Today’s electric utility rates, largely based on structures developed in the 19th century, cannot support the evolving business needs of utilities. Nor can current rates provide for a fair distribution of costs, particularly among residential consumers. In order to modernize the electric utility rate structure, we must fundamentally change everything we have thought about rate design since the birth of the industry.

Often referred to as “unbundling,” modern rate designs enable utilities to include a price signal for each service and improve the overall efficiency for all of its services to customers. Unbundling also reflects the reality that electric utilities now provide a variety of services to their customers and would change virtually all of the current rate traditions. Traditional services include power generation, transmission, distribution, operations and maintenance of the system, as well as customer care and billing.

The widespread implementation of advanced metering infrastructure and enables utilities to measure and record data for all of the services it provides to customers. With smart meters, each rate component may be billed separately and each customer will pay for the services they use. This creates a more equitable distribution of cost.

Traditionally, rates involved charges for customer service, energy demand/consumption and other energy charges. Under an unbundled rate structure, billing options would be broken into additional categories, such as customer charge, generation demand charge, transmission demand charge and distribution service demand charge, among other areas.

The following chart highlights, at a very high level, what a typical residential customer bill could include under an unbundled rate structure.

Traditional rate structures assume that collective utility costs are driven by overall consumption of power, or kilowatt-hours used, and therefore are recovered by a single measure. Net metering and energy conservation programs demonstrate the fallacies with this assumption. Customers are credited for the power generation they produce, or conserve onsite in the case of demand-side management -- even though they remain utility customers and continue to use utility services such as the distribution system.

These customers often do not pay for the services they consume, such as the distribution infrastructure and customer service functions of the utility under net metering.

Smart rates allow customers to use electricity more efficiently and allow the utility to recover its costs from customers who cause the cost. Benefits of a smart rate structure include less resource waste and more economically efficient power systems. Customers could have more stable energy bills and the utility would benefit from a more stable revenue stream. While some customers or stakeholder groups may end up paying more for the services they purchase, others will pay less. Most importantly, costs would be more equitably distributed among customers based upon their individual use. 


Edwin Overcast is a director at Black & Veatch, a global engineering, consulting, construction and operations company.