Electricity costs: the proof is in the billing

Every couple of months, Nova Scotians receive a bill from Nova Scotia Power for the electricity consumed in their households. The amount due is determined, in part, using flat-rate billing, which is simply the product of the amount of electricity consumed over the billing period (in kilowatt-hours) and the price of the electricity (in $/kWh). Although NSP generates electricity from a number of different fuel sources, all with varying prices, the cost of electricity is determined far in advance in rate hearings conducted by the Utility and Review Board (UARB).

In a time of volatile energy costs, setting electricity prices at rate hearings make little sense, because if they are too high, consumers pay too much (allowing NSP to make additional profits, which should be resolved at the next rate hearing), while if they are too low, consumers pay too little (causing NSP to carry the costs until the next rate hearing). As part of the evidence to support their most recent rate application, NSP explained how their new Fuel Adjustment Mechanism (FAM) will rectify this difficulty because, “by implementing the FAM effective January 1, 2009, the UARB will help ensure that NSPI customers pay no more and no less than the actual costs of fuel.”

When compared to the past practice of estimating the price to be charged for electricity in rate hearings, this is perfectly true, as the price will be closer to the actual cost of the fuel used for generation. However, what NSP didn’t mention in their rate application is that the price a customer pays for a kilowatt-hour of electricity consumed doesn’t reflect the cost of the fuel used to generate it.

NSP’s electrical load varies throughout the day, from a low overnight to a high in the evening. During any hour of the day, NSP uses a variety of fuels (or energy sources) to meet the load, including coal, petroleum coke, oil, hydroelectricity, natural gas, tidal, biomass, and wind. The cost of these energy sources ranges from the relatively inexpensive (coal) to the expensive (oil), meaning that, for example, the cost of generating a kilowatt-hour of electricity at 6am is less expensive than generating a kilowatt-hour at 6pm.

Despite the fact that the cost of a kilowatt-hour of electricity depends upon the fuels used to generate it, NSP has a flat rate for the electricity consumed by its residential customers. As a result, customers see no benefits when they consume electricity generated from less costly sources. The flat-rate method also means that customers have no incentives to change their consumption patterns to take advantage of, for example, intermittent, renewable energy sources. Most disturbingly, consumers of less costly electricity subsidize those consuming more costly electricity.

The root of this problem is time. By reading (or estimating) a customer’s meter every two months, NSP has no choice but to calculate the bill based upon the mix of fuels used over the two month period—any hourly variations are lost. If the meter reading interval could be decreased to, for example, hourly, then customers’ bills would reflect more closely the energy sources used to generate the electricity they consumed.

In an age of digital electronics and high-speed communications, it is a relatively straightforward task to design a meter that reads and records hourly electrical consumption. In fact, there are a variety meters on the market, collectively known as interval meters, that meet these requirements. Interval meters are being installed worldwide by many progressive utilities. These meters allow time-of-use billing, the matching of the utility’s hourly generation with a customer’s hourly consumption, and result in bills that more closely reflect the true cost of the electricity consumed.

Interval meters and time-of-use billing have other advantages over existing flat-rate billing methods. For example, most modern appliances such as dishwashers and washing machines can be programmed to operate at a given time-of-day, allowing the customer to take advantage of less-expensive overnight electricity rates.

For NSP’s residential customers, there are two other noteworthy benefits. First, the UARB recently agreed to NSP’s demand side management (DSM) program that applies a surcharge to every kilowatt-hour of electricity consumed, regardless of how and when it is generated. Not only does this penalize cleaner forms of generation, it does nothing to encourage Nova Scotians to reduce their consumption of electricity during times of expensive generation. A progressive DSM program would penalize dirtier fuels (such as coal and petroleum coke) and charge more for electricity consumed during the evening hours—something that time-of-use metering allows.

Second, in the last provincial budget, the government announced that, “The rebate for those heating with electricity will be applied on use over 27.4 daily kilowatt hours.” However, because NSP does not have time-of-use metering, the province had to fudge the rebate, increasing the consumption limit to about 1,644 kilowatt-hours for each two-month billing period. With interval meters and time-of-use billing, the rebate could have been implemented as announced, as the daily consumption would be known.

During the UARB hearings on demand side management heard earlier this year, the Board had the opportunity to make NSP change the way electricity is metered in the province—they didn’t. Perhaps this shouldn’t be a surprise, because as history has shown, when it comes to regulating NSP, the UARB never seems to miss an opportunity to miss an opportunity.

Published: AllNovaScotia.com 22 September 2008