PUC Considering Raising the Cost Of Home Heating and Cooling.

Since 1979, the policy of the state of Oregon has been based on trying to minimize utility shut offs by helping customers manage their highest electric bills. A new proposal at the PUC would dramatically change this policy by introducing a rate structure that varies the price of electricity depending on the time of day. Instead of trying to help customers manage bills, the PUC would be trying to increase customers’ bills in order to provide an incentive for customers to use less energy. Here is how a PUC economist describes the goal:

The tightening of budgets due to elevated utility prices motivates, not enables, the making of capital investments that will serve as substitutes for electricity consumption. Basic economic theory holds that when the price of a particular good is elevated, the demand for substitutes for that good is also elevated. From my own experience, monthly mid-winter electricity bills around $180 in earlier years motivated this Staff person to invest in a heat pump system this year in hopes of achieving a substantial electric bill reduction. The heat pump is viewed as a substitute for excessive electricity consumption.

While CUB doesn’t doubt that this is a true reflection of the experience of a PhD economist employed by the Oregon Public Utility Commission, it is not the experience of many other Oregon customers, who do not have the ability to make capital investments or the time to research economic substitutions. It is not true for renters who cannot make capital investments in their homes. It is not true for low-income families that are struggling to pay their bills. It is not true for people who are dealing with mental illness and may have trouble understanding the change in their rates. It is not true for families that are dealing with real issues such as health problems, marital issues, or deaths in the family, all of which are immediate and may prevent the timing of their energy usage from remaining a top-of-mind concern.

Time Varying Rate Options.

There are three basic versions of time varying rates, all of which are attempts to raise rates during peak times and lower rates during off-peak times. Peak usage is generally driven by heating and cooling our homes.

• Seasonal Rates: Under a seasonal rate system, rates rise during the winter and/or summer period, which corresponds to heating and cooling, resulting in lower rates during the fall and spring.
• Time-of-Use Rates: Time-of-Use rates vary over the course of the year, week, and day. For example, PGE’s optional Time-of-Use rates charges customers three different rates: on-peak, mid-peak, and off-peak, with rates changing up to 5 times each day. Rates are different on weekdays, Saturdays, and Sundays. Summer rates are different than winter rates—and the time that prices change within each day is different in the winter and summer. In the winter, on-peak prices are highest and correspond to when families turn on their heat, and in the summer prices are highest when families run their air conditioners. We are not surprised that few customers choose this option.
• Critical Peak Pricing: Critical Peak Pricing, which is often done in conjunction with time-of-use rates, charges really, really high rates (5 or 6 times normal) during the handful of hottest and coldest days of the year, when the utility system is at its peak. This is similar to a gas station raising gas costs fivefold during holidays when driving is at its peak.

Unprecedented Policy Change

This is a dramatic policy change. Since the economic difficulties of the late 1970s, Oregon policy with respect to energy has been designed to help customers manage their bills and their winter heating costs. Over the ensuing decades, Oregon has established lifeline rates, consumer protections from utility shut offs, equal pay programs that allow customers to spread seasonal heating and cooling costs out through the year, and bill payment assistance funded by a surcharge on utility bills.

Currently thousands of Oregon households are being disconnected from electricity service each year because they cannot pay their bills.
Disconnections peak in March, which shows that customers are falling behind while trying to pay their winter heating bills. That customers are struggling should come as no surprise. The economy is in a deep recession, unemployment is high, and utility rates continue to climb—Pacific Power’s rates have gone up 60% in recent years. The fact that this policy change is even being discussed suggests a serious disconnect between state regulators and state residents.

These programs aren’t just unpopular in Oregon. While some utilities have mandatory seasonal rates, CUB is not aware of any utility in the country with mandatory time-of-use or critical peak pricing. Puget Sound Energy, in Washington State, adopted this type of rate structure but later repealed it. The reason is simple. Customers generally don’t like these pricing schemes, and some customers will be harmed by them. We have seen PUCs around the country reject mandatory time-of-use and critical peak pricing, and it is time for Oregon’s commission to do the same.

There are better alternatives

There are better rate options that are more consumer-friendly, but Oregon utilities won’t ever develop these if the focus is on mandatory time varying rates.

One alternative is to offer time varying rates on a voluntary basis. This way the winners can take advantage of the rate structure without creating losers. Customers who have the ability to reduce their heating and cooling during the on-peak period will benefit from voluntary programs and the reduced off-peak rates associated with these programs.

Oregon utilities can offer peak reduction rebates, as some utilities elsewhere are doing. Offering customers discounts or rebates when they reduce peak usage creates an incentive without penalizing renters and low-income citizens.

Even better, utilities can offer direct load control programs where the customer works with the utility to reduce heating and cooling. Emerald PUD in Eugene has a program where it pays customers a discount in exchange for the ability to lower the temperature on their hot water heaters and thermostats a couple of degrees during peak periods. Idaho and Utah have also established air conditioning programs where the utilities cycles air conditioners on and off, so everyone gets their home cooled, but the utilities ensure that the air conditioners are not all working at the same time.

When PGE was considering installing Smart Meters, CUB was concerned that once the meters were installed, the PUC staff would propose mandatory time varying rates. The PUC staff assured us that this would not happen—that the PUC staff was interested in voluntary programs but not mandatory ones. But to an economist, the appeal of price signals is too strong. Once smart meters are installed, it is easy to test all kinds of keen economic theories about how people react to price signals. It is such an easy experiment to conduct that sometimes the experimenters lose sight of the human cost involved.

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