ML19199A578
| ML19199A578 | |
| Person / Time | |
|---|---|
| Site: | Crane  |
| Issue date: | 01/27/1977 |
| From: | Cleary D Office of Nuclear Reactor Regulation |
| To: | Norris J Office of Nuclear Reactor Regulation |
| References | |
| NUDOCS 7905040179 | |
| Download: ML19199A578 (9) | |
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Forms AEC.318 (Re. M 5) AF.CM 0240
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g UNITED STATES OF MtERICA NUCLEAR REGULATORY CCMMISSION BEFORE THE AT0f1IC SAFETY AND LICENSING BOARD In the Matter of
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METROPOLITAN EDISON CCMPANY,
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JERSEY CEiiTRAL PCWER AND LIGHT
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Docket No. 50-320 CCMPANY & PENilSYLVANIA ELECTRIC
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COMPANY
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(Three Mile Island Nuclear
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Station, Unit 2)
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TESTII CNY OF G. THCMAS SAV CN PETITICfl AS CITED IN PARAGRAPH NUMBER 5 l
9 Contention 5 "T5e Petitioners contend that the rate structure of the Applicant is a prctotional rate structure designed to increase tne consum; tion of electricity by effering declining rates for increased consumotion.
Sucn a rate structure minimizes the possibility and practicality of worth-while energy conservation efforts. Petitioners contend that a flat rate structure - one price for all levels of consumption and for all customers -
or a declining block rate structure would make conservation a viable and practical alternative to Three Mile Island, Unit II."
Recent empirical evidence indicates that the price of electricity is an important deteminant of the amount of electricity de anded per unit of time. 1/ Historically, U.S. electric utilities have charged a price per unit of electricity tnat has exnibited both intra-consumer and inter-consumer differentials.
Intra-censumer price dif ferentials exist with respect to the amount of electricity consumed per customer during the billing period. As successively larger amounts of electricity are con-sumed, the price per unit of electricity decreases in a series of steos -
such a price scnedule is usually referred to as a declining block rate Inter-consumer price differentials exist as a result of distinguishing among different classifications of customers for pricing purpcses; e.g.,
residential, ccmmercial, and industrial custcmer classifications are three major classifications generally used.
For eacn customer class-ification there is generally a different price or rate senedule which has historically been of a declining block nature. Thus, tne price of electricity depends, inter alia, en (1) how mucn is consumed and (2) by whcm it is consumed.
In the wake of an increasing awareness for the need to efficiently utilize cur scarce resources, the pricing practices of the electric power industry have been subject to much criticism. One of tne major criticisms put forth has been directed toward the declining block rates within custcmer classes. Critics maintain that ceclining bicck rates encourage tne consumption of more electricity by offering lower per unit prices as quantity consumed increases.
As a means for enccuraging conservation in electricity usage critics have proposed a restructuring of the declining block rates.
Ccmonly mentioned alternatives include increasing block rates and flat rates. Under increasing block rates (wnich accunts to inverting the declining block rate scaedule) the per unit crice of electricity increases in a series of steps as cuantity consumed increases during the billing pericd. Under a flat or unifem rate scnedule the price per unit of electricity is invariant witn respect to quantity consumed.
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. One of the most widely accepted principles of reasonable public utility rates and rate relationships is cost of service. 2/ Rates snculd be set in such a way that tney are cost justified, i.e., rates shculd. reflect the full cost associated with supplying electricity to customers at any given time. Using this principle of rate setting, the argument that costs of producing electricity decline as volume produced increases has long been a justification for declining block rates. Ecwever, proponents of increasing block and flat rates have argued that wnile electric utilities have experienced declining costs in the past, the recent trend has been for costs per KWh to increase with increasing cutput.
If this hypothesis were correct, then increasing bicck rates would be cost justified.
Similarly, if costs per KWh were constant with respect to electricity produced, tnen a flat rate would be cost justified.
