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Overview of Allocating Revenue Requirements

Understand City Light's marginal cost allocation framework among customer classes, driven by economic theory for social welfare maximization. Learn about different categories of marginal costs and how revenue requirements are allocated based on cost shares.

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Overview of Allocating Revenue Requirements

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  1. Overview of Allocating Revenue Requirements Based on Shares of Marginal Costs May, 2012

  2. Review Panel and Marginal Cost Allocation • Ordinance 123256 (March 2010) • Established Review Panel, defined role • …assess City Light's implementation of marginal cost allocation among customer classes to ensure that it provides a fair allocation of costs among customer classes and takes account of changes in costs and consumption. • Resolution 31351 (May 2012) • Policy framework for City Light rate setting objectives, rate design policies and marginal cost allocation among customer classes.

  3. Why City Light Uses Marginal Costs/Prices • Economic theory = social welfare maximization (best way to allocate society’s resources) • Customers will consume to the point where marginal value to them = their marginal price • If not worth the price to the consumer, society is better off by not consuming • Encourages energy conservation • Customers will not consume more that it is worth to them on the margin (i.e., at the marginal price) • Rates can be structured to reflect marginal cost (i.e., the marginal price), but… • Average rate paid by class = average cost for class

  4. Marginal Cost at City Light • Revenue Requirement: total $ City Light needs from customers. • Marginal cost allocation is a method of assigning a portion of the revenue requirement to each customer class • The results of calculating marginal costs are percentages (“marginal cost shares”) Example: Class x is responsible for 10% of the marginal energy cost. Class x will be assigned 10% of the revenue requirement related to energy. • Rates: • City Light does NOT charge customers the marginal costs. • Average rates by customer class come from the revenue requirement. • Price signals in rates can reflect marginal costs.

  5. Categories of Marginal Costs

  6. More on Marginal Cost Data Sources:Marginal Cost of Energy ($/MWh) • 3rd-party Mid-Columbia price forecasts by HLH and LLH: Ventyx, Kiodex prices (e.g., $31.01) • + Cost of environmental externalities--CO2 emitted when energy is generated: IRP research (e.g., $5.07) (e.g., American Wind Energy Association, EPA, U.S. Forest Service, Dept of Energy, National Renewable Energy Lab) • + Long-distance transmission cost: BPA transmission price (e.g., $4.42) • Total Marginal Cost of Energy: $40.50/MWh

  7. Example: Forecasts of Market Prices, $ / MWh

  8. Example: Annual Environmental Externality Costs

  9. Example: Market Price Forecast with Environmental Externality Price

  10. More on Marginal Cost Data Sources:Marginal Cost of Distribution ($/MW) • Capital: • In-service area transmission: SCL engineers-recent cost experience with line replacement (e.g., $80,000) • Substations: SCL engineers-recent cost experience (e.g., Denny substation estimate) (e.g., $110,000) • Distribution wires and related equipment: SCL engineers-recent cost experience (e.g., $200,000) • Meters: Recent SCL meter purchase costs-12 types (e.g., $100/meter but $10,000/MW) • O&M: recent costs from in FERC accounts (e.g., $18,000) • Total Marginal Cost of Distribution: $418,000/MW

  11. More on Marginal Cost Data Sources:Marginal Cost of Customer Service ($/meter) • O&M: recent costs recorded in FERC accounts • Meter reading costs (e.g., $20) • Costs of uncollectibles (e.g., $2) • Customer records and collections costs (e.g., $78) • Billing and account maintenance • Credit and collections • Customer engineering • Account executives (large customers) • Customer assistance (small customers) • Total Marginal Customer Cost: $100/meter

  12. Marginal Costs

  13. Simple Example of Allocating Revenue Requirements Using Marginal Cost Shares Step 1: Forecast consumption inputs by customer class Step 2: Multiply inputs by marginal costs by function Step 3: Calculate marginal cost shares (percentages) Step 4: Separate Revenue Requirements into functions Step 5: Allocate RR functions by marginal cost shares Step 6: Calculate average rate by customer class

  14. Step 1: Consumption Inputs--Forecasts of Load, Peak MW, & Meters

  15. Example: Residential $40.50/MWh x 3.1 M MWh = $126 M (Energy) $418,000 x 590 MW = $246 M (Distribution) $100 x 357,000 meters = $36 M (Customer Svc) Total = $408 M Step 2: Consumption Inputs x Marginal CostsSlide 12 x Slide 14

  16. Example: Residential $126/$378 = 33% (Energy) $246/$631 = 39% (Distribution) $36/$43 = 84% (Customer Svc) $408/$1,052 = 39% (Total) Step 3: Shares of Marginal CostsFrom Slide 15

  17. Step 4 : Revenue Requirements

  18. Step 5: Allocation of Revenue RequirementSlide 16 x Slide 17 (e.g., Residential Energy: 33% of $460 M = $153 M)

  19. Example: Residential $277,000,000 / 3,100,000,000 kWh = 8.9 ¢/kWh Step 6: Average RatesSlide 18 / Slide 14

  20. Some cost allocation issues from customers • Low-Income Cost • All customer classes (current policy) • Residential only • Conservation Cost • All customer classes (current policy) • According to $ spent on specific classes • Net Wholesale Revenue Credit • By shares of all other costs (current policy) • By shares of energy costs

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