Massachusetts DPU Proposes Time Varying Rates for Basic Service

Many in the clean energy community in Massachusetts are focused on the state legislature: the end of the legislative session is approaching and significant clean energy legislation (relating to clean energy procurement and net metering) is still in process. But the Department of Public Utilities (the DPU) has been busy, and two Orders issued earlier this month could dramatically change the way end consumers in Massachusetts use and pay for electricity – without any legislative changes.

In D.P.U. 14-04-B, the DPU proposed that “Basic Service” – the default electricity service provided by electric distribution companies and used by most residential customers – be changed from its current flat rate structure to a time varying rate. In D.P.U. 12-76-B (discussed here), the DPU modified some parts of the “Grid Modernization” straw proposal it issued at the end of last year. Although the Grid Modernization Order has a wider scope, the Order on time varying rates is a major policy change and a significant step towards a more efficient grid that enables customers to take greater control of their electricity usage and to benefit financially from doing so.

Currently, ratepayers in Massachusetts are defaulted into “Basic Service” from their local distribution company and pay rates that are essentially flat, changing, at most, on a monthly basis. While larger customers frequently opt out of this service for a competitive service that may be offered on different terms, most residential customers stick with Basic Service and flat rates. In its Order, the DPU lays out a straw proposal where the default Basic Service would entail a lower price for “off-peak” hours, a higher price for “on-peak” hours, and an even higher price, “critical peak pricing,” for periods when wholesale prices are extremely high. The DPU also proposes that customers be allowed to opt into a flat rate service with a “peak time rebate” – essentially a flat rate where ratepayers can get a rebate if they reduce their electricity usage during peak periods. It is important to keep in mind that the DPU’s specific proposals are for Basic Service. There is a strong chance that, if the DPU’s proposed time varying rates are adopted, the market will respond with an array of competitive alternatives for creditworthy customers.

There are good policy reasons for making such a change, the foremost being that time varying rates are likely to encourage more efficient behavior and create system-wide savings. Flat rates do not reflect the actual cost of producing electricity at the time it is consumed, which swings widely, but in largely predictable ways, over the course of the day and the year. As a result, flat rates provide no incentive for consumers to use electricity in an efficient manner (i.e. to consider the actual cost when making consumption decisions). Aligning rates more closely with wholesale prices will encourage customers to shift consumption away from periods of high prices and towards periods of low prices. And because high demand during relatively few hours of the year drives a significant part of the cost of producing electricity – the DPU noted that peak wholesale prices in 2013 were at times more than 20 times the average wholesale price for the year – shifting demand away from peak periods is likely to reduce the overall costs of producing electricity, benefiting all customers.

There are other benefits to time varying rates. They minimize cross-subsidization between ratepayers (under flat rates, ratepayers with relatively high consumption during peak periods are subsidized by ratepayers who consume during off-peak periods). They have potential environmental benefits as shifting demand away from peak periods could reduce reliance on less-efficient generation sources and reduce the need for new infrastructure investments. And they open up markets for technologies that empower consumers to control their electricity usage, such as electric vehicles, storage, smart appliances, smart thermostats, and other energy efficiency and energy management products. By attaching a financial reward to products capable of assisting consumers in shifting their electricity consumption, time varying rates should encourage innovation in this area.

The switch to time varying rates will not happen immediately. Widespread implementation of time varying rates will likely require a broad deployment of advanced meters, which the DPU required utilities to pursue in its D.P.U. 12-76-B Order, but which is likely still years away. Regardless, this Order is a significant step towards changing the way we operate our electric grid so as to better use new technologies to reduce costs and optimize benefits.

The DPU has invited comments, which are due by July 3rd.

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