Electricity costs for smaller and larger households

Regular economics commentator Frances Woolley turns her sights to electricity in a recent posting (‘http://www.theglobeandmail.com/report-on-business/economy/economy-lab/frances-woolley/why-ontarians-arent-saving-money-with-smart-meters/article2190147/’, The Globe and Mail, 4 October 2011).  I enjoyed much of her argument, but I will ‘dig into’ one aspect – and by doing so, return to a theme I have picked up in the past in this blog.

More specifically, she writes:  ‘ … Ontario’s old regulated price plans favoured small households over larger families. Consumers paid a higher price for power if they used more than a certain amount each month. So, for example, a one-person household consuming 400 kWh per month paid 6.8 ¢/kWh under the May 2011 rate schedule, while a four-person household consuming 300 kWh per person paid, on average, 8 per cent more, or 7.35 ¢/kWh.’  I agree with the specific statements, but take issue with some of the details.

She is comparing a ‘summer’ consumption of 400 kWh (one-person household) in a month with one of 1,200 kWh in a month (four-person household).  And, yes, under the two-tier system, the difference in the ‘commodity cost’ would be as she writes:  for the smaller household, all 400 kWh would be under the ‘summer threshold’ of 600 kWh and thus 6.8 cents/kWh; while the first half (600 kWh) of the larger household’s electricity consumption would be at 6.8 cents/kWh, and the second half (600 kWh) at 7.9 cents/kWh, to give an average of 7.35 cents/kWh.  My issue, however, is that these are not the ‘costs’ to the consumer – or the price that would be paid.  Instead, one must look at the total charges.

Using Hydro Ottawa as the service territory in the Ontario Energy Board’s bill calculator (Prof. Woolley is at Carleton University), I put in the consumption patterns, and got numbers as follows:

Charge	One-person household	Four-person household
Consumption in a summer month	400 kWh	1,200 kWh
Commodity charges	$28.14	$91.46
Delivery	$22.81	$48.15
Regulatory charges	$3.09	$8.78
Debt retirement charge	$2.76	$8.28
Sub-total	$56.80	$156.67
HST	$7.38	$20.37
Sub-total	$64.18	$177.03
Clean Energy Benefit	($6.42)	($17.70)
TOTAL	$57.76	$159.33
Cost/kWh	14.44 cents	13.28 cents

Two points to be taken from this.  First, it is important to flag that ‘commodity charges’ – though important – are not the ‘cost’ to the consumer.  And second, differences in commodity charges will not necessarily translate (‘exactly’) into differences in these final costs to the consumer.  Indeed, in the example above, the difference in the ‘per kWh’ cost to the consumer is not ‘8%’ (the 7.35 over 6.8), but instead is really ‘MINUS 9%’ (8.7% results from 14.44 over 13.28) -- that is, the larger household actually has the smaller unit cost for electricity.  Given that 'fixed charges' (reflected in delivery charges) are relatively large, and many of them fixed, regardless of one's consumption, these can overwhelm 'per kWh' calculations.  Therefore, while Woolley’s attention to distributional impacts is most welcomed -- and the ways in which smaller households and larger households will be affected by a move to time-of-use pricing is worth investigating further -- we should reflect further upon whether the difference in commodity costs for smaller and larger households in the conventional 'two-tier' system really told us the full story. 

Impacts upon seniors' and low-income households

To be honest, it is an article that I would not have expected to read in The National Post.  Entitled ‘Ontario’s Electric Circus’, and from 21 September 2011, interesting points about the relatively-modest differences in costs – to operate individual electric appliances in the home – are made.  These are similar to a blog posting of mine from last month.

The point to pick up on in this posting, however, follows from the article’s comment that:  ‘But there's little concrete evidence that time-of-use electricity rates disproportionately impact low-income families, seniors or otherwise at-risk groups - Mr. Hudak certainly hasn't offered any - and where such evidence can be found, it can be mitigated.’  I had the opportunity to supervise a Master’s student at the University of Waterloo a couple of years ago who investigated this issue.  In short (and the reader is directed to her thesis for full details), she found that seniors and low-income households (at least her sample in Milton, and at least as the on-, mid- and off-peak pricing existed before they were changed more recently) were a bit worse off under time-of-use rates (as compared to the traditional two-tier approach) in summer and a bit better off under time-of-use rates in the winter.  And, important to recognize, is that any differences were relatively modest.

