Changes Coming to Electricity Rate Design for Ontario's Commercial and Industrial Consumers

The process to redesign distribution rates for Ontario's large electricity customers is moving ahead. On March 31, 2016, Ontario Energy Board (OEB) Staff published a Staff Discussion Paper titled "Rate Design for Commercial and Industrial Electricity Customers: Aligning the Interests of Customers and Distributors." The Staff Discussion Paper is part of an OEB consultation process on commercial and industrial rate design that was commenced in May 2015 (as discussed in a prior post).

The Staff Discussion Paper addresses general issues around rate design for large electricity customers, and sets out several new rate design options.

As explained previously (see here), while distributors have historically provided a delivery route for commercial and industrial consumers, the expectation is that in the future, the distributors will also provide a "service platform" that may include balancing, storage and redistributing of power from consumers who are connected to the distribution system. The growth in activities such as distributed generation and storage will reduce the distribution throughout. However, commercial and industrial electricity consumers will still require a reliable distribution system that meets their peak requirements. There is a concern that current rate design will not provide distributors with adequate and stable revenue in the face of declining distribution load.

Taking these items into account, OEB Staff indicates that they seek to "facilitate customer choice by ensuring that the new rate designs support innovation and enable access to energy options." OEB Staff notes that the Board intends to increase efficiency in the sector by optimizing use of the current system and optimizing investment for long-term cost containment. As explained in the Staff Discussion Paper, current distribution rate designs are not fully linked to distribution cost drivers, i.e. customer and demand, both connection and peak. To address this issue, OEB Staff notes that the industry has the opportunity to use data from smart and interval meters to design rates that link to cost drivers more closely, including rates that vary by time of day. In OEB Staff's view, basing rate design on the cost drivers for distribution systems will align the interests of distributors and customers. In particular, OEB Staff endorse having distribution rates being more closely impacted by a customer's peak demand.

In the Staff Discussion Paper, a number of rate designs are presented for comparison. The following six basic rate design options are presented:

1. Fully-fixed monthly charge - This would be similar to the approach being phased-in for low-volume consumers (see here), where every customer in the class pays the same fixed amount for distribution service.
2. Time-of-use kWh - The distribution charge would be calculated as Monthly Service Charge + On-Peak Rate x On-Peak Usage + Off-Peak Rate x Off-Peak Usage.
3. Energy usage blocks (cell phone plan) - Customers would contract for a specific number of peak kWh based on their past and expected usage. Their distribution charge would be fixed every month, but will depend on a customer's peak use. There would be a relatively high per kWh charge for going over contract usage.
4. Minimum bill - This approach derives the charges and rates as in scenario 2 or 3 above, with the additional overlay of a minimum charge. If the total distribution charge were to fall below a pre-set amount, the bill applies that amount as the minimum distribution bill.
5. Three part demand rates - This option, which appears best suited to large customers, is said to be a way of using smart meters to increase the link between the rate and cost causality. It recognizes the two separate demand measures of the customer and charges for each: the design/connection demand and the peak/capacity demand. The first part of the charge is a fixed monthly service charge to reflect the direct customer costs. The second part is a variable rate based on the 'anytime' demand or non-coincident peak (NCP) demand to represent the cost of the design demand. The third part is a variable rate based on on-peak demand or coincident peak demand (CP) to represent the customer's contribution to peak capacity requirements. The bill calculation would be Monthly Service Charge + Maximum Monthly Demand (kW) x Anytime Rate + Maximum Peak Demand (kW) x Peak Rate.
6. Time of use demand rates - This approach is similar to the three part demand rates, except that time of use rates would be applied. The bill calculation would be Monthly Service Charge + Maximum Peak Demand x On-Peak Rate + Maximum Off-Peak Demand x Off-Peak Rate.

Some of these rate design options would not be appropriate for certain commercial and industrial rate classes. For example, OEB staff have not proposed demand rates for small commercial customers. One important item to note is that any new rate design approach that is adopted is expected to create a higher level of fixed charges that will apply to all commercial and industrial consumers, regardless of their actual consumption. This will create less opportunity for consumers to reduce their distribution charges through conservation or load displacement generation. An Appendix setting out possible rate impacts for each of the proposed rate design options is included with the Staff Discussion Paper.

OEB Staff have issued a letter inviting interested parties to provide comments on the Staff Discussion Paper, including a ranking of the proposed rate design options. Comments are due by May 27, 2016.