5.2 Rates and Billing

Rates are set through regulatory processes designed to be transparent and to rigorously protect customer interests.

Introduction to How Utilities Are Paid

Utilities are paid based on the electricity rates charged to their customers. Rates charged cover the actual costs of electricity, including the initial and ongoing costs of generation, transmission, and distribution; the costs of all ancillary services; and electricity market costs and taxes.

Regulated utilities are not allowed to earn profits in the way that private companies are, but they are permitted to earn a regulated rate of return, which will enable them to attract the capital they need for ongoing investment in their infrastructure.

How Rates Are Set

Electricity rates are typically set on a multi-year basis through an extensive review process involving the utility, the associated regulatory body, and key stakeholders. This process is designed to include a full and transparent view of all costs associated with the full electricity supply chain, along with forecasted customer requirements. The regulatory process includes the opportunity for stakeholder input in the interests of helping ensure reasonable rates are set.

1. Prices are set based on a forecast of how much it will cost to supply customers with the electricity they are expected to use over the next rate period and the capital investment needed to support and expand the electricity grid. 2. Distribution utilities—as the customer-facing part of the electricity system—issue and collect on customer bills and transfer portions owed to generators and other supply-chain participants. 3. Regulators review prices regularly and reset them if necessary. Regulation varies from one province to another, and rates can vary from one utility to another within the same province. Variables impacting rates include the generation supply mix, the distance the electricity must travel, and the population of customers being served. 4. Remaining variances between forecast and actual costs, whether a surplus or shortfall, are factored into the next price-setting review.

Types of Expenditures

Capital expenditures

Capital expenditures refer to investments in infrastructure and equipment, which typically have a multiyear service life. The cumulative value of all such capital investments is what utilities are allowed to earn a rate of return on (the “rate base”). For accounting purposes, these assets depreciate over multiple years, often beyond the rates that are being set.

Expenditures on large information and technology solutions, including both hardware and software, may also be capitalized. There is a lot of discussion now regarding “capitalizing the cloud”—meaning allowing utilities to include the value of their growing investments in cloud-based software in their rate base, even though these are not tangible in the same way that traditional capital investments are.

OM&A expenditures

Operating, Maintenance and Administration (OM&A) expenditures are annual expenses and are not depreciated. Such expenses include internal support functions such as regular infrastructure inspection and maintenance, and corporate services such as finance, human resources, customer care, legal, and regulatory. Utilities are allowed to recover approved OM&A costs but are not allowed to earn a rate of return on these expenditures.

Billing Determinants

Billing amounts are determined differently for residential and commercial customers.

Residential

For residential customers, bills are based on how much electricity is consumed (consumption or kilowatt hours) and in many cases, also on when the electricity is consumed.

Smart metering technology allows for a variety of billing options which include the following:

• Time of use billing – the rate you pay depends on time of day

• Critical peak price billing – time of use pricing is in effect except for certain peak periods when price reflects generation cost

• Flat rate billing – the rate is fixed and not based on generation cost or consumption

Commercial

For commercial customers billing determinants can include the following:

• Consumption – total electricity consumed as measured in kilowatt hours; time of day rates may also apply

• Demand – the peak amount of electricity consumed during the billing period (or annually) as measured in kilowatts

• Power factor – a measure of the efficiency of the customer’s facility

Time of Use Pricing

In many jurisdictions, utilities have implemented time of use (TOU) pricing. The rate you pay depends on the time of day the electricity is consumed.

• TOU pricing better reflects the true cost of power because customers are charged more for electricity during peak hours, when it’s more expensive to produce.

• This pricing option has been enabled by smart meters which can measure both how much and when electricity is consumed.

• The purpose of this pricing model is to “flatten the demand curve” by encouraging customers to shift their use from peak times to off-peak times.

• In Canada, the demand for electricity is usually greater during the day than at night. While there may be an abundance of capacity overall, TOU rates can help avoid the requirement for additional generation and transmission capacity.

Conservation and Demand Management (CDM)

Although there are pros and cons to all forms of electricity generation, most people can agree on the merits of conservation and minimizing demand.

Conservation

Electricity conservation typically means using fewer kilowatt hours of electricity and reducing overall consumption. This can be accomplished by simple low and no cost measures along with more complex and costly measures.

Conservation can include simple steps such as turning off lights and drawing window drapes to keep the sun out and rooms cool. Other steps may include turning the heat down in the winter or raising the temperature of an air conditioning unit in the summer. Many residential and commercial buildings now have automated energy management systems that can turn off or shift electricity loads to another time.

Demand management

Demand management involves processes and protocols to help minimize the demand for electricity during specific periods of time to flatten out the demand curve and to help avoid the need to build additional generation and transmission facilities.

Examples of such mechanisms include time of use pricing and programs that incentivize and enable both residential and commercial customers to curtail nonessential use during high-demand times.

Smart meters that enable lower prices during off-peak hours and higher prices during on-peak hours can encourage both conservation and demand management.

CDM Programs

Electricity Canada’s member companies are leaders in the provision of Conservation and Demand Management programs. These programs:

• Respond to the needs of utility customers

• Are cost-effective and a complementary alternative to address infrastructure constraints

• Contribute to meeting climate change targets

• Can be maximized through an integrated and collaborative approach between government bodies and utilities

• Support energy efficiency and are good for the economy

Knowledge Check

• Conservation refers to reducing electricity consumption.

• Demand management involves processes and protocols to help minimize the demand for electricity.

• Capital expenditures are investments in infrastructure and equipment that depreciate.

• OM&A expenditures are annual expenses that are not depreciated.

• Time of use pricing refers to electricity rates that are different at peak hours versus non-peak hours.

• Rate base is the value of capital investments that earn a rate of return.

• Regulation involves reviewing prices and resetting if necessary.