IEEE Power & Energy Magazine - May/June 2020 - 20

table 1. Bonbright's principles of rate making.
Key Criterion

Bonbright Principle

1) Economic efficiency

Static efficiency of the rate classes and rate blocks in discouraging wasteful use of service while
promoting all justified types and amounts of use
Reflection of all of the present and future private and social costs and benefits occasioned by a
service's provision (i.e., all internalities and externalities)
Dynamic efficiency in promoting innovation and responding economically to changing demand and
supply patterns

2) Equity

Fairness of the specified rates in the approportionment of total costs of service among the different
ratepayers to avoid arbitrariness and capriciousness and attain equity
Avoidance of undue discrimination in rate relationships to be, if possible, compensatory

3) Revenue stability

Effectiveness in yielding total revenue requirements under the fair-return standard without any socially
undesirable expansion of the rate base or socially undesirable level of product quality and safety
Revenue stability and predictability, with a minimum of unexpected changes that are seriously adverse
to utility companies

4) Bill stability

Stability and predictability of the rates themselves, with a minimum of unexpected changes that are
seriously adverse to utility customers and with a sense of historical continuity

5) Customer satisfaction

The related, practical attributes of simplicity, certainty, convenience of payment, economy in
collection, understandability, public acceptability, and feasibility of application
Freedom from controversies as to proper interpretation

100

Fixed

Fixed

90
80
70

Variable

(%)

60
50

Variable

40
30
20

Demand

10
0

Utility Costs

Customer Bill

Cost Categories
Fixed (US$/Month)
- Metering
- Billing
- Customer Service
Variable (US$/kWh)
- Fuel
- Operations and Maintenance
Demand (US$/kW)
- Transmission Capacity
- Distribution Capacity
- Generation Capacity

figure 1. An illustrative misalignment between residential
rates and costs.
20	

ieee power & energy magazine	

consume more in high-cost hours, are subsidized by less peaky
customers with a higher load factor. A customer with a low load
factor may consume the same kilowatt-hours as a customer
with a high load factor and thus pay the same bill under a
two-part rate but impose much higher costs on the system.
The recent distributed generation (DG) expansion has
further compounded inequity concerns by introducing a
cross-subsidy from non-DG consumers to DG consumers
(often referred to as prosumers, since they both produce and
consume energy). Under net energy metering, available
in 43 states, a utility credits prosumers for any generation
they produce back into the grid. As a result, prosumers
who produce as much as they consume can achieve very
low energy bills, even as they continue to require grid services from the utility. Given that fixed infrastructure costs
make up a large share of utility costs, this allows DG consumers to avoid paying for a key service that they continue
to use. Meanwhile, non-DG consumers must then cover a
disproportionate share of capacity costs through their own
energy charges.
Under most current rate designs, this misalignment will
only grow as DER penetration continues to develop, transforming the grid and the way in which customers interact
with it. Dynamic pricing has been proposed as a means to
address this misalignment, while also facilitating renewable
penetration. This also comes at a time when states are adopting increasingly aggressive goals for their renewable portfolio standards, with the city of Washington, D.C., and the
states of California and Hawaii all targeting 100% renewable energy within the next two to three decades. Although
Bonbright's principles remain as relevant as ever, the world
to which they apply is changing, and tariffs must now adapt
to meet that change.
may/june 2020
IEEE Power & Energy Magazine - May/June 2020

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