The Future of Electric Rates

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By Brianna Wall

The last 80-plus years of electric rates have conditioned us to believe the cost of electricity is around 11¢ per kilowatt hour (kWh) — a national average. Realistically, the electricity itself is the cheapest part of our electric bills; only about 3.5¢ per kWh. If that’s the case, why have we been paying 11¢ per kWh all these years?

It’s quite an enigma, the way we as consumers have been billed for electricity since the first electric bill went out almost a century ago. We believe most of our electric bill hinges on how much electricity we consume in a given month. What if we told you the amount of electricity you use isn't the biggest factor on your bill? That only 20 to 30 percent — or less — of your bill is dependent upon your electricity use? It’s true, and consumers across the nation are waking up to this new idea. It’s a revolutionary way to think of your electric consumption and how you pay for it, but, if your bill is only 20 to 30 percent electricity use, where does the rest come from?

THE SIGNIFICANCE OF FIXED COSTS

The American electric grid is a fascinating engineering marvel, one that took years to perfect and continual efforts to operate. From generation facilities and transmission infrastructure to distribution lines and meters, it took a hefty chunk of change to construct this intricate system and requires a continuous cash flow to maintain it. The good part is these costs rarely change and are rather simple to budget year after year. They are fixed costs. And they’re the backbone of all electric companies.

If you have read CEO Patrick Grace’s monthly column From the Top in the last year, you have an idea what makes up the majority of an electric utility’s costs: the infrastructure in place and its maintenance. In other words, fixed costs; not only OEC’s fixed costs, but those of our generation and transmission provider, Western Farmers Electric Cooperative (WFEC). 

Members pay for fixed costs through the service availability charge (SAC) and the energy charge on their bills. The SAC currently sits at 83¢ per day, or $24.90 for a 30-day bill. Let’s take a closer look at the actual fixed costs OEC is required to pay.

A recent cost-of-service study revealed OEC’s monthly fixed costs to be about $52 per meter. WFEC’s monthly fixed costs range from $50-$60 per meter — a total of $102-$112 per meter per month. We receive $24.90 per meter per month through the SAC, but we must recoup the rest of those fixed costs through the energy charge, hence the 11¢ per kWh rate rather than 3.5¢ per kWh.

“Think about it like this,” said Mark Faulkenberry, WFEC senior manager, member relations. “During the winter months, members who use natural gas and propane to heat their homes typically experience lower electric bills, say $60 for example. The co-ops’ fixed costs range from $100-$110 year-round whether one kWh is used or not. That member’s $60 bill doesn’t satisfy all the costs associated with providing that home with electric service, much less the electricity consumed.”

ELECTRICITY IS ACTUALLY A BARGAIN

The cost of the electricity itself is dependent mainly on fuel prices. Fortunately, those prices typically remain stable due to its many generating sources. The selection between hydro, natural gas, wind, solar and coal means electric prices avoid the volatility that any one source is subject to on its own — as we witnessed with the spike of natural gas costs in January.

Did you know some electric companies in Texas are literally giving away free electricity — specifically on nights and weekends? A few of them have restructured their rates to cover all fixed costs on a monthly basis, and they’re able to give away the electricity itself because of its insignificant cost. 

If the cost of electricity has been only 3.5¢ all along, why the sudden shift in thinking? It comes down to one factor: technology. The advancement of technology is enabling electric utilities to redistribute costs, making rates fairer for everyone. We'll continue to see effects of new technology in regards to outage restoration times, engineering, billing, usage monitoring and more.

“While we’re beginning to see electric cooperatives and other utilities take the plunge with these peak-based rates, we’re not quite ready for them yet here at OEC,” said CEO Patrick Grace. “However, the board [of trustees] and I believe this is the future of electric rates and that sooner or later, we will have to give it serious consideration."

For more insight into the development of electric rates, keep your eye on CEO Patrick Grace's monthly column titled From the Top.