Today’s rate designs are defective. How can utilities better recover their fixed costs, and from whom?

Volumetric rates, which place much of a utility’s fixed costs in the usage (KWh) charge of a tariff, have created a number of social problems as they relate to economic efficiency and equity.

The heightened interest in fixed and demand charges for residential electricity customers has sprung largely from the flaws in the prevailing rate design for residential electric service; namely, volumetric rates, especially as those failings have been magnified with recent developments in electricity markets and public policy.

Major reasons for this longstanding perverted rate structure seem to be the following: (1) the perception that alternative rate designs like fixed charges are unfavorable to vulnerable customers, like low-income households; and (2) less-than-definitive rules for allocating fixed or common costs to different customers and services. 

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