Kansas Encourages Separate Cost-Based DG Tariffs

In an effort to assure that electric utilities recover from distributed generation (DG) customers contributions sufficient to cover their proportionate share of the fixed costs of operating and maintaining the grid, the Kansas State Corporation Commission has issued an order offering guidance to electric companies in designing rate schedules for residential DG customers. In doing so, the Kansas commission joined regulators in a number of other states that have recently revisited rate structure matters for net-metered customers with self-generating capabilities, such as from wind or solar systems installed at their premises. 

A key feature of the new guidelines is commission authorization for utilities to establish a separate rate class and associated new rate design for DG customers. The commission posited that placing those customers in a distinct category will better ensure that they share in the fixed costs of the electric grid and are not unfairly subsidized by other ratepayers that are not net-metered. 

As a threshold matter, the commission found that DG customers should be uniquely identified within the rate-making process because of potentially significant differences in their usage characteristics. It added that assignment of DG customers within a class or sub-class is critical for properly recognizing both the costs and quantifiable benefits of DG. 

The commission thus urged the state's electric utilities to create separate residential classes or sub-classes for DG customers, with associated rates designed to appropriately recover the fixed costs of providing service to residential DG customers. However, the commission said, as an alternative, a utility could continue to serve residential DG customers within an existing residential rate class if the utility believes there are too few DG customers to justify a separate residential DG class or sub-class or it determines other justification exists to retain those customers in their current rate class. 

In concluding that institution of a separate DG class would be preferable, the commission related that the current two-part residential DG rate design used by most utilities is problematic for the utilities and residential private DG customers alike. The commission explained that that is because DG customers now use the electric grid primarily as a backup system, resulting in DG ratepayers consuming less energy than non-DG customers, which in turn means that DG customers end up not paying the same proportion of fixed costs as non-DG customers. 

Consequently, the commission found that DG customers were being subsidized by all other consumers, to the detriment of non-DG customers. To afford utilities a better opportunity to recoup the actual costs of providing service to that DG class or sub-class, the commission held that the following rate design options would be appropriate to apply to residential DG customers: 

1. A cost-of-service-based three-part rate consisting of a customer charge, demand charge, and energy charge; 
2. A grid charge based upon either the DG customer's output or nameplate rating; or 
3. A cost-of-service-based customer charge that is tiered depending on a customer's capacity requirements. 

According to the commission, the crucial factor in setting rates for private residential DG customers is that they should be cost-based such that any "unquantifiable value of resource" approach should not be considered when setting rates. The commission stressed that cost-based rates are a fundamental attribute of good rate design, as they allow the commission to clearly identify quantifiable costs, which ensures rates for all customers are equitable. At the same time, the commission said, cost-based rates encourage efficient use of resources and minimize unnecessary cross-subsidization between customers. 

Reiterating that a class cost-ofservice study would offer sufficient support for designing residential DG tariffs, the commission deemed it unnecessary at the present time to engage in any type of "value of resource" study or cost/benefit analysis instead. Re Issues Surrounding Rate Design for Distributed Generation Customers, Docket No. 16-GIME-403-GIE, Sept. 21, 2017 (Kan.S.C.C.).