Over the past couple of months, my PowerLines articles have focused on the costs utilities incur through their operations and how they recover those costs through the rates they set. In this article, I’d like to shift our focus to fixed costs, and particularly the purpose for the Service Availability Charge (SAC).
What is the SAC?
The SAC is a fixed charge members pay each month regardless of how much power they use. Utilities incur considerable fixed costs through their operations, maintenance and replacement of equipment like substations, poles and wires. When set properly, the revenues collected through the SAC cover all the fixed costs a utility incurs. The energy charge, and demand charge when assessed, are designed to recover the variable costs a utility incurs.
Think of the SAC like this: if you own a car, you have to pay insurance, license, and taxes whether you drive every day or once a year. Fixed charges are like those expenses that come with your car, and your cooperative budgets for these costs the same as you. While you may not use much electricity, we must keep the system functional so that you have the ability to use electricity whenever you need it. It costs just as much to ensure the reliability and availability of power for a cabin or shop as it does for a home.
Another way to think of service availability is like insurance. If a storm causes damage to the electrical system, the cooperative does not bill members for system repairs. The SAC ensures that you have service no matter how much or how little energy you purchase. This helps guarantee each member of our cooperative is paying their fair share and not being subsidized by others.
Ensuring Fairness and Equity
Consider what might happen to a utility that arbitrarily set its SAC much lower than it should be. To compensate for this, such a utility would need to set its variable rates (energy charge) much higher than otherwise needed so that it could cover its operational costs. Crucially, such a rate design would lead to very high bills for members during months when consumption is high and very low bills during months of low consumption. More concerningly, such a rate design can result in members overpaying when the weather is extremely hot or cold.
Some members argue that the SAC discourages energy conservation or the installation of solar panels. This is somewhat true. As described above, setting the SAC lower than it should would require the utility to set its energy charges higher than they otherwise would need to be.
And those higher energy rates would provide greater incentive to invest in energy conservation or the installation of solar panels to augment one’s energy consumption. Wouldn’t those be good and equitable outcomes? The answer to that question may be surprising.
Consider a hypothetical electric cooperative that serves 1,000 members whose demographic and average monthly consumption is shown in the table below. This hypothetical co-op incurs $105,000 in costs ($50,000 in fixed costs and $55,000 in power supply costs) each month to supply 550,000 kWh to its members. To recover the $50,000 in fixed costs from all members equitably, the SAC should be set at $50 per member. This would allow the power supply costs of $55,000 to be recovered through energy charges at a rate of $0.10 per kWh. This scenario (see Scenario 1) ensures fairness and equity among members.
Now, presume this same utility arbitrarily set its Service Availability Charge to $25 per member (see Scenario 2). This would mean that only half of the fixed costs incurred by the utility would be recovered through the SAC. This would require the remaining $25,000 to be recovered through the energy charge, which would need to be increased to $0.1455 per kWh. Under such a rate design members with electric heat would end up paying more than their fair share than if the fixed costs were set correctly (Difference in Monthly Bill table). Conversely, seasonal members and those who offset their consumption with solar generation would be under contributing.
The SAC and Net Metering
Establishing a SAC that fully recovers the fixed costs of providing service is particularly important for utilities such as KEC who serve members who have installed solar panels to augment their electrical consumption. Why is this? For most of our members, power flows from the utility to the member. For those with solar panels, power can flow in both directions. At night, when the solar panels are not producing anything, power flows from the utility to the member like everyone else. During the daytime, when the solar panels are producing power, there are times when more power is being produced than is being consumed. Capturing this reverse flow of power requires a special rate where the amount of power the member is charged for at the end of the billing period is the net difference between what they used and what they produced. This net metering rate mirrors the same energy rate ($/kWh) KEC charges to other members in that same rate class who do not have solar. When that rate is arbitrarily high because the SAC is set too low, it creates an artificial incentive to install more solar power, however this incentive is subsidized by other members who have not installed solar.
It’s also important to note that while those with solar panels can have very low net energy consumptions, they do rely heavily on the grid. Truth be told, they use the grid as a quasi-battery for their solar production. When the sun is shining, they use the grid to “store” their solar production for later use. When the sun sets, they rely on the grid to return that power when they need it. Setting the SAC to fully recover the fixed costs of providing service ensures that these members pay their pro rata share of the costs of supporting the grid. This isn’t to say that solar production is not valuable. It’s just that it should not be subsidized by those who either do not want to install solar or who cannot do so. Those who cannot install solar includes those who rent, those whose property is not conducive to solar installations, or those who cannot afford the capital investment.
For all these reasons, it is KEC’s policy to ensure the Service Availability Charge it assesses through its rates closely recovers the actual fixed costs of providing service to its members.