Straight Fixed Variable

The issue

Straight fixed variable (SFV) rate design imposes a fixed charge to customers that is designed to recover all of a utility’s fixed costs. Traditionally, high load factor and industrial customers prefer rates that separate variable energy costs from all other costs in order to reduce volatility and receive the proper benefits for controlling peak demand. Separation of fixed and variable costs for small commercial and residential rates has been recently raised as a recovery mechanism that achieves the same goals as decoupling by removing a utility’s disincentive to reduce sales through energy efficiency.

States Using SFV

Straight fixed variable rates are being used by gas utilities in:
  • Georgia
  • Missouri
  • North Dakota
  • Oklahoma

No states currently use SFV to recover electric utility costs for small commercial or residential customers

Payback

Example of payback on energy efficiency investments:

Reduction of monthly customer usage from 1,000 to 900 units, with an energy efficiency investment of $200.

Standard Two-Part Tariff SFV
$15 Fixed Charge
$0.075/kWh
$50 Fixed Charge
$0.04/kWh
1,000 Units Fixed: $15.00
Variable: $17.00
Total: $90.00
Fixed: $50.00
Variable: $40.00
Total: $90.00
900 Units Fixed: $15.00
Variable: $67.50
Total: $82.50
Fixed: $50.00
Variable: $36.00
Total: $86.00
Savings $7.50/month
$90/year
$4/month
$48/year

How SFV works

There are two parts that figure into how SFV rates work: the fixed costs and the variable costs. Fixed costs are the portion of electricity costs that do not change with the level of energy consumption. Within each rate class that does not have a demand charge, each customer is charged the same amount for fixed costs. Variable costs are those costs that differ depending on the amount a customer consumes (the volumetric charge per kilowatt-hour). Some items that would be considered a variable charge include fuel, some maintenance, and often purchased power. By separating these two charges, a utility’s ability to recover its revenue requirement is completely separated from sales volume. By ensuring the recovery of all fixed charges, the revenue level of the company remains fairly consistent, providing a high level of certainty for investors. Additionally, this concept insulates the utility company from feeling the effects of external forces such as loss of sales due to poor weather or customer investment in energy efficiency would typically have on revenues. Alternatively, the utility company’s upside from increased sales is limited.

AEP position

We believe that there are a host of alternative regulatory strategies that are far more flexible and more closely aligned with traditional regulatory practices that can better achieve these goals. That said; we recognize that there may be unique circumstances in which SFV would be deemed a reasonable ratemaking solution for a regulated utility and its customers. AEP supports regulatory flexibility that would allow utilities to work with their state commissions to develop such a framework when and where appropriate, without requiring all utilities in a jurisdiction to follow suit.

What the stakes are

There are several concerns with SFV rate design. Under this design, all users within a rate class, large or small, are charged the same amount, instead of a proportional one, for fixed costs. This has the potential to adversely affect small users if their usage characteristics are not in line with others in their group. Another challenge that results from this mechanism is the weakening of the price signal received by customers. By removing fixed costs from the variable charges, consumers lose the incentive to engage in energy efficiency. Additionally, there can be great variation and debate in what should be considered a fixed cost.

Ratemaking Continuum

Due to the challenges associated with SFV, most state utility commissions are reluctant to pursue such a mechanism for electric rate recovery.