|
Abstract: This Article argues that retail electricity rates should vary more from place to place across a utility’s service area to more accurately reflect geographic differences in the utility’s costs of providing electricity service. Utilities’ costs of supplying electricity have always varied by location due to topography, economies of density, wildfire risk, and other factors. Despite those cost differences, state utility commissions have historically set retail electricity rates that are the same regardless of a customer’s location. For nearly a century, this “postage stamp rate” approach has compelled customers in inexpensive-to-serve areas to subsidize the electricity service of other customers in costly-to-serve places. Although this “one-rate-for-all-locations model” keeps electricity rates lower in costly-to-serve communities, it does so by overcharging low-cost urban customers and distorting retail electricity markets. Today, as growing wildfire risks and data center development drive up electricity prices and create energy affordability challenges across the country, the inefficiencies of utilities’ postage stamp rate approach to electricity rates are increasingly difficult to ignore. A straightforward way to address these challenges would be to designate multiple rate “zones” on a utility’s service area map and set retail rates that vary from zone to zone to at least partially reflect clear geographic differences in the utility’s service costs. Such an approach would send more accurate price signals to customers about the true costs of their electricity service, enhancing efficiency and equity in these markets—just as “locational marginal pricing” has done in wholesale power markets for many years. Among other things, zoned retail electricity pricing could reduce local opposition to renewable energy development by making it possible to offer discounted electricity rates in a project’s host community. Zoned rates could also promote distributed solar and storage installations where they would most benefit the grid. Such rate structures could even make it more difficult for utilities to hide the costs new data center projects indirectly impose on other ratepayers. In an age when climate change, artificial intelligence, and rising infrastructure development costs are placing unprecedented strain on the electric grid, zoned retail electricity pricing could be a valuable means of promoting low carbon, affordable electricity for generations to come.
|