Saturday, March 15, 2008

Aligning Revenue with Cost

SRP recently announced that they would increase electricity rates during the two hottest months of the summer in order to recapture the higher cost of providing service during those months.

SRP managers originally proposed the 9.3 percent July/August increase because they said it would reflect the higher cost of providing electricity during the two hottest months, when more expensive generators have to be turned on to meet the higher demand.

That plan, which is still preferred by SRP's management, was defended as being the soundest business decision.

"There was public comment about the impact on the peak summer months but also ... they agreed with the philosophy of aligning revenue with the cost of service," said SRP spokesman Scott Harelson.

Of course there has been some objections, and hence some alternative proposals.

Two alternatives announced Thursday would spread the rate increase over six warm-weather months rather than concentrating all of it during July and August - the two hottest months when demand for electricity is greatest.

The board, which requested the alternatives, is scheduled to consider the proposals on Monday. Any new rate plan approved by the board would go into effect May 1.

The new proposals, however, did not win the support AARP Arizona, which opposed the original plan.

"The alternatives are not significantly better and don't address our major concerns," said Janee Briesemeister, senior legislative representative for AARP Arizona.

"There are serious health consequences for people who can't afford adequate cooling in the summertime. We believe SRP can meet its need by spreading the increase throughout the year."

We can use basic economic theory to predict what would happen in either scenario. If the rate increase is concentrated during the two highest cost months, customers will have an increased incentive to use less power during the time period when it is most expensive. If the rate increase is spread throughout the year, customers will not have as much incentive to reduce usage during the high cost months. Hence, spreading the rate increase will result in higher costs (and usage) and overall higher bills. Since SRP is a cooperative, their customers will pay the entire bill one way or the other.

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