A universal electricity rate

Should all utility customers pay the same rate for electricity? That’s the opinion of Kshama Sawant, Seattle City Council’s new socialist member. Her proposal got nowhere, however, failing to receive a second from a committee colleague. Sawant believes that residential customers should pay the same rate as, say, Boeing. After letting Sawant’s motion die, the committee proceeded to authorize Seattle City Light to raise all rates by 4.2 percent next year and by 4.9 percent the following year.

The Seattle Times earlier wrote:

The 2014 average residential rate is 9.04 cents per kilowatt hour, while the rate for very large businesses outside downtown is 5.89 cents. The proposed 2015 residential rate is 9.35 cents, an increase the council’s energy committee is expected to approve Wednesday.*

Utilities, in general, conduct a cost-of-service analysis by customer class. Among the costs considered:

  • transmission
  • distribution
  • administrative
  • energy

The combined costs for each class are then divided by the number of electricity units consumed by that class. The result is typically expressed in cents per kilowatt-hour.

Boeing, a large industrial user, receives its power in high voltages; there is no need for the distribution utility to “step down” the voltage, as it must do to provide electricity to lower-voltage residential customers. Moreover, residential customers are broadly dispersed throughout the distribution grid, which results in greater costs and more line losses vis-a-vis large industrial users..

In understanding the differences between classes, it helps to distinguish between “distribution” and “energy,” with ‘distribution’ as a descriptor for all non-energy costs. Council member Sawant appears to have lumped together the two cost categories, without regard to the significant differences between “distribution” and “energy.” The former varies considerably between classes; the latter is the same—a kilowatt-hour is a kilowatt-hour, regardless of who consumes it.

Now suppose that a distribution utility like Seattle City Light or Snohomish County PUD restructured its retail rates by establishing a fixed charge to recover fixed distribution costs for each class and a variable rate to reflect strictly energy costs. Under such a schedule, Boeing would pay the same energy rate as a residential customers. However, the fixed charge would vary according to customer class.

Let’s assume a utility now charges residential customers 10 cents/kWh and that it’s distribution costs are roughly equal to its energy costs. A distribution charge would recover the fixed charges; the energy rate would vary according to consumption.

Let’s assume further that a residential customer consumes an average of 1,000 kWh per month. At 10 cents per kWh, the customer would pay $100. Under the bifurcated, or unbundled schedule, the energy rate would be 5 cents/kWh and the fixed charge would be $50/month. The customer’s bill would be the same in each case—$100.

And that energy charge of 5 cents/kWh would be universally applied to all customer classes, from small to large. It could then be said that everyone pays the same for electricity. The different costs to serve each class of customer would be reflected in different fixed, or distribution, charges.

_________________

*  There is a discrepancy in the Times‘ reporting. The incremental change from 9.04¢ to 9.35¢ is 3.4 percent, not 4.2 percent. Increasing the residential rate by 4.2 percent in 2015 would result in a rate of 9.42¢/kWh.

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