 13(d) requires each company to issue comparative analyses at current levels of consumption to demonstrate the effect of mandatory seasonal rates, beginning April 1, 2007.

The act also allows DPUC to approve, reject or modify applications submitted in compliance with sections 13(a) and 13(c) of the act. DPUC must conduct a contested case to approve, reject or modify applications these applications. It cannot approve a TOU rate application unless (1) the rates reasonably reflect the cost of service during peak, shoulder,

seasonal and off-peak periods, and (2) the costs associated with the implementation, the impact on customers and benefits to the utility system justify implementation of such rates, and (3) such rates alter patterns of customer consumption of electricity without undue harming the customer.

Finally, section 13(g) of the act requires DPUC to determine the standards for and process under which a customer having a maximum demand of 350 kW or more may obtain an exemption, until July 1, 2010, from the mandatory TOU rates.

Currently, most of UI's customers with demands of 350 kW or more are on rate LPT, which bills customers based on peak, shoulder, and off-peak rates. As a result, these customers are already billed under a three-period TOU rate. The price differentials for the periods are part of the distribution component of the customer's bill and do not affect the generation component of bills. DPUC determined it was appropriate to reduce the TOU differential in the distribution component, and to extend the differential to the other bill components.

The act requires DPUC to determine the standards and process under which a large customer may obtain an exemption, until July 1, 2010, from the mandatory TOU rates. DPUC believes that the mandatory TOU rates will affect fewer than 300 customers that are not presently on rate LPT and that most of these customers will be able to mitigate any potential bill increase resulting from being charged TOU rates. DPUC believes that the number of customers that could potentially apply for an exemption should be manageable. As a result, it is reasonable to allow customers to apply for an exemption on a case-by-case basis. The decision permits waivers if a customer demonstrates that its bill will increase by more than 15% as a result of the TOU requirement. In addition, the customer would have to show that it does not have viable options for shifting load or installing conservation measures to control this rate crease.

UI currently has in place an optional interruptible rate for customers with demands greater than 350 kWs. Therefore, DPUC finds that it is in compliance with the act's requirements in this regard.

UI currently offers optional TOU and mandatory seasonal rates for all customers and thus already complies with Section 13(a) of the act. UI has one rate for the summer (June-September) and one for the rest for the year. UI argued for retaining this two-period rate. However, information it supplied in the proceeding showed that it costs the company substantially more to procure power in the winter months (December through February). According to DPUC, it appears reasonable to establish a winter seasonal period for recovering these higher costs. DPUC already required UI to include monthly pricing in its solicitation for bids for Standard Service, which will be provided to small and medium size customers who do not choose a competitive supplier starting in 2007. If the bids for demonstrate that the higher costs of providing service in the winter months warrant seasonal pricing then, DPUC will consider implementing winter pricing for 2008.

The decision finds that peak demand is placing significant pressure on the cost to provide power in Connecticut, and DPUC believes it is appropriate to use rate design to address this issue. As a result, DPUC will require that UI begin moving its residential customers with the greatest demand to TOU rates over a seven-year period beginning January 1, 2007. The proposal would eventually affect residential customers using more than 1, 000 kilowatt-hours (kWh) per month; UI's average residential consumption for customers who are not currently on TOU rates is under 700 kWh.

1. during 2006 UI will begin an educational campaign regarding residential TOU, promoting the benefits of this rate design;

2. from August 1, 2006 through December 31, 2006 any residential customer who uses more than 4,000 kWhs in a single month will be notified that he will be placed on a TOU rate starting January 1, 2007, or earlier if the consumption threshold is reached before December 2006;

3. during 2007, any residential customer who uses more than 3,000 kWhs in a single month will be notified that he will be placed on a TOU rate within six months of the meter reading in which the threshold was reached;

4. this threshold will be reduced to 2,000 kWhs per month in 2008, 1,500 kWhs in 2009, and 1,000 kWhs in 2010;

5. starting January 1, 2008, all new residential customers (i. e. , new construction and meter change-outs) whose consumption is estimated to exceed 1,000 kWhs in any one month billing period will be required to take service under the TOU rate; and

6. starting in January 2011 UI will evaluate this program and determine whether to extend mandatory TOU billing to customers that consume less than 1,000 kWhs per month

In all cases, once a customer is placed on the TOU rate, he must remain on that rate. The decision does not address exemptions from the mandatory residential TOU rate.

