Testimony on Cost of Service and Rate Design

I have delivered testimony over the years in support of reasonable rates for low-use residential ratepayers, consumers who live in densely populated metropolitan areas and street lighting ratepayers. You can download the testimony by clicking on the buttons below. I have taken some extreme positions and I think the exercise of developing testimony that is subject to cross examination forces you to think through things on a careful basis. My two friends from the U.S. — Ron Jolly and Conrad Reddick — helped me write the testimony and they are brilliant legal scholars on electricity utility issues. Some of the testimony is detailed — on the cost of street lights and customer costs. Given the dense topics involved in this type of testimony, I have tried to make the testimony interesting to read. The direct testimony includes provocative statements that were intended to irritate the utility company including the accusation the company’s behavior is analogous to an obstinate teenager. The first testimony is on the regressive nature of electricity rates for the company that sells electricity in Chicago.

Illinois Utilities have the Most Regressive Rate Structure in the World

I think it is important to be direct about the state of the rate structure for electric utilities in Illinois. The fact is that Illinois private utility companies here have extremely regressive rate designs, and this has been the case for many decades. Indeed, when I have studied this in the past by examining the level of the customer change and the remarkable way the Illinois utilities maintained a declining block, the Illinois rate structures are the most regressive in the country.  By regressive, I mean that the average price per kWh declines with increased usage. As I have worked around the world, I now know that typical rate structures in Europe, Asia, South America and Africa have inverted block rates (lower prices for lower usage) and no customer charges. This means that rate structures like ComEd’s are probably among the most regressive in the world. When I discuss rate structure in places like Nigeria and Malaysia with people in the industry, they are stunned to hear my stories about how in Chicago, we collect revenues from high customer charges and discounts for people who use a lot of electricity (we also have a laugh about the way executives at utility companies behave). If you want to see documentation of how to compute the regressiveness of a rate structure you and look at my testimony at my website https://edbodmer.com/testimony-on-cost-of-service-and-rate-design/.

“Electricity is the Rich Man’s Fuel”, David Poyer

As anybody who has worked for or against utility companies knows, executives like to confuse issues when they are wrong. We of course know that there may be some really rich person who lives in the City of Chicago in an apartment near the lake, who takes a lot of trips to Paris and who therefore may have low usage.  There also may be a poor family who lives in the suburbs, who has inefficient insulation and who therefore uses a lot of electricity. We have had to listen to this kind of bunk for years when fighting against the regressive rate structures. When working for the City of Chicago we even hired an expert from Argonne National Laboratory to study the issue – Dr. David Poyer (who should be on your email list). Dr. Poyer studied the issue in detail and demonstrated that for electricity there is an extremely high correlation between usage and income. Not very surprising. So, if you want to help low-income people, you should fix the absurd rate structure in the state.

Fixing the Rate Structure is More Important than a Low-Income Program

In the past, when we have discussed the dramatic problems with Illinois rate design, a typical response from the utility companies has been to say that these issues should be solved with a targeted low-income program. With these programs, they can then easily recover all of their costs and continue to keep their rich suburban customers happy with low rates for really high use in their big mansions around Lake Forest (where you could not find an overhead line). The specific low-income programs are fine, but it is much more important to get the rate design right. A good and efficient (and also completely cost justified) rate design would cover people like the working poor, lower middle-class, students and other people. The effect of having a low charge for the first block would cover so many more people than the limited target of specific low-income programs. I beg you not to fall into this utility company trap of feeling good about making a low-income program and leaving the regressive rate structures in place.

Don’t be Fooled, Green-washing Utility Companies Want Rate Designs that Encourage Higher Usage

When one reads about Samuel Insull, who started ComEd and eventually ended up in jail, one can see the importance to a utility company of increasing electricity usage. This has not changed. When I was a banker and met ComEd officials (and even provided advisory services to them), they would be so proud of hitting a new really high peak load or showing strong sales growth. When a former friend of mine named Ross Hemphill (he was a friend from my ICC days) became the head of ComEd’s rate department he successfully implemented a crazy idea called SFV (which I think stands for Single Fixed Variable). This even more regressive rate design was meant to head off solar power. So, when ComEd has their commercials about using less electricity or helping you with solar power, it is just green washing and nothing real.

