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Increasing fixed charges on electricity bills hurts customers–and society 

Ivy Main's picture
Publisher Powerforthepeopleva

Ivy Main is a writer, lawyer, and environmental advocate, and volunteers extensively with the Virginia Chapter of the Sierra Club. In addition to lobbying in the Virginia General Assembly for...

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solar panels on a house
SVEC’s fixed charges would discourage customers from pursuing net zero homes like this one. Photo by Ivy Main

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Okay, folks, the kids are back in school, so in their honor we are all going to do a word problem! 

Bob Rich lives in a sprawling subdivision of large, single-family homes. Bob has a pool and a hot tub and outdoor lights he keeps on all night. Bob’s four children have loads of electronic gadgetry, plus a habit of leaving windows open when the air conditioner is blasting. Needless to say, the Rich family uses a lot of electricity. But Bob doesn’t worry too much about his utility bill. It’s really not that much compared to all the other bills he pays; and fortunately, his wife is a hedge fund lawyer so he can afford it. 

John Poore, on the other hand, lives in a small apartment and uses as little electricity as possible to save money. He works a low-wage job, and his best efforts to attract a wealthy spouse have not yet panned out. John uses air conditioning only on the hottest summer days. He switched out his incandescent lightbulbs for LEDs, caulked the cracks around his windows where air leaked in, and when his old refrigerator broke, he replaced it with an EnergyStar model. 

Bob and John are both customers of Shenandoah Valley Electric Cooperative, in western Virginia. SVEC says its costs are going up, so it has been “adjusting” its rates. What would you expect the effects to be?

A) Bob’s bills go up more than John’s. 

B) Both Bob and John’s bills go up by the same amount. 

C) John’s bills go up more than Bob’s (and Bob’s might even go down).

You probably already figured out it’s a trick question. We’re dealing with a Virginia utility, so the answer can’t be (A) regardless of that being the obvious and rational answer. 

Indeed, answer (A) is how most utilities operate: Every customer pays a small fixed fee, typically under $10, and the rest of the bill is determined by how much electricity the customer uses. People who use a lot of electricity pay the most. They are usually better able to afford it, but if they don’t like the size of their bills, they can turn off the lights in empty rooms, change their thermostat setting, invest in energy efficiency, or put solar panels on the roof. Conserving energy and adding renewable energy happen to be public policy priorities, so the incentives are aligned with the behavior society wants to encourage. 

But SVEC notes that a lot of its costs aren’t dependent on how much electricity customers use; it has wires to maintain and so forth, plus it recently “invested” in a beautiful and spacious new headquarters that it swore wouldn’t mean rate increases (but, well, you know how that goes). SVEC says Bob and John benefit equally from all these investments, and wants their bills to reflect that. Early last year SVEC “adjusted” its rate structure to increase the fixed customer fee from $13 to $25 and decrease the rate per kilowatt-hour of electricity used. If you chose answer (C), you were correct!

This year, to raise more revenue, SVEC proposes to increase everybody’s fixed fee again, this time to $30. For customers who don’t use much electricity, that fixed fee could become the biggest charge on the bill, and one that can’t ever be reduced by any amount of energy conservation, efficiency or solar panels. They may also wonder whether $30 is just a stop on the way to even higher fixed fees that will further undercut their energy-saving investments.

SVEC didn’t need anyone’s approval when it almost doubled the fixed fee last year. But this year, the State Corporation Commission has to approve the additional changes, so customers finally have a chance to challenge them. Utilities around the state are watching what the SCC does. If SVEC gets approval to shift more of its costs away from customers who use a lot of electricity and onto those who use the least, other utilities will see that as a green light to do the same

Utilities prefer fixed charges because they provide revenue certainty; left to their own devices, they will move as much of their revenue into the fixed-cost category and increase fixed charges as high as they can. Unfortunately, doing so creates an incentive for utilities to spend as much as possible on infrastructure costs that can be recovered through fixed rates. That will raise costs for everyone and produce a further perverse incentive for the utility to encourage energy consumption (and waste) in order to make maximum use of the infrastructure.

This isn’t the result anyone should want, and especially a nonprofit electric cooperative. More affluent, high-use customers will benefit from lower rates per kilowatt-hour, while low-income customers will be less able to control their bills, an inequity that flies in the face of Virginia’s efforts to limit the energy burden on low-income residents. And customers who are considering investing in energy efficiency or solar will find they are looking at a longer payback time, discouraging the energy-saving measures that Virginia strives to promote.

The SCC is holding a hearing today to consider SVEC’s proposed rate increase. The commission should reject SVEC’s efforts to raise fixed charges for customers and send the utility back to the rate-drawing board. 

This article originally appeared in the Virginia Mercury on October 5, 2021.

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Matt Chester's picture
Matt Chester on Oct 11, 2021

This isn’t the result anyone should want, and especially a nonprofit electric cooperative. More affluent, high-use customers will benefit from lower rates per kilowatt-hour, while low-income customers will be less able to control their bills, an inequity that flies in the face of Virginia’s efforts to limit the energy burden on low-income residents. 

Exactly the type of situation that is why rate cases are reviewed and the utility industry is regulated differently than any other. Thanks for sharing these updates, Ivy-- let us know more as the story develops

Bob Meinetz's picture
Bob Meinetz on Oct 12, 2021

Ivy, you have it exactly backwards.

SVEC is raising its fixed charges (and they will approved) because rich residents, like the family who lives in the beautiful "not-zero" house you show above, haven't been paying their fair share of grid infrastructure and administrative costs.

Not everyone is fortunate enough to be able to afford a nice, four-bedroom house with a powerful solar array on the roof. So traditionally, the less-fortunate have gotten stuck with paying grid maintenance costs in their rates, and they've had enough. 

Now, wealthy renewables owners will have to pay their fair share? My heart bleeds.

James Kirby's picture
James Kirby on Oct 12, 2021

You raise  important social concerns. Utilities, particularly in the face of greenhouse gas emissions concerns, have most of their costs as fixed charges.

A failure to allow recovery of those fixed charges is not appropriate. I just wrote a piece stating the opposite of what you advocate. That said, I recognize the validity of what you are stating. At the moment, everything is being put on the spot market in places like California. The marginal running costs of generation are totally immaterial, but the prices set based upon competition lower spot prices towards that benchmark. It is not enough to encourage investment; and not enough to even recover fixed operating costs in some cases. Generation that is needed to supply the load reliably is being retired because of this. Perfectly viable generation.

I believe these concerns bear upon the issue, as does yours. I stated that the maximum benefit to society has to be the criteria; but that criteria depends upon how you measure those benefits. Encouraging conspicuous consumption among the wealthy should not be included among those benefits. The precise mechanisms for doing this needs a careful thought to threat this needle.

In any case, your article is very thought-provoking.

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