Residential Electricity Rates and Pricing in North Carolina in 2011

Comparison of North Carolina Electric Utilities and the NC electric rates dashboard http://efc.unc.edu/projects/NCElectricityRatesDashboard.htm

This comparative review of the pricing and rate structures electric utilities used in 2011 for residential customers in North Carolina includes information from a survey of these utilities. It includes data from all three investor-owned utilities (IOUs) and the majority of municipal utilities and electric cooperatives. Financial operations data is from the North Carolina Treasurer’s Local Government Commission fiscal year 2009-2010 audit report and U.S. Energy Information Agency summary statistics. The review looks at rate structure designs, including base charges, seasonal, consumption, and energy demand rates, as well as 2011 rates, affordability, and financial sustainability. The utilities’ 2011 rate sheets were collected by a survey, with 96 out of 110 responding (87% response rate). Summaries and statistics were created, including: rate structure demographics, actual charges and rates, percentages of utilities with certain rate structures (e.g. differing warm/cool seasonal rates), and mean charges and rates for the various structures. Using annual median household incomes (MHI) and the rate statistics, the affordability of the rates was calculated from the annual residential electricity bill as a percentage of MHI. Finally, using the LGC audit and the Energy Information Agency’s Residential Energy Consumption Survey, financial sustainability was assessed using the operating margin of the utilities and their combined monthly-equivalent residential bill, as well as the median operating margin as compared to the median bill at 1,000 kWh per month.

About the Environmental Finance Center: The EFC at UNC is dedicated to enhancing the ability of governments and other organizations to provide environmental programs and services in fair, effective and financially sustainable ways, working with decision makers to assess the effectiveness of environmental finance policies at a regional or state level, and to improve those policies as a way of supporting local efforts.

How you PAY for it matters.

Contact: Project Team: Jeff Hughes, Casey Wichman, David Tucker, Jacob Mouw Poster Created and Presented By: Jacob Mouw Dashboard URL: http://efc.unc.edu/projects/NCElectricityRatesDashboard.htm

Moving Forward For a future rates and pricing survey of North Carolina Utilities, it might be interesting to look at the relationship between the financial sustainability of the utilities and the structure of their rates, as well as to do a little more analysis as to how the structures impacts both the utilities’ and the customers’ financial well being. This may result in seeing that a poorer municipality needs a certain structure while a larger coop in a more wealthy community would thrive best under another. It would also be interesting to see how the capacities of the utilities match up with the actual usage, to perhaps gain insight as to why such a large amount of the utilities use a decreasing block rate structure. The EFC will update the survey, report, and dashboard in 2013.

Who’s who among NC Electric Utilities

Rate Comparison Tab To the left is the rates comparison tab for the warm weather rates for Morganton, NC at a consumption level of 1,200 kWh per month (a typical consumption amount) compared to all utilities • The bill is below the average, but still in the

middle 50% • The price per kWh is in the 25-50 percentile

range, meaning it does not send a strong signal to reduce consumption levels

• Cost recovery is at 1, meaning that though they are not in the red, they are not accumulating savings for future capital costs

• Despite being below average in cost per month, the % MHI is above average.

This presents an interesting case. If Morganton wanted to increase their cost recovery, the top two seem to indicate they have room to increase prices while the household impact, while the Household Impact shows they are already above average.

Characteristics Tab Looking at Morganton, we see some of the specifics as to their demographics, size, rates, and other bill additions. • It is a relatively small municipality • It has seasonal rates, though both warm

and cool seasons have a uniform rate structure

• They offer both time-of-use rates (meaning they charge more or less based on the time of day/demand they face) and hardship/senior rates.

• They have an addition to their bill for the Renewable Energy Portfolio Standard

• Municipal utilities fall under the NC Public Power umbrella organization and, for the most part, utilize the services of ElectriCities for training, assistance, communications, government affairs, and legal services

• Electric cooperatives, which are private, independent, and non-for-profit entities, provide service to rural areas in NC. Cooperatives are owned by their members who elect their board, but the majority are themselves members of Touchstone Energy.

• Municipalities and Co-ops often have power purchase agreements with Investor-owned utilities(IOUs), which are large, private companies that provide the bulk of electric service to North Carolina customers.

