ORIGINAL REPORTING: What utilities can learn from Amazon and Netflix about ratemaking

Business Models: What utilities can learn from Amazon and Netflix about the future of ratemaking; Electricity rates will include time and performance factors, unless subscriptions take over.

Herman K. Trabish, Oct. 15, 2018 (Utility Dive)

Editor’s note: Momentum is slowly gathering behind voluntary trials of subscription rates.

The future of electricity ratemaking will give individual customers more control of their own utility bills. Maybe much more. Policymakers are already designing and deploying time- and location-based price signals to customers to guide usage. More ambitious plans would incentivize utility performance that meets customer demand. Performance-based regulation (PBR) is gaining traction "all over the world" as an alternative to cost-of-service regulation (COSR), Jim Lazar, senior advisor for the Regulatory Assistance Project (RAP), told Utility Dive. But PBR may not satisfy emerging consumers whose demand has been shaped in the subscription e-commerce market, according to Navigant Director Lon Huber and Tucson Electric Power Manager for Pricing and Analytics Richard Bachmeier. Their cutting-edge proposal offers a complete paradigm shift: Based on communications and entertainment industry subscription packages, it would offer customers subscriptions for electricity services.

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The idea of electricity subscriptions elicits mixed reactions. Lazar questions it because it bypasses regulators' ability to impose the pricing discipline of competitive markets. But it "takes seriously the idea of electricity as a service and gets the economics of the value proposition right," according to Purdue University Associate Professor of Economics and rate design authority Lynne Kiesling. "As technology evolves, we will learn what customers will do, embrace, tolerate and eschew," Lazar told Utility Dive. "As the green power revolution unfolds, we'll need a lot of rate design innovation." But the technology unlocked a subscription revolution through e-commerce platforms," the paper reports. "It is a complete paradigm shift," Huber told Utility Dive. But if the utility provides a compelling value proposition, its load will fall while its revenue from subscriptions does not, Huber said. That could be the ideal performance incentive, perfectly aligning customer and utility interests… click here for more

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