The issue
Inverted block rate design utilizes a tiered pricing structure where higher usage customers pay a higher marginal rate. Since subsequent quantities of energy have higher per-unit prices as usage rises through the tiers, persons who consume more electricity will pay a higher average rate than those who consume less. This price signal is intended to encourage energy efficiency
Flat Rates
1,500 kWh @ .10 = $150
1,200 kWh @ .10 = $120
1,000 kWh @ .10 = $100
Monthly bills – three consumers
Total bill for 1,000 kWh = $100
Total bill for 1,200 = $120
Total bill for 1,500 kWh = $150
Total utility revenue = $370
Inverted Block Rates
300 kWh @ .20 = $60
200 kWh @ .10 = $20
1,000 kWh @ .09 = $90
Monthly bills – three consumers
Total bill for 1,000 kWh = $90
Total bill for 1,200 kWh = $110
Total bill for 1,500 kWh = $170
Total utility revenue = $370
How we got to this point
When designing price signals to encourage energy efficiency, the impact on low income consumers is always a concern. While some heavy consumers of energy are owners of executive homes with plasma televisions in every room, others are low-income families in large, aging inner city homes, with poor insulation and outdated heating technologies. To combat any unintended hardship on low-income customers, inverted block rates may be combined with weatherization and other low-income energy efficiency programs.
Another challenge with inverted block rates is setting the proper price signal while maintaining utility revenue neutrality. Inverted block rates do not follow the traditional cost of service rate design, making it difficult to design rate tiers that will accurately recover the utility’s commission approved revenue requirement. Some proponents have suggested erring on the side of over recovery, with a true-up that directs any over recovery to low-income energy efficiency programs.
When properly designed, inverted block rates can provide a gentle nudge of a price signal to those families who may be able to make use of low-income weatherization programs to help with their struggles; and can also increase the strength of that nudge in the higher consumption stratosphere of people who choose not to conserve.
AEP position
Inverted block rates can be a useful tool to send price signals than may lead to energy conservation and AEP companies have experience with these rates in some of our jurisdictions.
Care must be taken during rate design to ensure the rates do not pose an undo hardship on low-income customers while still sending a strong enough price signal to spur conservation. However, a utility typically does not have income information for its customers.
What the industry says
Although not used as widely as some other pricing mechanisms, inverted block rates offer unique characteristics that can be applicable in various special circumstances.
For instance, the state of Colorado recently approved inverted block rates requested by Xcel Energy, only for use during summer peak load periods. An alternative to industrial interruptibles, in this case inverted block rates allow consumers the option of paying a higher price for their air conditioning. In this situation, customers’ high summer rates are offset by lower rates in winter.
New Mexico’s NMSA 62-17-2(E) and (F), adopted in 2005, incorporates an inverted block rate into a decoupling framework to encourage energy efficiency
