Ratemaking has a trilemma. How should utilities and policymakers balance the competing goals of ratemaking: sufficiency, efficiency, and equity? Sufficiency is principally a legal constraint that creates a revenue floor during ratemakings to address concerns about unconstitutional takings. The latter goals—efficiency and equity—have fewer legal limitations but compel important policy tradeoffs when designing rate structures for electricity consumers. Recently, technological ad-vancements and shifting social priorities have prompted a rebalancing of these seemingly conflicting goals. New technologies have made time-based electricity rates a viable means of demand response in many communities, reducing the need for expensive and polluting peaker plants and increasing economic efficiency by more closely aligning the retail price for electricity (which historically has been flat) with the cost of providing electricity service. But a renewed focus on equitable considerations calls into question the wisdom of new time-based rates since they may eliminate important cross subsidies that ensure electricity is accessible to vulnerable customers.
Before allowing efficiency or equity to dominate the other when balancing ratemaking’s trilemma, electric utilities and policymakers should ask when, if ever, these two goals are actually in tension with one another. Empirical evidence generated to date, for example, demonstrates that the two are not always mutually exclusive goals. Much evidence suggests most time-based rates are not harmful to vulnerable populations’ financial well-being, but different subpopulations may be harmed by these rate designs in light of the heterogeneity in initial load profiles and price responsiveness across populations and geographies. Utilities and policymakers, therefore, should acknowledge the potential for harm and act to minimize it but continue experimenting with time-based rate programs.
Experimentation carried out across the country over decades highlights ways to mitigate the potential for negative equity consequences from time-based electricity rates while not unduly sacrificing the efficiency benefits these rates pro-vide. When considering introducing time-based rates, utilities should also consider providing vulnerable customers technology that enables them to shift demand in response to new price signals; educating customers on new rate structures and how best to respond to them, particularly during periods of transition from one set of rates to another; and utilizing pilot studies to better understand idiosyncrasies of their service areas, customers, and generation mixes to help craft rates that make the most sense for their customers. Although these recommendations do not eliminate ratemaking’s trilemma, they offer utilities and policymakers an opportunity to balance the equity and efficiency goals of ratemaking in an empirically informed manner
