Ahmad Faruqui and Dr. Stephen S. George,
Charles River Associates
Puget Sound Energy (PSE) serves about a million customers in the suburbs of Seattle. In May of 2001, PSE designed and implemented a time-of-use (TOU) rate for its residential and small commercial customers (see Electric Light & Power, February 2002, page 8). Since then, PSE has suddenly ended the program, leaving a few kernels of wisdom in its wake.
The rate involved four pricing periods. The morning and evening periods were the most expensive periods, followed by the mid-day period and the economy period.
Unlike most TOU rates, which feature significant differentials between peak and off-peak prices, PSE’s TOU rate featured very modest price differentials between the peak and off-peak periods, reflecting the hydro-based system in the Northwest.
The peak price was about 15 percent higher than the average price customers had faced prior to being moved to the TOU rate and the off-peak price was about 15 percent lower. To keep the rate simple, there was no seasonal variation in prices. The rate was launched during the western states’ power crisis, which had been characterized by extreme price volatility and a near total absence of demand response.
PSE placed about 300,000 customers on the rate, but they could opt-out to the standard rate if they so desired. There was no additional charge to participate in the rate. The rate was designed to be revenue neutral for the average customer. During the first year of the program, less than half of one percent elected to opt-out of the rate. Customer satisfaction with the rate was high. In focus groups, customers identified several benefits of the TOU rate besides bill savings, including greater control over their energy use; choice about which rate to be on; social responsibility; and energy security. PSE also provided a web site to customers where they could review their load shapes for the past seven days.
A year ago, PSE retained Charles River Associates (CRA) to conduct a cost-effectiveness analysis of the TOU rate. In April, CRA reported the results of this analysis to PSE’s collaborative. We found that the TOU rate was cost-effective on the commonly used total resource cost (TRC) test if one assumed, that in addition to shifting loads from peak to off-peak, it triggered a significant amount of energy conservation. Several parties in the Pacific Northwest, who wanted PSE to expand the conservation programs it had scaled back a few years ago, challenged this assumption.
PSE settled its rate case in June. Under the terms of the settlement, the program became an opt-in program for new customers. The peak/off-peak rate differential of the TOU rate was reduced from 14 mils to 12 mils per kWh. A monthly fee of $1 a month, about 80 percent of the estimated variable cost of providing TOU meter reading, was levied on participating customers. Finally, each quarter PSE would notify customers of their savings (or losses) on the program, and it would switch all customers to the lower-cost rate (flat or TOU) in August 2003.
Last October, PSE sent letters their first quarterly report. For 94 percent of the customers this report showed that they were paying an extra eighty cents a month by participating in the TOU pilot, comprised of the difference between twenty cents of power cost savings and a dollar of incremental meter reading costs. This was in marked contrast to the first year of the program when, prior to charging customers any part of the TOU meter reading costs, over 55 percent of residential customers experienced bill savings by being on the TOU rate.
Even though the report was for a single quarter, 10 percent of the participating customers chose to opt-out of the program between July 1 and October 31. At the same time, 1.8 percent of new customers opted into the program.
Media coverage was very negative and featured interviews with customers claiming that they had shifted as much almost half of their load from peak to off-peak periods, only to find out that they had lost money. Customers felt cheated, even though the amount of the loss for the average customer was 80 cents per month. PSE was left with no alternative but to pull the plug on a program that had become the most visible national symbol of a utility’s commitment to time-varying pricing, and agreed to refund the increased amounts to participating customers. This sudden termination of the program sent shock waves throughout the country.
In conclusion, five simple lessons can be drawn from PSE’s short-lived TOU program.
•Customers do shift loads in response to a TOU price signal, even if the price signal is quite modest. According to an independent analysis, customers consistently lowered peak period usage by 5 percent a month, over a 15-month period.
•It is important to manage customer expectations about bill savings.
•Consumers should be educated on the magnitude of bill savings they can expect from specific load shifting activities. A variety of means can be used for providing this information to them, including letters, refrigerator magnets, a company Web site that provides a listing of load shifting activities and associated savings estimate, and a personal web site which they can consult for tracking their load shapes and savings.
•It is desirable to conduct a pilot program involving a few thousand customers before offering a rate to hundreds of thousands of customers. The pilot should allow before/after measurements on customers who get the rate treatments as well customers in a statistically representative control group. It should also feature multiple TOU prices, rather than a single price, in order to allow measurement of price elasticities. This information would allow the company to estimate the impact of future rates that are not included in the small pilot.
•Finally, and most importantly, any program should make a majority of the customers better off, or it should not be offered. elp.Faruqui is a vice president with Charles River Associates in Oakland, Calif. He has 25 years of experience in designing pricing programs for electric and gas utilities.
George has more than 22 years of experience consulting to electric and gas utilities and regulatory agencies; his most recent assignments have involved extensive evaluations of dynamic pricing and advanced metering policies.