What’s going on with electric utility monthly fixed charges?

How would you like to pay a fixed charge of $69 per month for your electric service, even if you used no electricity that month? Further, imagine this is $59 more than the $10 you are used to paying.

That was the proposal put forth by one investor-owned electric utility in its latest rate increase proposal. Ultimately, the state regulatory body approved an increase to $19 per month. This situation isn’t unique. Fixed monthly meter charges are increasing nationwide, much more dramatically than any other component of the typical rate structure.

What is causing the change?

Historically, typical residential electric rates have had two primary components: a meter or service charge that is fixed and a usage charge that varies according to energy consumption during a given period. When the rates were designed, the fixed service charge recovered metering, billing, administration, and some miscellaneous costs, while the usage charge recovered the cost of the electricity generated/purchased and most of the cost of delivering the electricity to the customer. Delivery costs were recovered in the variable usage rate, under the assumption that those customers who used more electricity required more facilities to deliver it.

Recently, there has been a shift of the cost of delivering power from the usage rate to the fixed charge. Proponents of the change cite the relatively fixed nature of delivery facilities as a basis for the adjustment. The issue has been amplified by customers who invest in alternative electricity supply facilities, only using the traditional electric delivery grid when their alternative supply is not available. Under the current rate structure, because these customers purchase less electricity, they also pay less for the relatively fixed cost of delivery facilities. Opponents of the shift argue that the fixed rate increase will slow development of alternative energy supplies because the money saved by investing in them will not outweigh the costs incurred by the fixed charge rate hike.

What can be done about the change?

There are several arguments for and against the shift towards an increased fixed rate for electrical services. While opinions vary, the reality is that many utilities are moving forward with rate structure changes. We advise you, as municipal electric utilities, to discuss the issue with your management teams, governing bodies, and customers to determine the best course of action in regard to your local rate structure, considering both short- and long-term implications. For those municipalities with water and wastewater utilities, consideration should be given to how water conservation efforts have impacted your revenues and if shifting the costs of distribution and collection to a fixed fee is the right direction for you.

We welcome the opportunity to discuss this issue and your local situation with you. Learn how Baker Tilly energy and utility specialists can help, contact our team.