Bloomberg News

Utilities Mimic Cable With Monthly Fee to Preserve Grid: Energy

December 23, 2013

Electricity Pylons

A flat grid charge for electricity on top of billing for the quantity of kilowatt-hours used is poised to become the new standard across the U.S. Photographer: Steve Hockstein/Bloomberg

U.S. utilities are starting to charge customers just for hooking up to power lines as they seek to collect $2 trillion over the next two decades to maintain their electricity grids in a shrinking market.

A new flat fee to connect homes and businesses to power-delivery networks has appeared in several U.S. markets where utilities see a threat from customers who are buying less energy and making their own with private solar panels.

Duke Energy Corp. (DUK:US) and American Electric Power Co. are among utility giants forced to reexamine their century-old monopoly business playbook. They’re studying industries such as cable-TV to break away from the traditional pay-as-you go model that last year underpinned charges to Americans of more than $360 billion, an amount they say will fall short of costs in coming years.

“Utility executives go to bed at night dreaming of fixed charges,” said Matthew Freedman, an attorney with the Utility Reform Network, a San Francisco-based consumer advocacy group. “They like the revenue certainty and they like the idea of a large portion of customer usage being collected through a single monthly charge.”

A flat grid charge for electricity on top of billing for the quantity of kilowatt-hours used is poised to become the new standard across the U.S. The change takes power companies in the direction of water, phone and cable television providers that typically charge for their basic service.

Pushing Back

Consumer groups like Freedman’s are pushing back against the fees, saying they discriminate against the poor and households that use less energy. Flat fees discourage conservation and amount to a tax on solar users, according to advocates for clean energy. Most electricity in the U.S. is generated from burning fossil fuels like coal and natural gas.

“It’s a controversial rate design,” said Ken Costello, natural gas policy expert at the National Regulatory Research Institute in Silver Spring, Maryland. Other nations including Australia are considering the practice for solar users. Spain is trying to make them pay more for benefiting from the grid.

Many utilities already charge customers monthly administrative service fees. Those that adopt a grid charge would reduce rates for hourly energy use, the National Regulatory Research Institute has said.

Customers in Sacramento, California, and Minneapolis already pay fixed fees for being connected to the power grid. Local utilities there are proposing increases, and executives at power companies such as Duke, Exelon Corp. and American Electric (AEP:US) predict customers in the coming years will be paying substantial monthly fees for access to lines.

Shrinking Market

Gains in energy efficiency have brought tepid growth or declines in U.S. power consumption, which peaked in 2008 and fell about 1.5 percent last year.

As solar technology improves, more households and businesses are investing in private units to generate their own electricity. They typically connect to a grid only as backup or to sell extra power back to a utility through a process known as net metering.

A connection charge possibly could be a “fair” way for solar users -- who can now offset their bills through net metering -- to pay for their use of the grid, Exelon Chief Executive Officer Christopher Crane said in an interview last month.

In addition, watt-based billing won’t be enough to cover the estimated $2 trillion it will cost to operate, maintain and expand electricity networks over the next two decades, American Electric CEO Nick Akins said in an interview last month.

Grid Value

“If customers are deciding what resources they want to supply their own needs, then that really does argue for some type of facilities charge that compensates and ensures the value of the grid is dealt with,” Akins said.

Sempra Energy (SRE:US)’s San Diego Gas & Electric utility told California regulators in 2012 a flat charge of as much as $65 a month would cover its fixed costs of delivering power.

California changed the law earlier this year to allow investor-owned utilities like San Diego Gas & Electric to request regulatory approval for a fixed monthly charge of as much as $10 a month.

Sacramento’s municipally owned utility wasn’t subject to the previous restriction and last year started charging customers $12 a month to connect. It plans to raise the fee to $20 a month by 2017.

“Over the next five years, the technology revolution is going to finally catch up with the utility industry,” said Sacramento Municipal Utility District Chief Financial Officer Jim Tracy.

Starting Small

“We have to start now to be in a position not just for solar, and not just for energy efficiency, but load management and other services that might come along, and we need to be in a spot where we have rates that are more neutral in terms of collecting what our costs are,” Tracy said.

So far, most regulated utilities are moving cautiously.

Northern States Power, a unit of Minneapolis-based Xcel Energy Inc. (XEL:US), began collecting a basic service charge this year of $8 a month from households connected to overhead lines and has proposed increasing that to $9.25, according to filings.

With fixed rates, actual customer usage accounts for less of the bill. The practice discourages conservation because it limits how much a consumer can save on their monthly bill by using less energy, said Rebecca Stanfield, senior energy advocate at the Natural Resources Defense Council, an environmental group that has opposed fixed grid charges.

Ohio Example

Ohio’s utility regulators disagree. Five years after telling gas utilities that fixed costs should be covered by a fixed charge for every customer, they have ordered electric utilities to propose similar rate structures beginning next year, saying it will encourage competition and make it easier for customers to conserve or use solar panels.

Ohio’s four largest gas utilities began imposing charges that pay for their fixed costs in 2008, while lowering the rate customers pay for each cubic foot of gas, at the direction of the Public Utilities Commission.

This year, the commission approved a fixed rate of $33.01 for residential gas customers of Duke’s Ohio unit that covers 76 percent of its fixed costs, said Blair Schroeder, a company spokesman. Duke Ohio doesn’t collect a flat fee to cover fixed cost of electricity delivery. It will probably propose one in June, when it seeks rates to take effect in 2015, Schroeder said.

“The industry needs to be proactive in talking about how do we embrace new technologies, but do so in a way that maintains reliability and do so in a way that is fair,” said Duke CEO Lynn Good in an interview last month. “So customers are paying for the service we deliver to them.”

To contact the reporters on this story: Mark Chediak in San Francisco at mchediak@bloomberg.net; Jim Polson in New York at jpolson@bloomberg.net

To contact the editor responsible for this story: Susan Warren at susanwarren@bloomberg.net


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Companies Mentioned

  • DUK
    (Duke Energy Corp)
    • $74.35 USD
    • 0.91
    • 1.22%
  • AEP
    (American Electric Power Co Inc)
    • $53.63 USD
    • 0.94
    • 1.75%
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