Straight Fixed Variable

Straight fixed variable (SFV) rate design provides a fixed charge to customers, 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. Separating fixed and variable costs for small commercial and residential rates can achieve the same goals as decoupling by removing a utility’s disincentive to reduce sales through energy efficiency (EE).

Two components figure into how SFV rates work: fixed and variable costs. Fixed costs are those that do not change with the level of energy consumption. Within each rate class that does not have

What the stakes are

Several concerns arise 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 are given a more correct price signal but at the same time can lose the incentive to engage in energy efficiency. Additionally, there can be great variation and debate in what should be considered a fixed cost.

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

Example of Payback on Energy Efficiency Investments

Reduction of Monthly Customer Usage from 1,000 to 900 Units Energy Efficiency Investment of $200.

Standard Two-Part Tariff $15 Fixed Charge $0.075/kWh SFV $50 Fixed Charge $0.04/kWh
$15 Fixed Charge
$50 Fixed Charge
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

AEP position

We believe a host of alternative regulatory strategies are far more flexible and more closely aligned with traditional regulatory practices to 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.

Issues In Electricity

Issues In Electricity

Straight Fixed Variable

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