PC elaboration of new residential pricing plans

There was quite a lot of coverage of Tim Hudak’s elaboration of how he would give residential customers ‘the choice’ with respect to time-of-use or flat rates.  The Toronto Sun, in an article entitled ‘Meters outsmart power users:  Hudak’ and dated 19 September 2011, reported it as follows:  ‘But Monday he elaborated on how prices would be different under a PC government: There would be a flat rate for the first 1,000 kilowatt hours and a higher rate for use after that.  “The flat rate is simply set as an average of the other (time of use) rates,” Hudak said.’  A check of the PC website could not provide confirmation and/or elaboration of this on a posting that explored the smart meter issue.  The Liberals, in their own subsequent press release, suggested that Hudak’s campaign team had issued a press release in clarification, but I could not find it.

But the Liberals were quick to jump on the issue, with a press release coming out saying that this would be a dramatic increase in costs to consumers.  The Liberal argument is that the PCs are talking about an ‘average’ of the three time-of-use rates – averaging 5.9, 8.9 and 10.7 gives you 8.5 cents per kWh.  Alternatively – and probably the case – if the average was in fact weighted to ‘time-of-use’, then the calculation would be a weighted average of 5.9 (64% weighted), 8.9 (18% weighted) and 10.5 (18% weighted), which is 7.268, or 7.3, cents per kWh.  This is higher than the present ‘lower-tier’ price of 6.8 cents per kWh, though lower than the ‘higher-tier’ price of 7.9 cents per kWh (which occurs across the summer threshold of 600 kWh). 

It will be interested to see how this is elaborated by the PCs.  ToU and two-tier are meant to be ‘impact-neutral’ to the average customer, and that is why you will find the 7.3 between the 6.8 and the 7.9.  As I have argued elsewhere in this blog, if you allow customers to choose whether they are on ToU or two-tier, then the rates for each would have to be higher than if everyone were on one or the other (because consumers will choose the ‘better one’ for them).   Another interesting elaboration will be with respect to the threshold – 1,000 kWh (mentioned by Hudak) is the winter threshold, but, as noted above, the summer one is lower.

This article also had interesting points about the impact of ToU upon peak consumption -- namely, a claim by Brad Duguid (Liberal MPP) that 'smart meters ... have already shaved 4% off demand during the peak consumption period' -- and I have addressed that in a previous posting.

Consumer choice of time-of-use or flat-rate

A 23 August 2011 article, entitled ‘PC candidate says smart meters bad for business’, appeared in The Barrie Advance.  In it, the PC Party’s plan for moving away from obligatory time-of-use rates was noted.  The relevant part of the article is as follows:  ‘[PC candidate Rod] Jackson said families and business should be able to choose what works for them – and opt out of smart meters. He couldn’t say, however, what rate they’d pay – an off-peak, mid-peak or on-peak rate. “It’s a good question. It’s up to the Ontario Energy Board. It won’t be as much as for a smart meter,” he said.’

I am left to wonder how prices can really go down when consumers are left with a choice of time-of-use rates or, say, some kind of flat-rate.  The revenues from the customers need, of course, to cover the costs of providing the electricity, so without a change in the cost of supply (which, admittedly, may be part of the broader PC platform), the money coming in has to be the same.

To give this further substance, I laid out the following simplistic example. (And noting my earlier comments in this blog, I recognize my own problem for concentrating upon ‘commodity costs’, but the point does not depend on that.)

Imagine customer A and customer B with load profiles as below.  If both are paying in a time-of-use environment, then the total revenue is 141.4 cents.  If both were paying in a flat-rate environment, the total revenue would be 140.0 cents.

Now if each was given the choice, customer A would stay on time-of-use rates (a heavy off-peak user) and customer B would choose the flat-rate tariff. Total revenue is now 136.8 cents.  Would it not be that the missing revenue would have to be made up by increasing the relative costs (say to 6.1/9.1/10.9 and 7.2 – that is, increases of about 3%), which would then generate revenue of 140.8 cents?

Customer	kWh use during off-peak (5.9 cents/kWh)	kWh use during mid-peak (8.9 cents/kWh)	kWh use during on-peak (10.7 cents/kWh)	Total cost under time of use (cents)	Total cost under flat-rate (assuming 7.0 cents/kWh à blending 6.8 and 7.9 cents/kWh prices)
A	8	1	1	66.8	70
B	6	2	2	74.6	70

It will be interesting to see if these options that will be available to customers will be more fully elaborated during the campaign.