Moving Forward with Electricity Tariff Reform

For the better part of the past century, residential customers in the United States and many other countries have paid for electricity through a twopart tariff that has collected most of the revenue through a flat volumetric charge—that is, flat electricity rates paid in cents per kilowatt hour (¢/ kWh). In contrast, a large share of the cost of producing and delivering electricity does not vary with the volume of electricity consumed. By not being cost-reflective, such tariffs have neither promoted economic efficiency nor equity in customer bills. Although these limitations have been recognized by the industry, tariff reform has been desultory, characterized by fits and starts mostly driven by energy crises and technology advancements. Since the 1980s there have been four waves of tariff reform. In the now-ongoing fourth wave, there is an opportunity to move ahead with efficient cost-reflective tariffs because of the widespread deployment of smart meters. The need for cost-reflective tariffs has become pressing because of major shifts in the industry, including a slowdown in utility sales growth and trends toward more distributed generation. We are on the cusp of a fifth wave of tariff reform that will see residential customers engaging in a “transactive energy” marketplace, akin to how larger entities engage in wholesale energy and capacity markets today. But we cannot reach the full potential of that future without first implementing efficient and cost-reflective tariffs. In this article we discuss ways in which the industry can make the most of our smart grid investments thus far, move forward with tariff reform, and set the stage for a successful transactive energy future. Advancements in today’s electricity industry have led many