Straight Fixed Variable: Balancing Utility Companies and Customers Need for Energy Efficiency - ABA YLD 101 Practice Series

By Jaime Ott

With Federal and State pressure for energy conservation, regulatory bodies are faced with the dilemma of balancing interests between consumers and public utility companies.  Consumers need an incentive to conserve energy and companies are in the business to make a profit. Utilities need motivation to implement energy conservation programs that would reduce the sale of its commodity.   Regulatory bodies have approved decoupling mechanism as an attempt to resolve the problem.  Decoupling separates (“decouples”) the growth in sales from profitability. 

Decoupling allows a utility to recovery of any deviations in actual revenue from the authorized level of revenue through rate reservations or surcharges.  The goal is to separate a utility’s fixed costs and sales while rewarding the utility for providing the service at the least cost. Decoupling reduces the motivation to promote sales by making the company indifferent to shifts in customer usage, thus giving the utility incentive to promote energy efficiency.

Decoupling is achieved through the Rate Design.  Rate design is a methodology that translates a public utility’s total revenue requirement into rates that can be charged to customers. Rate Design can be unique to customer class, i.e., grouping based upon commodity usage. As an attempt to meet Federal and State energy efficiency policies, regulatory bodies have began to shift their Rate Design methodologies.

A relatively new form of Rate Design is called Straight Fixed Variable (SFV).  Currently, the SFV method of rate design is only used in the natural gas industry.  SFV enables all fixed costs associated with transporting natural gas (including return on equity, taxes and depreciation) to be recovered through reservation charge or surcharge and all variable costs in a volumetric charge.  In essence, SFV decouples the cost of transporting natural gas from the cost of commodity. Regulatory commission’s role is to approve rates in which customers pay a fixed charge for fixed costs and variable costs come through a volumetric rate.

SFV provides utility companies with a disincentive to promote customer usage.  It promotes energy efficiency by giving the customer incentives to reduce natural gas use by lower bills, energy independence, and environmental concerns.  This type of Rate Design gives customers an incentive to conserve gas energy because the variability of customer bill is through gas usage, not fixed costs. The fixed gas costs remain constant throughout the year by being spread out amongst the billing cycles.  Fixed costs doe not change with the weather or the amount of gas consumed.  SFV aligns the interest of the utility company and the customers in promoting energy efficiency.

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About the Author

Ms. Ott is an assistant general counsel with the Missouri Public Service Commission. She is a member of the American Bar Association Young Lawyers Division, the Missouri Bar Association, and the Illinois Bar Association. She has served as the Chair for the American Bar Association Young Lawyers Division, Public Utility, Transportation, and Communication.

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