In a recent order, the Massachusetts Department of Public Utilities (“Department” or “DPU”) stated that time varying rates are an essential component of grid modernization. As a result, the design of basic service must change to incorporate time of use (“TOU”) rates for all customers, including residential customers. The Department noted that in 2013, the average wholesale market price of electricity over the course of the year was $56 per megawatt-hour (“MWh”), but the peak wholesale price in the summer reached nearly $870 per MWh and in winter nearly $1,300 per MWh. However, despite the volatility in the wholesale market, basic service customers’ rates did not reflect the time varying nature of electricity supply costs. The Department sees this as a problem. (Warning: DPU should take a short flight down to PJM land where customers’ exposure to last winter’s price spikes is still being discussed.) Nevertheless, DPU is concerned because under the current basic service structure in Massachusetts, rates do not reflect the time varying nature of electricity supply costs. Additionally, customers who are able to shift more of their electric usage to off-peak/lower wholesale cost hours subsidize customers who use more electricity during hours with higher wholesale electricity prices.
The Time Varying Rates Order describes a policy framework that will require electric distribution companies to offer two basic service TOU options:
- A default product with time of use pricing that includes a critical peak pricing (“CPP”) component. Under this TOU pricing structure, the retail electricity price will be higher during certain hours of the week when customers typically use more electricity and wholesale energy prices rise (e.g., the “on-peak” hours of noon to 8:00 p.m. each weekday) than during the remaining hours of the week when electricity usage and wholesale prices are typically lower (i.e., the “off-peak” hours).
- A flat rate with a peak time rebate (“PTR”) option. With a PTR, customers will receive a rebate if they lower their electricity use relative to a pre-established baseline during times when wholesale hourly energy prices are highest. Thus, under PTR, customers will have an incentive to lower their electricity usage when it is most critical to do so, but even those who ignore the incentive will be insulated against higher peak prices because they will pay one price for all electricity consumption.
The Department anticipates that the on-peak rate will be higher and the off-peak rate lower than a flat-rate product. Thus, customers who respond to price signals by reducing on-peak energy consumption will pay less than they would under a flat rate.
Written comments regarding this policy framework may not exceed 25 pages and must be submitted no later than the close of business (5:00 p.m.) on July 3, 2014.