Utility customers and complexity: What if Bonbright was wrong?

I was surprised recently when an email landed in my inbox with a link to an article on the Sacramento Municipal Utility District’s (SMUD) adoption of a default time-of-use rate for residential customers.

I was even more surprised when I realized that, in fact, SMUD’s Board of Directors had approved the new rate earlier this summer. Any utility move from traditional, volumetric rates — based on how much power a customer uses — to time-varying rates, based on when power is used, is generally considered big news in our industry. How had I missed something this important?

Nothing immediate popped up when I ran a series of searches with varying keywords on Google and a few popular industry news websites. What I did find were intermittent articles beginning in 2015, tracking SMUD’s original exploration of what would become its new “time of day” rate through a successful pilot program, several rounds of public meetings and the recent final approval.

What struck me about all this was not only the scanty coverage, but what was missing from the articles I did find.

Media approaches to the energy transition now underway in the United States have mainly focused on technology — how quickly prices will fall and rates of adoption will rise — and its impact on utility regulatory and business models. The approach to customers is more frequently played out in general terms and concepts, such as market segmentation, customers’ desire for choice and control, and the transition from energy consumer to “prosumer.”

Such generalities tend to focus on the early adopters and miss the larger implications for all customers. A shift from volumetric to time-varying rates ultimately depends on a parallel shift in customers’ understanding of rates, from one based on simple economics to one that encompasses value and complexity.

For example, SMUD’s time of day plan, to be rolled out in 2019, includes summertime rates with peak (weekdays 5-8 p.m.), mid-peak (weekdays noon to 5 p.m., and 8 p.m.-midnight) and off-peak (all other times) prices ranging from 11 cents to 28 cents per kilowatt-hour. Not all customers may save money, and a gradual rollout with lots of customer education is in the works.

Other examples of this shifting customer dynamic include:

• The Pedernales Electric Cooperative in Texas, which rolled out its own optional time-of-use rate in March. The summertime rate schedule includes five different price levels, from Super Economy (3-5 a.m.) to Super Peak (2-6 p.m.)
• Oklahoma Gas and Electric (OG&E), which has a summertime demand response program called SmartHours. In this program, peak prices change daily, and customers with utility-installed smart thermostats receive advance notices of the next day’s peak pricing. The thermostats can then be set to customer preferences that will shift energy use to off-peak hours, helping both customers and the utility save money. More than 120,000 customers have enrolled in the program, according to the OG&E website.
• Kansas City Power and Light, which partnered with Nest for a similar summertime demand response program. Customers receive a Nest thermostat, which can automatically “tune” a customer’s home for energy savings — by turning heating or cooling up or down — if needed during times of strain on the grid due to high demand. Again, customers receive advance notice and can adjust their thermostats up or down for their own comfort.

What all these programs have in common is that they require customers to weight monetary cost savings against their own comfort and the larger benefits demand reduction may have for their utility, the grid and, ultimately, other customers. In other words, they have to think both about how they use energy and how that affects others, which according to conventional wisdom, few utility customers can or want to do.

That electricity rates should be simple — easy to explain, understand and implement — has been the closest thing the utility industry has to holy writ since James C. Bonbright formulated the concept in his principles of rate design in 1961. However, 56 years on, we have a much more complex electricity system. How we pay for electricity and how we interpret words like “simple” and “easy to understand” are, like everything else in this industry, evolving at different speeds in different places.

Customers’ understanding and acceptance of new, more complex rates is, to some extent, related to technology and demographics. Younger, tech-savvy millennials expect to be able to control everything from their cell phones.

But, the early adopters who embrace such changes are one end of a continuum. Comprehensive rate reform requires proactive outreach and education, and the interests of those at the other end, who want to maintain the status quo, must also be protected.

Which is all to say, changes in rate structures do involve tradeoffs. SMUD estimates that its new time of day rates may provide modest savings for about 44 percent of its customers, versus 49 percent who may see modest increases. As part of the utility’s preparation for the rollout, its customer service representatives are getting a new bill analysis tool to be used to walk customers through how the new rates may affect their bills. The utility also has an opt-out for those who want to stay with their current rates.

The caveats here notwithstanding, the shift in utility-customer relationships — around technology, rates and other issues — is a significant story worthy of closer coverage for a number of reasons. Most people do not really understand the transition going on in the energy sector, and more good, explanatory journalism is needed.

At this point, the U.S. energy transition has established its own internal rhythm. Any specific change begins with isolated examples and a gradual ramp that gathers momentum to an inflection or tipping point. Once that point is reached, the change — in technology, organizational culture or business models — occurs sooner and much faster than originally predicted.

Clearly, rate reform — and the evolution of customers’ understanding of value and complexity — are still in the ramping phase. But, just as clearly, momentum is building, and we will reach the tipping point sooner than expected.