Recovery of Utility Fixed Costs: Utility, Consumer, Environmental and Economist Perspectives

Lawrence Berkeley National Laboratory hosted a webinar on July 8, 2016, titled "Recovery of Utility Fixed Costs: Utility, Customer, Environmental, and Economist Perspectives." To view a recording of the webinar, click here.

Utilities recover costs for providing electric service to retail customers through a combination of rate components that together comprise customers’ monthly electric bills. Rates and rate designs are set by state regulators and vary by jurisdiction, utility and customer class. In addition to the fundamental tenet of setting fair and reasonable rates, rate design balances economic efficiency, equity and fairness, customer satisfaction, utility revenue stability, and customer price and bill stability. 

At the most basic level, retail electricity bills in the United States typically include a fixed monthly customer charge — a set dollar amount regardless of energy usage — and a volumetric energy charge for each kilowatt-hour consumed. The energy charge may be flat across all hours, vary by usage level (for example, higher rates at higher levels of usage), or vary based on time of consumption.

While some utility costs, such as fuel costs, clearly vary according to electricity usage, other costs are “fixed” over the short run — generally, those that do not vary over the course of a year. Depending on your point of view, and whether the state’s electricity industry has been restructured or remains vertically integrated, the set of costs that are “fixed” may be quite limited. Or the set may extend to all capacity costs for generation, transmission and distribution. In the long run, all costs are variable.

In the context of flat or declining loads in some regions, utilities are proposing a variety of changes to retail rate designs, particularly for residential customers, to recover fixed costs.

In this report, authors representing utility (Chapter 1), consumer (Chapter 2), environmentalist (Chapter 3) and economist (Chapter 4) perspectives discuss fixed costs for electric utilities and set out their principles for recovering those costs. The table on the next page summarizes each author’s relative preferences for various options for fixed cost recovery, some of which may be used in combination.  The specific design of any ratemaking option matters crucially, so a general preference for a given option does not indicate support for any particular application.

A literature review at the end of the report (Chapter 5) defines each of these options and highlights current practices, potential pros and cons, and the diversity of views held by a wide range of energy experts.