Electric Utility Rate Structures

The Sierra Club believes that the price mechanism is a means available to bring demand for energy into line with present and future supply. Therefore, the Sierra Club endorses the promotion of energy conservation through appropriately designed electrical utility rate structures which, in conjunction with additional regulatory activity, minimize the emission of environmental pollutants.

Energy consumers should pay the full costs of energy production. Ideally, the price of a unit of energy for one customer should accurately reflect the cost of replacing that unit for the next customer. These costs include those for capital investment, operating expenses, pollution control, and environmental and social externalities. Moreover, when the long-run, incremental costs of providing electricity are accurately reflected in energy prices, customers will tend to make optimal decisions to conserve energy both by investing in energy-saving alternatives and by foregoing non-beneficial uses. The term "long-run, incremental cost" (LRIC) means the cost of delivering an additional unit of energy to meet reasonably expected demand, including environmental costs, investment costs (generation, transmission, and distribution capacity), and the variable costs of operation.

Because states will be reluctant, for political and economic reasons, to unilaterally adopt appropriate pricing principles and mechanisms to reduce energy consumption and pollution emissions, nationally applicable principles for utility regulation should be mandated by the federal government. The Sierra Club recommends that state and federal legislation and regulation should be designed to minimize the emissions of pollutants and the consumption of energy. The following principles should be adhered to:

  1. Electricity rates should approximate LRIC.
  2. Regulations that allow utilities to automatically adjust rates to reflect variable costs should not be permitted unless they promote pollution control and efficient use of energy resources, and are justified by revenue requirements.
  3. Volume discounts should be phased out.
  4. Load management techniques, such as peak-load pricing, should be implemented in a manner that will not contribute to increased pollution emissions. This will require positive regulating activity.
  5. Customers should not be discouraged from owning or installing renewable resource systems by discriminating rates or charges.
  6. Institutional barriers and economic inequities that prohibit integrated management of entire energy systems, the by-product generation and sale of electricity, the sharing of transmission systems ("wheeling"), and the use of "total energy systems" by industrial plants and institutions should be eliminated.
  7. Demand forecasts which are prepared by states or regions through a public process that provides for and encourages full citizen participation and that incorporates optimal energy conservation initiatives should determine the need for expanded capacity. Utilities should be allowed to include the cost of prospective capacity in their rate base only after LRIC has been implemented and after a regulatory decision has been made that the capacity will be needed to meet future demand. Furthermore, rate payers should not be penalized for the costs of overbuilt capacity.
  8. Utilities should be encouraged to assist consumers in installing cost-effective energy-saving devices, including insulation.
  9. The implementation of LRIC pricing may produce excess revenues to utilities and create hardship on low-income customers. The former consequence may foster unneeded expansion and encourage waste. The latter would affect a segment of society whose portion of demand is relatively inelastic and would result in deprivation rather than conservation. Therefore, utilities should receive no more than a fair rate of return on investment as LRIC pricing comes into effect, and excess revenues should be returned to the economy in a manner that would alleviate hardship without discouraging the conservation of energy. Redistribution decisions should be made with full public participation. In collecting and redistributing excess revenues, the following criteria should apply:

a. Excess revenues may be used to forgive all or part of "customer charges" unrelated to the quantity of electricity used by consumers.

b. Any excess revenues retained by the state or federal governments should be used to offset regressive taxes that would otherwise be paid by individuals.

c. If excess revenues are used to subsidize "lifeline rates," such subsidies should be restricted to subsistence quantities of electricity used by residential customers.

d. Any subsidies must be either neutral in application, or progressive and designed to favor low-income individuals.

e. Administrative efficiency and simplicity should be encouraged.

f. Any rebates should be restricted to excess revenues derived from residential consumers, should be paid only to residential consumers, and should not exceed the prices paid for electricity during the relevant period of consumption.

10. The Sierra Club recognizes the need to assure the availability of electricity for essential uses to low-income persons beyond what may be provided by mechanisms for the distribution of excess revenues. Subsidies for conservation investments or lifeline rates are two such samples.

Adopted by the Board of Directors, May 7-8, 1977

Mandatory Time-of-Use Pricing for Electricity

The Sierra Club urges an expanded effort to implement mandatory time differentiated prices of electricity to all commercial/industrial customers and for residential users consuming an annual average of 1,000 kilowatt hours per month or more. Time-of-use (TOU) rates better reflect the costs of supplying electricity by time-of-day and by season of the year. TOU rates apply marginal cost pricing principles and hence eliminate the promotional element in traditional rate structures, such as declining block rates. TOU rates also eliminate a de facto cross-subsidy of peak-load users by off-peak users. The effect of these two improvements in electric power rate structures is to reduce environmental stress from fuel production and consumption and to reduce the need for new power plant generating capacity and the environmental stress resulting therefrom.


Adopted by the Board of Directors May 4, 1985