A simple graphical analysis in which electric production expenses expressed in mills per KWh are plotted against time would accear to suggest that since abcut 1965 the per KWh production costs of electricity have changed from a dcwnward to upward sloping relationship. However, more sophisticated empirical studies have concluded tnat these recent upturns overtime are actually the result.of dynamic upward shifts in declining cost curves.
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Moreover, statistical evidence shows that, even for these later years, the cost per KWh said is inversely related to both average residential electricity consumpticn and average nonresidential censumotion.
In addition, econcmies of scale are realized frcm increases in consumpticn per customer. Thus, the evidence substantiates the rationale underlying declining bicck rates.
There are additional econcmic consequences which must be considered in evaluating the effects of rate restructuring.
Econcaic theory suggests that consumers of electricity base their incremental consw ption decisions (i.e., whether or not to consume more or less electricity) on the marginal price of electricity (i.e., en the price of one more or one less unit of el ectricity). Under a declining block rate, tne average price of elec-tricity to tne consumer is higher than tne marginal price. An increasing block or flat rate scnedule whicn increases the marginal price even thcugh the average price remains uncnanged cculd have the effect of reducing censumption of an indivicual customer. This, however, does not imply that a particular group of custcrers (e.g., residential) will reduce their ccabined cr overali consumption of electricity.
In fact, overall con-sumption could increase, since small quantity users may pay a lower m ginal price than before tne restructuring - even thcugn large quantity users pay a higher marginal price.
In total, increased censumction of small quantity users within a particular group may more tnc.) offset the decreased consumption of large quantity users. The net result being an increase in the overall censucction of electricity.
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- Research conducted at Cornell University has attempted to estimate the impact of such rate restructuring an the consumption of electricity. J/
The research methodology used a model for forecasting electricity consum;tien.
The model included explanatory variables whicn represented botn tne level and steepness of the rate schedule.
The study leads to the conclusion that there is no evidence to support the contention that restructuring of the rate schedule will lead to significant recuctions in the consumption of electricity. Moreover, there mignt be a slign expansion in consumption as a result of increased ceisumotion by small quantity users offsetting the reduced consumpticn by large users.
Yet another study has investigated the effects of eliminating scme of the inter-consumer price differentials for electricity.
5/ The results indicate that an elimination of the price differentials between residential, ccm-mercial, and incustrial consumers wculd lower industrial consumption and increase both residential and ccmmercial consumation.
In scme instances, the aggregate growth rate of electricity consumption remained unchanged.
In otner instances, rate equalization resulted in an increased aggregate growth.
State public utility ccamissions are delegated with the authority of reg-ulating electric power companies and have the responsibility of approving
. rates and rate designs. The FEA recently recuested that the fiaticnal Association of Regulatory Utility Commissioners submit a cuestionnaire to state commissioners concerning, among other things, electric utility rate structures.
6/ The responses indicated a general disagreement abcut the potential effect of increasing block rates.
Financial effects, it was thougnt, cannot be predicted with certainty since the response of different groups of consumers to a rate change is highly speculative in the absence of any definative elasticity of demand studies. As to whether or not rate inversion would be beneficial to consumers, it was mentioned that icw usage custcmers would face icwer rates but any additional costs incurred by industry would precably be passed on to the consomer in the fcnn of higher product costs.
It was also felt that where rates were increased more than is cost justified, incustry would be driven out of tne state and that higner rates would affect plant location decisions.
In sum, these renarks suggest that the level of the rate schedule is a more important determinant of electricity consumption than is the shace of the rate schedule. Althougn increasing bicck rates or flat rates are not expected to lead to substantial reducticns of overall electricity demand, this does not imply that they are ineffective as a conservation measure.
Declining bicck rates tend to stimulate the demand for electricity in such uses as air conditioning and space heating. Albeit inverted or flat rates may discourage electricity use for such activities, the expected net effect is one of increasing overall useage.
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4 Declining block rates have more recently been criticized not because of their intra-or inter-consumer price differentials, but rather the absence of differential rates / tween ceak and off-peak consumotion. The demand for electricity is not.tiform over time.
