California’s IOUs plan to offer time-of-use rates

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Customers’ acceptance or resistance to time-of-use-rates hinges on two key factors—how well the rates are designed, and how effectively they are marketed—according to Peter Cappers, a research scientist with the Electric Markets and Policy Group at Lawrence Berkeley National Lab.

Whether California’s investor-owned utilities, which recently filed proposals to offer time-based rates, use the strategy Cappers outlined will be revealed in the coming months.

California IOUs plan to offer time-of-use rates

On February 28, San-Francisco-based Pacific Gas & Electric (PG&E) filed a proposal with state regulators to overhaul its rate design, which would include offering voluntary time-of-use rates. Southern California Edison (SCE), and San Diego Gas & Electric (SDG&E) also filed rate design plans with the California Public Utilities Commission (PUC).

California adopted a tiered electricity rate structure during the state’s 2001 energy crisis as a way to shield low usage customers from rates that were skyrocketing at the time. The approach led to the unintended consequence of shifting a disproportionate amount of steeper rates to customers with high consumption. The state legislature last year gave the California PUC more flexibility to set rates.

As for PG&E, the utility said it wants to introduce a voluntary time-of-use rate with no tiers, beginning in 2015. PG&E said a customer survey run in spring 2013 showed that a simple, non-tiered optional time-of-use rate is more likely to attract customers, as it is easier to understand than tiered rates.

SCE also wants to implement a voluntary time-of-use rate starting in 2015. SDG&E proposes optional non-tiered time-of-use rate, with default time-of-use rates starting in 2018. Customers would have the option to receive a 2-tier rate with a baseline credit.

Utilities ‘often don’t make a concerted effort’

Capper noted that annual Federal Regulatory Energy Commission studies show that many utilities have time-of-use rates on the books, but they “often don’t make a concerted effort” to market them.

Most utilities have limited budgets for marketing and they may decide to spend these funds on their larger commercial and industrial customers, rather than residential customers, Cappers said.

Time-of-use rates are successful when they offer a “narrow peak time and wide price differential” between time-of-use and other rates, Cappers said. That gives customers many hours in the day when they can save money by using the time-based rates, he said.

Marketing that focuses on the positive—such as how many hours customers can save money by using time-of-use rates—has a higher customer acceptance rate than marketing without such a focus, Cappers said.

What California’s IOUs can learn from Salt River Project and SMUD

Cappers pointed to Salt River Project, a Phoenix-based publicly-owned water and electric utility, as an example of a utility that has successfully adopted time-of-use rates. Between 20-25% of its customers are on the rates.

A quick glance at Salt River Project’s website shows that it offers customer-friendly information about time-of-use rates. It features clear descriptions and graphics, shows how much money customers can save annually, and identifies off-peak hours.

The issue of consumer attitudes towards time-based pricing has been front-and-center for the Department of Energy (DOE). The Sacramento Municipal Utility District is one of 10 utilities participating in DOE’s consumer behavior project. Detroit Edison, Minnesota Power and Oklahoma Gas & Electric are among the other participants.

SMUD’s initial evaluation of its 2009 time-of-use pricing pilot included lessons learned about communicating with customers. Instead of relying on enrollment or marketing materials, SMUD said its “customers preferred context, simple explanations, detailed tips and a lexicon that matched their expectations. The plan should be benefits-focused and address areas of concern presented by the customer.”

SMUD said it conducted a survey on customer attitudes on time-of-use and other time-based rates. The survey found that for voluntary customers, financial benefits were the strongest motivator. Customers with default time-of-use rates cited financial and environmental benefits, as well as “being unaware that they could drop from the rate as being primary reasons for participation.”