The following article was submitted to the Chronicle-Herald in early December 2004. It was never published.
As most Nova Scotians are aware, Nova Scotia Power Incorporated (NSPI) has applied to the UARB for a substantial price increase for all its rate classes. In the residential rate class (the Domestic Service Tariff) NSPI is proposing an increase of 10.22 percent for energy consumption (8.61 to 9.49 cents per kilowatt-hour) and 10.25 percent for the customer charge ($10.83 to $11.94 per month). According to NSPI, this will result in an increase of about 14 percent for a residential customer's electricity bill.
Electrical utilities use rates to obtain revenues to meet the costs of running their business. One of the most significant costs for a utility such as NSPI is the cost of fuel. Since fuel costs vary, NSPI burns its most inexpensive fuels first (notably coal and petroleum coke) to meet the minimum daily demand, moving to more expensive fuels (oil and natural gas) to meet daily 'peak' demands, and, when unable to meet provincial demand, pays a premium price for electricity from other utilities (such as NB Power and Quebec Hydro).
Although NSPI generates electricity from a variety of fuels, each with a different cost, residential customers pay a common 'flat rate' for a kilowatt-hour of electricity (in part reflecting the various fuel costs). This means that customers who use more electricity during peak periods push up the price of electricity for all customers. In other words, customers who use small quantities of electricity can (and do) subsidize those customers using large quantities of electricity.
There are alternatives to the residential flat rate, such as time-of-day billing, in which customers are charged more during periods of high demand when generation costs are higher. NSPI does have an optional residential Time-of-Day rate; however, only about 3,000 (out of 420,000) residential customers use it. Despite its advantages, a switch to time-of-day billing would require a complete re-metering of all NSPI's residential customers (at a cost estimated to be between $20 million and $40 million).
Another billing technique that addresses the issue of subsidization (and does not require re-metering) is the inverted block rate. In the inverted block rate, the customer's consumption is divided into blocks; each block has a price per unit of electricity consumed, which increases with each succeeding block. The customer's bill is simply the sum of the consumption per block multiplied by the electricity price associated with each block. A customer's electricity bill reflects the amount of electricity consumed in each block: the more used, the more it costs per kilowatt-hour of electricity. Reducing consumption means paying less for each kilowatt-hour of electricity consumed.
A report submitted to the UARB hearings shows how a residential inverted block rate could be implemented by NSPI. The rate consists of five distinct blocks and is based upon NSPI's residential data: electricity consumed in the first block is charged 8.71 cents per kilowatt-hour, increasing to 10.65 cents per kilowatt-hour in the fifth block. Using this inverted block rate, 80 percent of NSPI's residential customers would pay less per kilowatt-hour of electricity consumed than under NSPI.s proposed new rate. Furthermore, the example rate is revenue neutral, meaning that NSPI would suffer no financial penalty for changing from the flat rate to the inverted block rate.
The inverted block rate has been shown to be superior to the flat rate as it can encourage customers to maintain or reduce their present levels of consumption, reduce the levels of subsidization, and reduce the impact of rate increases on low- and fixed-income customers. Large electricity consumption customers who are adversely affected by the rate change can be put onto other billing schemes, such as time-of-day billing.
Ideally, all of NSPI's residential customers would be put on time-of-day billing, as this is a more progressive billing scheme than the flat rate. However, until widespread time-of-day billing becomes available, the UARB should require NSPI to replace its proposed flat rate in favour of an inverted block rate billing structure for its residential customers.