The Chicago Area has More Diversity in Load than Just About Anywhere Else

When I visit my daughter in California, I see a lot of small houses. This is obviously because houses are so expensive there, and because people need to worry about earthquakes. Now, can you imagine moving from California to the much more interesting, diverse, cultured and lively City of Chicago or the Chicago Suburbs (a little less interesting). When you would move here, for the same price of a small house in California you could build a palace. But if you lived in the City, you would probably live in a small and much more environmentally friendly apartment. (One day, people must realize that when it comes to helping the environment, size matters. That is to say, big cars, big houses, big seats on airplanes, big dinners, big hotel rooms, big luggage, big Christmas decorations … are the worst). So, here is the problem. On average people in the City of Chicago use about 300 kWh per month while houses in the suburbs use about 900 kWh per month. People in the City, whether yuppies or CTA drivers or hotel maids or students at DePaul use less electricity and unfortunately are generally poorer. So, the ComEd and Ameren rate structures both penalize poor people and end up transferring a lot of money from the city to the much richer suburbs. In the end, this is simply criminal, we have a rate design that benefits the rich and at the same time encourages people to destroy the planet.

Solving the Problem

To solve the problem of regressive rates and also discouraging wasteful usage, I suggest something that was once called a life-line rate.  The first 100 kWh should pay only for the marginal cost of generation, maybe a price of about 3 cents per kWh.  This must be less than the absurd subsidies paid for really big industrial companies. Then, for the next 200 kWh, the price should be about 5 cents per kWh. There should be no customer charge at all. The remaining revenues could be in gradual increased prices for increased blocks. That’s it. And, when the weatherperson talks about the really hot temperatures on Channel 7 or the newsman on the national news shows pictures of floods or the tornadoes, maybe they will for once say that global warming is real and that you should use less energy, get a smaller car and turn off your air conditioner in rooms that you are not using. Fixing the regressive rate structure would be a step in the right direction.

PDF File with a Copy of My Testimony from a Long Time Ago -- Testiomny on the Regressive Rate Structure in Chicago

PDF File with a Copy of My Discussion of the Financial Crisis and Structured Finance Modelling

PDF File with a Copy of My Testimony from a Long Time Ago -- Testimony on Demand Forecasts and Regression

PDF File with a Copy of My Testimony from a Long Time Ago -- Testimony on Transition Charges and Stranded Investment

PDF File with a Copy of My Testimony from a Long Time Ago -- Testiomny on Customer Costs and Street Lights

PDF File with a Copy of My Testimony from a Long Time Ago -- Testiomny on Crazy Use of Non-Coincident Load Allocator

Financial Model File that Illustrates Bond Financing versus Bank Financing

PDF File with a Copy of My Testimony from a Long Time Ago -- Testiomny on Decommissioning Costs of Nuclear Plants

Cost of Service – Street Lights and Customer Costs 2009.pdf

Rebuttal Testimony on Cost of Service 2009.pdf

Testimony on Flaws in using the NCP allocator in Cost of service studies and how the NCP allocator is biased in favour of large business consumers

NCP Technical Appendix — City_Ex._2.1_–Bodmer_Rebuttal_Technical_Appendix_–_30_Dec._10.pdf

Rebuttal_Testimony on NCP Allocator_–_30_Dec._10.pdf

Testimony on the cost of serving residential ratepayers in densely populated areas and low use/low income ratepayers. In the rebuttal testimony I suggested the utility company was guilty of the firehouse effect in which firemen who sit around for most of the day can make themselves believe propositions that are preposterous to others (2007).


Firehouse Rebuttal.pdf

Testimony on fixed and variable costs and customer charges in embedded cost studies (2010)


Testimony on problems with the highly regressive rate structure in Chicago

Rebuttal Testimony in Case 94-0065.pdf

NCP Technical Appendix — City_Ex._2.1_–Bodmer_Rebuttal_Technical_Appendix_–_30_Dec._10.pdf

Testimony on selectively tracing franchise fees without computing regional cost of service

Testimony on Franchise Fee Tracing and City vs Suburb Costs in 1992.pdf

Testimony on new rates required for transition from bundled to unbundled rates

Direct Testimony in ICC 99-0117 Delivery Service Case on Behalf of the City of Chicago.pdf

Direct Testimony in ICC 99-0013 on Behalf of Competitive Energy Suppliers.pdf

Rebuttal Testimony in 01-0423 on behalf of Government and Consumer Interests.pdf