Iowa Highlights New Rate Design in IPL Order

In an electric rate proceeding in which several novel rate design proposals were put forth, the Iowa Utilities Board has approved, as modified, a partial settlement in the case, the terms of which allow the utility, Interstate Power & Light Company (IPL), to increase its revenues by $130 million. The company had initially sought $176 million in rate relief. Among the new rate offerings suggested by the utility were an optimal demand rate, an economic development infill rate, and a time-of-use (TOU) rate specific to customers with a second meter.

Under the optimal demand (OD) rate program, which IPL proposed on a pilot basis, the utility would be able to recover its costs from residential and small general service customers in much the same way as it does from its larger-volume commercial and industrial customers, i.e., through demand charges. The company explained that the OD rate is targeted at those residential and small general service customers with a “good” load factor, meaning that their peak demand is very close to their average demand.

According to the utility, the OD rate would be revenue-neutral for any residential customer with a 35% summer load factor and a 30% winter load factor. For smaller general service customers, revenue neutrality would be maintained if such customers have a 40% load factor for both summer and winter. The company posited that making OD customers subject to demand charges would encourage customers to better control their demand and use their energy more efficiently.

Opponents of the plan, however, noted that demand charges may be difficult for smaller consumers to comprehend. They also argued that demand charges do not convey useful price signals such that customers may inadvertently shift their usage into higher-cost hours.

Emphasizing that pilots by their nature are designed to test new processes and procedures in a limited manner before instituting a change on a permanent basis, the board deemed the OD pilot worthwhile. The board stated that should the trial run show that customers were shifting usage to on-peak periods, thus increasing IPL’s system costs overall, the plan obviously would not be continued. But, the board added, it believed that the pilot should be pursued to see if customers may be able to adjust their consumption patterns so as to lower their bills, the new demand charges notwithstanding.

As to the company’s economic development infill (EDI) rate proposal, the board said it saw promise in that plan as well. The utility had crafted its EDI tariff with an eye toward incentivizing customers to locate in areas where IPL facilities already exist but are presently unused or underused. The company averred that unlike its standard ED tariff, which offers a discount to qualifying customers choosing to locate or relocate anywhere within IPL’s service territory, the EDI rate would be available only with respect to certain designated sectors of the company’s service area.

In adopting the EDI plan, the board commented that taking advantage of currently unutilized or underutilized facilities clearly would be more efficient and cost-effective for the company. Further, the board found that the EDI offering could help relieve pressure on those areas of the utility’s system that may be approaching overload conditions.

However, the board cautioned, for the EDI initiative to be truly effective, it is imperative that IPL clearly identify where in its service territory those underused facilities are. And, the board said, the utility must take care to update the public as changes in eligibility for the EDI rate occur. The board concurred with the company’s offer of the EDI rate as a fiveyear incentive with reductions premised on demand charges.

While the board commended IPL on its innovative thinking with regard to its OD and EDI proposals, the board was not as receptive to the company’s suggested TOU rates for customers with a second meter. The board noted that the utility had originally limited the TOU second meter rates to those customers using the second meter to charge an electric vehicle (EV). After some parties voiced objections to that restriction, the company eliminated the EV nexus from the proffered tariff.

But the board still was not satisfied, finding that the TOU second meter rate plan remained unclear and lacked specifics. The board reiterated some of the arguments against the plan as presented by challengers, including that the TOU second meter charge had not been shown to be cost-based. Moreover, the board related that some parties had questioned whether IPL had implemented appropriate tracking protocols to see whether second meter usage, whether for an EV or some other purpose, was leading to an overall increase in offpeak load.

Nevertheless, the board told the utility that while it was declining to authorize the TOU second meter tariff as proposed, it was open to revisiting the plan at a future time. The board provided IPL with an outline of the type of information it expected the company to include in any subsequent TOU second meter filing, should the utility decide to pursue it further.
Two other issues generated significant debate in the case, both of which often give rise to dispute in rate proceedings. The first was an appropriate level of customer charges and the second was the rate of return on common equity (ROE).

As to the former, the utility, pointing out that it had been 13 years since its customer charges had last risen, asked that it be permitted to raise its residential charge from $10.50 per month to $13.50 per month and its general service charge from $17.80 per month to $24 per month. The company attested that its class cost-ofservice studies indicated that even higher charges were actually warranted.

Upon protest by a number of parties, the utility agreed in a settlement to a new residential customer charge of $11.50 per month and a new general service customer charge of $19 a month. While some claimed the new charges were still too high, the board deemed them reasonable overall. It expounded that whereas IPL’s cost-of-service study supported an increase in the residential charge of 61.4% and a 40.3% increase in the general service charge, the increases ultimately provided for in the settlement were 9.5% and 6.7% respectively.

The board ruled those increases justified, especially in light of the lapse of time since the company’s customer charges had last been reviewed and adjusted. The board also commented that a greater increase was not necessary in part because IPL was being allowed to add a separate rider to its bills over a three-year period to recover its rate case expenses from the instant proceeding.

Finally, turning to ROE and other cost-of-capital matters, the board held that the 9.6% ROE reflected in the settlement was just and reasonable. It reported that the 9.6% value was slightly above the 9.4% midpoint of the ROEs advocated by the various participants, which ranged from a high of 10.3% sought by IPL to a low of 8.5% recommended by the Office of Consumer Advocate.

In determining the propriety of the stipulated 9.6% ROE, the board drew attention to the fact that two rate cases it had decided in 2017 had relied on ROEs of 9.6% and 9.5%. Moreover, the board said that the record revealed that the average ROE for electric utilities had declined to around 9.6% in 2016, a level that remained valid in 2017. Re Interstate Power & Light Co., Docket No. RPU-2017-0001, Feb. 2, 2018 (Iowa U.B.).