Rate Structures Electric utilities employ a range of rate structures to determine what their customers pay. All utilities in North Carolina use a combination of a base service fee and a variable charge in their rate structures, to account for fixed (salaries, operations) and variable (power purchases, maintenance) costs.

Base service charges do not vary from month to month (other than, rarely, for a seasonal change) regardless of consumption, and as such, contribute to a utility’s revenue stability.

The majority of utilities had a fixed base charge, while 16.4% of municipal providers, 46.2% of cooperatives and 33.3% of investor-owned utilities had variable base charges., dependent on phase, either three-phase (better for commercial or industrial use) or single-phase. Unique cases: Two utilities, one municipal and one cooperative, also included a small amount of electricity (74 and 20 kWh/month, respectively) in the base service charge. This practice is less common in electric utility billing, more often seen in water service billing

Base Charges

Seasonal Rates Electricity usage is linked to patterns in weather and climate, and high usage during part of the year lead to higher costs for utilities. Two trends are a peak in winter an a slightly higher peak in summer, due to heating and air conditioning respectively. While a smaller number of utilities charge seasonal rates, all three IOUs charge them, so a majority of customers face seasonal rates.

Uniform and decreasing block structures are the most common. Increasing or decreasing blocks discourage or incentivize greater electricity usage, respectively. In the cold season we see an increase it he number of utilities with a decreasing block, likely implemented to increase consumption and revenue, which is lower than in the warm season.

The size of the blocks varies, but the majority seen here in the warm and cold seasons have their first block in the 300 to 500 kWh range

Riders: In addition to charges for electricity service, many

electricity utilities provide a variety of mandatory and voluntary charges in addition to service charges, on customers’ bills in order to cover extra expenses. An example is the Renewable Energy Portfolio Standard, as the utilities need funds to accommodate the mandate requiring a percentage of electricity to be generated by renewable and/or energy efficiency programs.

2011 Residential Pricing Data Base charges rarely change from season to season, though there seems to be variation in base charges across different sizes of utilities. In all cases, the mean exceeds the median charge, which indicates that the distribution of base fees is skewed towards high charge.

Consumption rates, also known as marginal rates shown in the figure below are the charges for the next kWh beyond 1,000 kWh per month for all utilities. In the cool season, the most common marginal rate is between 9 and 10 cents per kWh, while the most common marginal rate in the warm season is between 10 and 11 cents per kWh. Both distributions have maximum marginal rates between 17 and 18 cents per kWh and minimum marginal rates between 5 and 6 cents per kWh.

The median bill for investor-owned utilities is significantly lower than that of municipal and cooperative utilities. Part of this explanation is likely explained by the economies of scale that are at work as larger investor-owned utilities spread their costs, particularly high fixed costs, over much larger customer bases.

Variation in the billing structures and prices are amplified as consumption increases. The range of the middle 90% increases to as much as several hundred dollars at high consumption levels

Affordability and Financial Sustainability

The total annual bill was typically between 2-5% of the median household income for the community, but 15 utilities were above that. This high percentage could be particularly difficult to manage for low-income communities.

When analyzing residential electricity rates, it is important to consider the supply-side factors that influence a utility’s rate-setting practices. There is no apparent relationship between the operating margin and monthly-equivalent billing, but it is important to note that about 1/3 have operating margins below zero, indicating that there are numerous municipal utilities that have costs exceeding revenues

To the right, plotting median operating margin and median monthly-equivalent bill at 1,000 kWh/month against power purchase percentages indicates that utilities with low power purchase, relative to their revenue, have the highest operating margins and lowest median bills.

Resources Local Government Commission. North Carolina Department of State Treasurer. (2011). Financial Results and Key Ratios of Municipal Electric Systems for the Fiscal Years Ended June 30, 2011, 2010, 2009 and 2008. United States Census Bureau. (2010). American Community Survey. 2011 ACS 5-year estimates. Median Household Income in the Past 12 Months (In 2011 Inflation-Adjusted Dollars). United States Energy Information Administration. (2009). Residential Energy Consumption Survey. Wichman, C., and Hughes, J. (2011). Residential Electricity Rates and Pricing in North Carolina 2011. Environmental Finance Center at the University of North Carolina at Chapel Hill.