In its draft decision, DPUC addresses a wide range of rate design issues that were not covered by PA 05-1. These include, among other things, real time pricing, the “demand ratchet,” the definition of peak periods, and demand metering for residential customers.

During the proceedings, the parties and DPUC discussed real-time pricing, a more sophisticated form of TOU rates in which rates more closely reflect wholesale market rates on a day-to-day basis. The decision orders UI to work with the entity that operates the regional wholesale market to submit a proposal as to how such rates could be implemented on a voluntary basis for large customers. The proposal would need to address issues such as how the company would procure power to serve this load and its implementation strategy. DPUC anticipates that such a rate would not be available until 2008 to give UI the time needed to accommodate this change.

Currently, large industrial and commercial customers on rate LPT have a demand ratchet. As a result, the distribution component of their bills is based on the greatest demand registered during the on-peak hours of the month that is being billed, but not less than 80% of their on-peak demand in the preceding summer (demand for the entire system peaks in the summer). The rationale for this measure is that the company needs to build and maintain a distribution system that can handle peak demand, and that the ratchet allocates the costs of doing so to the customers who place the demands on the system. Demand ratchets are intended to provide an incentive for customers to control their peak demand.

In contrast, small industrial and commercial customers on other rates pay a non-ratcheted charge. For example, a customer that has a demand of 300 kW in June, July and August and 100 kW throughout the remaining months of the year pays a demand charge that is based on each month's actual demand, even though UI must install distribution facilities to meet the customer's peak demand, as well as the peak demands of all other customers.

DPUC believes that demand ratchets are equitable and fair. However, UI cautioned that most small commercial and industrial customers will not understand the economic theory behind these charges and may object to them as being unfair. To address these concerns, UI proposed to phase-in the ratchet for these customers over time. UI suggested that the ratchet begin at 60% of a customer's peak summer demand, starting January 2007, and increase by 10% annually until the desired percentage is achieved. UI also believes that an educational effort would be critical to the success of this program. Finally, company revenue would increase as the ratcheted percentage increases. UI suggested that to offset the additional revenue derived from the ratchet, DPUC should decrease the distribution charge and the competitive transition assessment over time.

The draft decision agrees with these arguments, subject to several modifications. It orders that the ratchet start in June 2007 at 50% of the customer's peak summer demand and be phased in over four years. And to minimize the effect of this decision on small business, it proposes to limit the ratchet to customers having a peak demand of 100 Kw or more.

Under the current residential TOU rate, off-peak hours are after 8 p. m. and before 9 a. m. on weekdays and all day on weekends. The residential on-peak hours are 9 a. m. to 8 p. m. , weekdays. The on-peak hours for commercial and industrial customers are 10 a. m. to 8 p. m. , weekdays, and all weekend hours.

DPUC has found that peak demands actually occur during the early afternoon through 8 p. m. Based on this information, DPUC believes that it is appropriate to adjust the peak hours among UI's TOU rates to more closely align the pricing periods to the time of Connecticut's system peak. DPUC will direct UI to establish the hours beginning 12 p. m. to 8 p. m. , weekdays as the peak hours for all rates. For rate LPT, the shoulder periods will become 7 a. m. to 12 p. m. and 8 p. m. to 11 p. m.

In addition to aligning peak times among all tariffs, DPUC believes that providing residential customers with an eight-hour on-peak window that begins at noon instead of 9 a. m. will produce more opportunities to shift consumption. For example, residential customers will be able to operate washers, dryers, and dehumidifiers until noon and still pay off-peak charges. These customers may also take advantage of the extended morning off-peak hours to cool their homes so that air conditioning consumption can be curtailed between noon and 8 p. m.

Residential customers, unlike most commercial and industrial customers, do not have demand meters and do not pay a demand charge. Instead, the entire cost of serving these customers is recovered through rates and the customer service charge. The decision has an extended discussion of the merits of requiring large residential customers to install demand meters and pay a demand charge. However, this matter was not fully explored in the proceeding. As a result, DPUC could not determine the effect that residential demand metering would have on UI's costs and revenues. The draft decision directs UI to evaluate the potential to implement demand metering for residential customers with significant demands. It requires UI to submit a report on this matter in 2007 and to recommend a plan to implement this policy. DPUC anticipates beginning residential demand metering in 2008.


August 25, 2006		2006-R-0503
DRAFT UNITED ILLUMINATING RATE DESIGN DECISION

By: Kevin E. McCarthy, Principal Analyst