The speed and scale of large load requests across the country has led many state public utility commissions to use existing cost allocation methods and ratemaking to set rates for large customers. As we learn more about what is needed in terms of infrastructure to serve these loads and as more of those loads come online, the potential for cost shifting from large customers to other consumers becomes more clear. Today, Energy Futures Group in partnership with Earthjustice is releasing a report detailing areas of cost shifting concern at the state level across multiple cost categories and some potential solutions to these problems.
Costs at Risk of Shifting to Consumers
In rate cases, costs at risk of being shifted to consumers include:
- New generator capital and O&M costs
- Energy market costs, especially congestion costs.
- Embedded system costs.
- Interconnection, network upgrade, and transmission costs. An incomplete view of future transmission needs and system demands driven by both new generation and new large electricity users results in inefficiencies and redundancies, leading to costlier transmission build-out, possible cost shifting to ratepayers, and higher reliability risk.
- Costs incurred to manage post in-service reliability concerns and/or during outages to connect or to serve a large load customer.
Oftentimes, utilities fail to explicitly consider these costs when proposing rates and tariffs because analyses of new large customers are limited to either their incremental costs and benefits or specific cost categories. These limited analyses are then used to justify continued use of existing allocators and/or customer class designations.
How to Address Cost Shifts
Solutions include:
- Direct Assignment. Large customers often demand enough power that their sole presence necessitates new generation. In such cases, direct assignment of those costs and the associated O&M to that customer(s) is the most straightforward approach. Similarly, because other types of new loads so infrequently interconnect on a single line or at the scale of large loads, transmission infrastructure for large loads can oftentimes be directly assigned.
- Wholesale Cost Allocation to Identify Large Load Costs. Transmission charges allocated to a load serving entity ("LSE") by an RTO/ISO may not make explicit which transmission charges are related to large loads. Understanding the methodology under which transmission charges are socialized within an RTO is then critical to understanding how to direct those costs to specific customers rather than socializing them based on class demand-related allocators.
- Pricing Nodes for Large Customers. Energy market costs include the cost to produce energy, the cost of losses associated with transmitting that energy across power lines, and congestion costs arising from suboptimal dispatch of generators due to transmission and other constraints. These are typically allocated or true-up based on consumption by customer class. Large loads can cause congestion pricing changes in particular and requesting that the RTO/ISO assign a pricing node to that customer allows direct allocation of energy pricing charges to the customer and may help alleviate shifting of congestion costs to other consumers.
- Congestion Hedging Programs. Owners of transmission lines are assigned rights to those lines that may be converted in financial instruments known as Financial Transmission Rights (FTRs). Those FTRs can be traded to others and can serve as a hedge on energy pricing and especially congestion pricing across those lines. LSEs adding large customers should be directed to explore implementing a congestion hedging program based on FTRs.
- Fully Embedded Cost of Service Studies. Full cost of service studies should be updated to align with evolving customer demand to ensure that large customer rates align with their embedded cost of service. Delays in rate cases to set allocation or approaches that focus solely on incremental costs may result in substantial cost shifting to consumers.
- Demand-Related Charges Based on Contractual Demand. Certain costs on any large customer's bill are likely to be pegged to their demand and oftentimes, their actual demand. Because these customers are large enough to cause the need for significant incremental investment, demand related charges that aren't pegged to contractual demand will also shift costs to other consumers. Large customers may consume less than their contracted demand because they are ramping up, because their contracted demand is designed around the hottest day of the year, and/or because they want to reserve capacity for future expansions.
- Adjusted Line Extension Policies. Some LSEs may have legacy line extension policies in their tariff allowing certain interconnection costs to be socialized to other consumers if a threshold is met, e.g., % increase in revenue. It should be made explicit that these policies do not apply to new large customers since their interconnection costs are likely to be significant and their interconnection infrastructure is unlikely to be utilized by other customers.
- Frequent Utilization of CIACs and Limited Utilization of CWIP. When properly structured, Contribution in Aid of Construction (CIAC) agreements ensure that costs needed to serve large customers are never rate based and are recovered from the customer causing those costs. These agreements are needed and appropriate and should be as widely used as possible for dedicated infrastructure. Conversely, Construction Work in Progress (CWIP) which puts capitalized costs into rates immediately should not be used to build new infrastructure for large customers. Those costs are likely to be incurred before the customer is online or before their load is fully ramped and the effect of using CWIP is therefore cost shifting to consumers.
Taking Action to Prevent Cost Shifting
Many jurisdictions are addressing cost allocation in disparate cases rather than in a full rate case, for example, in special contract cases, rider cases, and others. Addressing these cost considerations together and performing fully embedded cost of service studies will help mitigate these cost shift concerns.
Click here to download the report.
For more information, please contact: Nina Peluso, Senior Consultant, [email protected], 802.230.5284; or Drew Siebenaler, Managing Consultant - Transmission, [email protected], 651.202.5201