Electric utilities zap conserving customers by hiking fixed fees

This story was originally published April 4, 2015

Electric utilities across the nation are responding to slumping sales by boosting fixed customer charges, generating a guaranteed cash flow regardless of the volume of energy a customer consumes.

Pennsylvania's two largest electric companies, Peco Energy Co. and PPL Electric, have filed in recent days rate-increase requests that seek substantial boosts in basic monthly charges.

This shift toward fixed fees has aroused opposition in other states from advocates for low-income customers and seniors, as well as from renewable-energy and environmental groups.

Critics say reliance on fixed fees places a heavier burden on small customers and penalizes the growing number who install solar panels or use other methods to reduce their dependence on the grid.

"It's poor public policy," said Bill Malcolm, a senior legislative representative for AARP. "Raising the fixed monthly charge lowers the variable per-kilowatt charge, which creates a disincentive for conservation and energy-efficiency and gives consumers less control of their bill."

Peco, in a filing submitted March 27, proposed increasing its monthly customer charge 68 percent, from $7.13 a month to $12. The boost would account for most of the 6 percent bill increase a typical residential customer would pay.

PPL's monthly fee, already the highest in the state at $14.13, would go up to $20 a month, a 42 percent increase.

Both utilities also are seeking rate changes for commercial and industrial customers. Peco's basic fee increase would generate $84.5 million in annual revenue from residential customers alone, nearly half the total $190 million increase the utility seeks.

The proposed changes were disclosed in the thousands of pages of testimony and financial data the utilities submitted at the end of March to the Pennsylvania Public Utility Commission.

"The customer-charge increases are something we're looking at," said Pennsylvania Consumer Advocate Tanya McCloskey, who has opposed the fee increases in the past.

The utilities argue that they need stable sources of revenue to maintain aging electrical-distribution systems, and say the higher customer charges are a more fair way of allocating system costs to customers.

Despite Americans' appetite for new electronic gadgets, households generally have become more energy-efficient in recent years as consumers replace old-generation appliances with more miserly modern equipment.

The utilities blame stagnating sales growth on the recession, government-mandated energy-conservation measures, and the growth of "distributed generation" - customers producing their own power.

"These flat or declining consumption data have serious implications for PPL Electric's annual revenue and are a substantial factor in the company's request for rate relief in this proceeding," PPL said in its filing Tuesday.

PPL, which serves 1.4 million customers in 29 counties, including Bucks, Chester, and Montgomery, increased its customer charge two years ago from $8.75 a month to $14.09. It said the continued shift to a fixed fee is "more reflective of how costs are incurred by an electric distribution company."

Peco, which serves 1.6 million customers in Philadelphia and surrounding counties, raised its monthly customer fee to $7.25 in 2011, its last rate increase.

The utility said the proposal to boost its current fee, second lowest in the state, to $12 would make Peco's customer charge consistent with others. Most utilities in the state charge about $10 a month. West Penn Power has the lowest basic monthly fee, $5.81.

For regulators, designing rates is a complex balancing act of competing interests between a utility and different customer classes - residential, commercial, and industrial.

Typically, costs that would be incurred no matter how little energy a customer consumed would be included in the fixed fee. Costs for maintaining the distribution system were mostly recovered from fees charged on the number of kilowatt-hours consumed.

"In general, rate design should focus on incentivizing customers to use less energy and power, which has well-known benefits such as lower utility bills, job creation, and increased economic competitiveness," said Maggie Molina, a utility expert with the American Council for an Energy-Efficient Economy.

Some experts in utility economics say that modern "Smart Rates" could appropriately charge fixed prices for some services.

"Smart Rates recognize that utilities provide a variety of services to customers and that the costs of these services are not always caused by the amount of energy the customer consumes," H. Edwin Overcast, an energy economist for the consulting firm Black & Veatch wrote in a white paper last year.

An increasing number of utilities appear to be turning to fixed rates.

In perhaps the most dramatic case, Madison Gas & Electric Co. in Wisconsin last year proposed setting its basic fee for electric customers at $69 a month - before the customer used one watt of power. The state Public Service Commission approved a $19 monthly fee, an 82 percent increase.

In Connecticut, regulators last year allowed an electric utility to increase its monthly charge to $19.25, arousing so much fury that lawmakers now are considering legislation to cap fixed monthly fees at $10. California legislators already have enacted caps on the fees.

Some regulators, meanwhile, are rejecting fee increases out of hand.

Last month, the Minnesota Public Utilities Commission turned down a request by Xcel Energy to increase its $8-a-month basic charge by $1.25. Washington state regulators in March nixed a plan by Pacific Power & Light Co. to increase its basic charge from $7.75 to $14.

215-854-2947 @Maykuth