Is There a "War of Attrition" on Electricity Fixed Charges?

Findings from a 2017 analysis of fixed charge proposals by investor-owned utilities

Every year since 2015, at about this time, we’ve taken a look back at the previous year of utility commission decisions on proposals to raise monthly customer charges for residential electric bills. NRDC, Vote Solar and National Consumer Law Center have now compiled the data for 2017, and there are a few important findings.

But before we start, just a quick reminder that the fixed charge (sometimes also called the “customer charge”), is the fee electricity customers must pay each month — even if you don’t use a single kWh of electricity. That fee sits on your bill alongside volumetric (per/kWh) charges that go up and down as you consume energy. Utilities are proposing increases in the fixed fees as a way to shore up their income at a time when customers are using less power thanks to energy efficiency (customers doing more with less energy), demand response (conserving in response to specific power grid or economic signals), and rooftop solar systems. These fees hit customers who use the least energy the hardest — primarily lower-income households and seniors on fixed incomes. (Click here for more on the negative impacts of fixed charges on clean energy)

That’s the background. On now to the findings…

Finding #1: Utility fixed fee hike proposals keep coming

Our analysis for 2017 uncovered 43 investor-owned utility customer charge increase proposals that state utility commissions decided on last year. This is up from 33 in 2016 and 34 in 2015.

The good news is that the increases were rarely granted in their entirety — over the last three years, commissions fully approved only between 9 percent to 15 percent of these proposals to increase fixed charges.

The bad news is that requests to increase these fees appear to be on the rise.

So why are we seeing utilities come back for another bite at the apple, again and again? Is it possible that over time, facing relentless requests (in some jurisdictions, coming one year after another), utility commissions are getting worn down in a “war of attrition” and becoming more prone to allow at least some increase over existing levels?

Unfortunately, the data over the last three years do appear to bear this narrative out. In 2015, commissions fully rejected 50 percent of all utility mandatory fixed fee hike proposals, meaning they denied any increase at all over the existing customer fixed charge. The next year, in 2016, commissions fully rejected 39 percent of proposals.

In 2017, that full rejection rate continued to decline, leading us to the second headline from this year’s analysis…

Finding #2: Commissions were less likely to fully reject fixed-fee hike proposals last year than they were in 2015 or 2016

In 2017, the rate of full rejections of utility fixed charge proposals dropped to 25 percent, as the graph below shows. In other words, commissioners were 50 percent less likely last year than in 2015 to fully reject fixed charge hike proposals and 50 percent more likely to say yes to some level of increase.

Source: February 2018, NRDC, NCLC and Vote Solar

Here’s an important question given this unfortunate revelation: while commissioners are more frequently approving some level of increase in the fixed charge, are they still largely keeping the lid on the final dollar amount of the charge they’re approving? That was certainly the case in 2015 and 2016, with the average approved monthly charge hovering in the $10 range.

But not so fast — there’s another takeaway from the 2017 study…

Finding #3: The average mandatory monthly fixed fee that commissions approved ticked upward in 2017

The average monthly fixed customer charge approved by public utilities commissions rose from $10.19 in 2016 to $11.19 last year. This could be related to the fact that the average fixed charge proposed by utilities in 2017 ($15.30) was over two dollars higher than the year before, as shown here.

Source: February 2018, NRDC, NCLC and Vote Solar

Looking at these dynamics of the existing, proposed, and approved monthly fixed charges in 2016 and 2017, it would be understandable to conclude that the process of determining the fixed charge is little more than a simple negotiation. There’s an existing charge, utilities make a proposal for a higher one, and the final levels end up settling somewhere in between.

These days it can feel like just about everything in life is a negotiation. It’s just the way the world works, right?

In fact, this is not how determining the fixed charge for electricity customers should work. The fact that many power companies would like to shift to receiving more of their revenue through a guaranteed fixed fee shouldn’t make an increase (even a small amount) a foregone conclusion. To the contrary, determining the proper fixed charge should be a data-driven process supported by economic theory and long-established principles of rate design, not a negotiation. There’s a right answer, as long as the appropriate information is considered and accurate measurements of customer-related costs are used. And there are times when the right answer should actually lead to customer charge reductions, rather than increases.

Let’s look at a case from our 2017 analysis to show what we mean…

Correctly calculating the fixed charge

A recent example of a public utilities commission getting it right on fixed charges is last year’s Xcel Energy rate case in Minnesota, in which the utility proposed to increase its existing $8 per month customer charge.

Fresh Energy, NRDC, the Minnesota Office of the Attorney General and others maintained that the fixed charge should only include the short-run costs that are truly “fixed” — those costs that don’t vary with someone’s use of electricity. It is generally accepted amongst rate design experts, including the team at the Regulatory Assistance Project, that this means no more than the costs to provide the electricity meter, read it, and send and process the bill and payment. These costs typically add up to $5 to $10 per month, and the rest of the utility’s revenue needs would then ideally be recovered through the usage (or “volumetric”) rate that charges customers per kilowatt-hour of electricity they use.

To push monthly fixed charges higher, utilities need a justification. Many, including Xcel Energy in Minnesota last year, assert that a portion of their electricity distribution system — poles, wires and transformers — are another “fixed cost” to recover via the monthly customer charge.

But they aren’t.

As the Regulatory Assistance Project has pointed out, the costs of power plants, transmission lines, and distribution facilities end up varying with energy use when viewed over the long run. In other words, more energy usage over time — and not the mere fact of a household being connected to the grid — is what drives needs for investments in generation and delivery system infrastructure.

The Minnesota Commission understood these dynamics and rejected Xcel’s proposed fixed fee hike last year.

Unfortunately, some utilities have made this arena unnecessarily complicated by advancing a range of different economic theories aimed at supporting higher mandatory fees for utility customers. The theory used by Xcel in Minnesota is but one. However, a simple and very straightforward approach continues to be best: to leave the customer charge low by basing it on the actual and projected costs of meters, meter reading, and billing in a given utility territory. All costs that vary over the long-term — including distribution system-related costs — are then recovered volumetrically.

This is the basic recipe that gets the customer charge right. Commissions that stick to it will do well by both utilities and all utility customers, no negotiation needed. And, hopefully, ending the war of attrition on fixed charges that seemed to be on display in 2017.

About the Authors

Samantha Williams

Director, Midwest Region, Climate & Clean Energy Program

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