My thoughts on cost shifts: First, we should speak clearly about potential vs. actual cost shifts. Second, the implication is that a cost shift is an unfair transfer of a revenue recovery burden; the term is, in fact, neutral. Third, fair characterization of a ... https://twitter.com/bsmithwood/status/1287437061960675328

2/ cost shift is only as good as the underlying rate. Fourth, since humans are involved, potential and actual cost shifts are everywhere. Finding cost shifts is rate making porn for neoclassical economists and for advocates with hidden agendas.

3/ Point 1. Only a regulator or legislator can create or continue a cost shift—through the approval or mandating of rate designs. Absent a tariff that automatically changes rates in close to real time (rare), the behavior of a customer can only create a potential shift.

4/ After the consumption behavior changes, the utility can propose, and the regulator can choose, to lock the shift in place, ignore it, or modify it through a rate change. This means there is discretion in timing and allocation of cost burdens, to be discussed in point 4.

5/ Point 2. A cost shift happens when, under current rates, one customer, group of customers, or customer class was going to pay a designated portion of the cost-based revenue req to the utility, but in the future and after a change in rates, the burden will be different.

6/ It is not enough and therefore not correct to yell, “I see a cost shift!” whenever a customer changes behavior. The behavior change is like claiming a tax deduction—it changes cash flow today for the taxpayer and maybe in the future for the government and others.

7/ The later re-allocation of burden in the rate design—the cost shift (which can happen by changing rates or leaving them alone after customer behavior changes)—might improve or worsen fairness or economic efficiency.

8/ For example, if a customer responds to high peak time rates by installing efficiency measures, they will pay less of the peak time costs allocated through the rate. If the measure is permanent, the customer will never pay those costs, and . . .

9/ if those costs are not avoided by the reduction in demand (e.g. saved fuel), then the utility will likely seek to recover them in an even higher peak rate in the next rate case. As a result, the efficient customer bears less cost burden, and the customer still using ...

10/ electricity during the peak period pays more. The efficient customer’s behavior set up a potential cost shift, and the regulator decides whether to lock it in. Another very common example is economic development rates. These rates give discounts to ...

11/ new customers or to customers that increase their load. The discounts are costs that the utility usually recovers—shifts to—other customers, with pre-approval from regulators. Utilities often argue that these rates are good because they support jobs.

12/ Utilities also argue that such rates create beneficial cost shifts because permanent increases in sales volume create more sales base over which to spread fixed costs. Of course, these increases also drive demand for new power plants and infrastructure.

13/ Point 3. Whether a potential cost shift is good or bad also depends on the quality of the underlying rate. Class rates are based on average usage. Customers who use less pay less than average and are often accused by utilities of not paying a “fair share” of costs. But . . .

14/ under cost of service regulation, you are only supposed to pay for what you use. They are just heeding the price signal. Crying “cost shift!” whenever a customer uses less makes no sense. Crying “cost shift” only in response to certain ways in which customers use less ...

15/ like through installing distributed generation (DG), is discriminatory absent actual evidence of avoided payment for caused costs. Note that there is a lot of evidence that DG customers actually cost much less to serve than non-DG customers. That means ...

16/ most DG customers have costs shifted onto them unless they are put on a rate that credits them for those reduced costs. Finally, since utilities operate under cost-of-service regimes, it is fair to suggest that the vast majority of potential ...

17/ cost shifts arise from bad planning, forecasting, and grid investment. If the utility had accounted for DG growth and built accordingly, the rate would recover the revenue required. Didn’t they see it coming? Should customers pay for every utility mistake? That is:

18/ Rates send price signals to utilities, too. When a regulator guarantees recovery of every cost, they tell the utility that cost control doesn’t matter—the opposite of substituting for the forces of competition the utility would otherwise face. That leads to my final point.

19/ Point 4 is that dealing with cost shifts is complicated, a bit subjective, and a matter of policy preferences. Rates and the forecasts they are built on are seldom if ever perfect. A utility rate case can involve hundreds of different and potentially offsetting potential ...

20/ cost shifts. Dealing with one at a time is usually a bad idea—“piece meal rate making.” Dealing with tiny ones when giant ones are staring you in the face is administratively inefficient and discriminatory. Some deserve action; some deserve watchful waiting. Some are ...

21/ actually intended. The very best place to start is with objective benefit-cost analysis for the programs involved. Understanding cost-effectiveness can inform the very separate, subjective task of allowing or adjusting potential cost shifts in rate proceedings.

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