It varies uitn the time of day and according to the season of tne year. Historically declining block rates have not incorporated a time differential ccmconent. As a result eratic load patterns nave been maintained and characterized by (1) ceak periods witn demand pressing against available generating capacity and (2) off-peak periods with demand insufficient to utilize available capacity.
However, because electric utilities are required to provide a level of capacity sufficient to meet demands in peak periods, tney are left with substantial amounts of idle capacity in off-peak periods.
Peak load pricing has been proposed by many critics of electricity pricing as a solution for moving away from this inefficient utili:ation of resources.
Peak load pricing involves a pricing schedule in which price varies arcord-ing to the level of kilowatt demand on the system over a daily and seasonal cycl e.
In the peak period prices would be set relatively hign, thereby di;couraging use, whereas in the off-peak period comparatively low prices would be in effect, tnececy encouraging demand. This type of pricing scneme is alleged to smooth out the pattern of demand; i.e., remove the peaks and hollows f rca the demand pattern. Depending on the own price and cross price elasticities of the demand for electricity, peak load pricing would have the ffect of decreasing quantity demanded at the peak and increasing the quantity demanded at the off-peak. As a result, (1) the amount of unused gen-erating capacity is reduced due to a smoother demand pattern and (2) the total generating capacity requirements are reduced due to both a more stable demand pattern and a decrease of quantity demanded at the peak. 7]
The arunt of total capacity needed by an electric utility is determined by the level of peak demand. Obviously, if peak load pricing reduced peak demand, then total capacity recuirements would be reduced (unless own price and cross price elasticity of demand for peak power is zero). But con-sideration as to the ultimate effects of ;eak load pricing must go beyond the total capacity requirements. Soecifically, consideration must be given to the effects en the optimal mix of generating capacities.
For any given pattern of electricity demand there is a least cost (hence cptimal) mix of gererating capacities for supplying this demand.
The optimal mix, being determined by the pattern of demand, varies as the pattern changes.
The flatter is the load duration curve, the more base load capacity (low ocerating cost) it is optimal to include in the gen-erating mix. Steeper load duration curves imoly the inclusion of more ceicing capacity (high operating cost) in the optimal mix. Comoared to present rate structures, peak load pricing wcula have the effect of flattening the load duration curve; i.e., decrease *ne cuantity demanded at the peak and increase the quantity demanded at the off peak.
S/ Consecuently, peak 4 ^
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... -... -... - -. load pricing would likely alter the least cost mix of generating capacities, viz., decrease peak Icad capacity requirements and increase base load capacity requirements.
A study recently conducted at the Massachusetts Institute of Technology examined the impact of peak load pricing on the U.S. Nuclear Energy Industry. 9]
The study concludes that peak load pricing wculd increase the demand for nuclear base lead facilities. Additional literature addressing the subject of peak load pricing indicates a general consensus that this type of pricing scheme will lead to additional base load capacity requirements while reducing the need for peaking capacity.
Peak load pricing of electricity in the United States has just begun to gain mcmentum. The Federal Energy Acministration (FEA) is currently funding a series of demand management projects to be undertaken in several states - including Ari:cna, Arkansas, California, Connecticut, New Jersey, and Ohio. These projects involve various types of experimental rates (primarily time of day rates) within the residential sector, generally 200 to 400 hcuseholds are included in each project. Althcugh any definite results are not yet available, preliminary data indicate that housebolds respond to time of day rates by shifting tneir consumption away frcm peak periods toward off peak pericds. The system wide effects, however, will be determined in the final phases of the projects - when all data have been obt'ained.
Jersey Central Power and Light Ccapany is a participant in the FEA demand-management, demonstration project. The experimental tests, however, are just getting underway and are expected to continue a couple of years into the future. There is, of ccurse, no data currently available wnich lends itself to evaluation by the staff.
