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Electricity: What exactly are you paying for every month?

By Kenya Stump

Renewable Energy

Most of us pay an electric bill every month to keep the lights on, appliances running and to heat and cool our homes. But are you really just buying electricity? And if not, what exactly are you paying for?

In general, an electricity bill can be broken down into three main categories: a basic service charge, an energy charge and then charges for special programs and taxes.

The bill like the one to the right is a typical two-part bill

rate structure. You pay for the utility service to your home and for the electricity you use.

The basic service charge is what is referred to as a fixed charge. While some of the other charges, mainly the energy charge, depend on the amount of electricity you use every month, the service charge remains the same regardless of your usage. What this means is that even if you didn’t use any electricity for a month, you will still be paying the service charge and any other charge that is not dependent on electricity usage.

But what is a service charge? Traditionally, this would include those fixed costs borne by the utility to read your meter, meter maintenance, billing and payment processing — costs that don’t really change.

The first mention of service charges began in 1891 when Walton Clark first demonstrated that there were various types of costs borne by a utility to serve a customer. Up until then, a customer paid either a charge for how much electricity they used or a charge based on how many appliances or light fixtures they had installed in their house (a flat demand fee). Neither one alone proved to be sufficient in providing a utility the revenue they needed to remain financially stable and so developed the concept of service charges and minimum bills that customers see today.

More than 100 years later, service charges remain controversial mainly because customers perceive any increase as an additional cost against little or no gains in actual customer service. This is especially a concern for those customers on a fixed income or those with very small usage. But, just exactly why would a service charge increase beyond normal inflation unless there are other embedded costs beyond basic administrative, billing and meter services? These other fixed costs are related to the lines, poles, substations and power plants needed to provide the customer electricity.

This again is where history provides a lesson. A utility operator named Henry Doherty, in 1900, basically determined that a customer’s electricity rate should be based on three costs and called it a “readiness-to-serve” rate.  This rate was a customer or meter charge, a demand charge and an energy charge. Henry’s rate scheme, thought to be superior by his peers to any other rate at the time, never caught on with residential customers.

What was so difficult about the concept? First, electricity demand is not how much electricity the customer uses but the rate at which the customer uses electricity. It also represents how much equipment a utility must have on-hand to meet its customer’s rate of electricity usage. An example would be looking at two different customers who have installed compact florescent light bulbs, each rated at 20 watts. Customer #1 turns on one bulb for 5 hours, and uses 100 watt-hours of electricity. Customer #2 turns on five 20 watt bulbs for one hour and uses the same 100 watt-hours of electricity. Yet, Customer #2 has five times the rate of consumption compared to Customer #1. The utility must be prepared to meet Customer #2 rate of consumption. To the utility it represents how much generating capacity (power plants) they need to construct and the amount of wires, poles, transformers, etc. are needed to deliver the electricity.

Example: Demand versus Consumption

Customer #1 Customer #2
Equipment Installed Installs one 20 watt CFL light bulb Installs five 20 watt CFL light bulbs
Hours equipment is turned on 5 hours 1 hour
Electricity consumed 1*20 watt*5 hour = 100 watt-hr 5*20 watt*1 hour = 100 watt-hr
Demand from Utility 20 watt 100 watts

Fundamentally, demand is the potential rate at which a consumer will use electricity and depends on how much electricity consuming equipment a customer installs. Controlling demand requires controlling the potential rate of the equipment consuming electricity along with when consumers use the equipment. All in all, this equals a significant amount of monitoring and control.

As a result, for most residential customers, demand requires behavior changes to control. Because of this, most utilities have simply incorporated the demand costs into both the service charge and the energy charge, resulting in a simpler two part rate. This has worked because traditionally, residential demand hasn’t changed from home to home. This means most homes have the same equipment and consumers use their home appliances and equipment in predictable patterns. However, this is not the case for industrial and some commercial customers, which is why demand charges are common outside of the residential sector — to compensate for this unpredictability.

There are rumblings nationwide of utilities adding a residential demand charge. But what exactly are the issues at plays? Let’s say, a customer owns a vacation house and is only there six months out of the year. Is that customer paying their share of demand costs when they are not there for six months if they subscribe to a two part rate like the one above? Or, let’s say, a customer generates their own electricity and consumes no utility supplied electricity, are they paying their share of demand costs for infrastructure and capacity? Are these customers different enough from their peers to need a different rate structure? At the center of this questions are fundamental questions of inequity and fairness among customers.

As utilities file rate cases to increase service charges, add fixed charges or even go to minimum bills, more than 100 years after Walton Clark and Henry Doherty tried to formulate an electric rate structure, society is still asking: What are the net costs of serving a customer when that customer uses no electricity, how should those costs be paid and who should pay for it?

 

 

 

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