In contrast to practice in the United States, several European utilities -
e.g., in Norway, Sweden, Finland, France, and Britain - have insti tuted various forms of peak load pricing. Results frcm tne British experience are readily available and widely published.
lof The British experiment was motivated by an undesiracle increase in tne winter peak load. The experiment began in the 1966-67 winter and lasted until the 1971-72 winter.
It involved nearly 3500 residential households divided into experimental and control groups.
Experimental housencids were sucjected to several types of new rate structures, including a seasonal time-of-day (STD) rate.
Ccmpared to the ordinary rates, the STD rates had a 300%
mark-up during the daily work day peak hours of 8 A.M. to 1 P.M.
and 4:30 P.li. to 7:30 P.M. for the winter months of December, January, and Feb rua ry.
The results of the experiment indicate that, av:rauec over the five years, the STD households consumec 1.75 more annual Lh per hcusehold than the control group. Mcwever, the pattern of consumpticn l,
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Relative to the control households, STD households consumed less electricity during peak hours and more electricity during off-peak hours.
Although these resuits may not be directly transferable to the United States, they do support the general results anticipated in the current literature on peak load pricing; viz., that peak load pricing will reduce peak consumption and increase off-peak consumption.
In conclusion, the staff does not believe that alternative rate structures would be a viable alternative to Three Mile Island, Unit II.
Recent evidence suggests that inverted or flat rate structures have little, if any, cost justification and in any event could have the effect of increasing the overall consumption of electricity if adopted.
European experience indicates that the implementation of peak load pricing reduces consumption at the peak period and increases consumption at the off-peak pariod. When a heterogeneous mix of generating capacities are recuired, however, peak load pricing implies an increased demand for base load capacity in order to supply electricity at least cost. Thus, rate restructuring would increase the need for Three Mile Island, Unit II.
C.
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h REFERENCES 1.
L. D. Taylor, "The Demand For Electricity: A Survey," Bell Journal of Econccics, Spring 1975, 6,74-110. Also W. S. Chern, S. B. Caucill, S. D. Holccab and W. W. Lin, " Future Growth Of Electric Power Demand In The Scuth Atlantic Regicn," October 1976, research sconsored by the U.S. iiuclear Regulatory Ccm-mission under Union Carbide Corporation's contract with the Energy Research and Development Administraticn.
2.
James C. Benbrignt, Princicles of Public Utility Rates, New York, 1961, Chapter IV.
3.
John W. Wilson and Robert G. Uhler, " Inverted Electric Utilities Rate Structures: An Empirical Analysis," Federal Power Commission, March 1974.
4.
L. D. Chapman, G.G. Akland, et. al., " Electricity Demand: Project Independence And The Clean Air Act," Cak Ridge National Laboratory, work supported by the National Science Foundation, November 1975.
5.
See Reference 4.
6.
National Associatit - of Regulatcry Utility Ccmmissioners,1974 Recort of the General Counsel On Economics, Washington, D.C.,
October 1974.
7.
Elizabeth E. Bailey, " Peak-Load Pricing Under Regulatory Con-straint," in Elizabeth E. Bailey, Economic Theery of Reculatory Constraint, Bell Telephone Labcratories, W/3,1:::i-Itd 8.
John T. Wenders, "The Misapplication of the Theory of Peak-Load Pricing to the Electric Utility Incustry," Public Utilities Fort-nichtly, Cecember 4,1975 9.
Paul L. Joskew and Martin L. Saughman, The Future of the U.S.
Nuclear Ecercy Incustry, Massachusetts Institute of Tecnnoicgy, April 1975,
- 10. John T. Wenders and Lester D. Taylor, " Experiments in Seasonal-Time-Of-Cay Pricing of Electricity to Residential Users," Bell Journal of Econenics, Autumn 1976, 7, 631-552. Also Bridger M.
Mitcnell, "Les1gnis Peak-Load Pricing for Electricity with Reference to Eurocean Theory and Practice," pa::er presented at the 1976 kmual rsdarenco nf rhn,Ies te rn Econ mic Association; and reference number 6.
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