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For decades, the business model of a municipal electric utility was straightforward. Customers consumed power, the utility measured it in kilowatt-hours, and the bill followed. Fixed costs for poles, wires, substations, and staff were bundled into that per-kWh price and recovered reliably as long as sales kept growing.
The model was simple, customers understood it, and it worked. However, that model is now under pressure from several directions. These pressure points include:
While these trends have been emerging for some time, their cumulative impact is accelerating, often leaving municipal utilities to address this transition without a clear roadmap.
The core problem is structural. A municipal utility incurs high costs, such as debt service on infrastructure, fixed operations and maintenance, and line crew salaries, that do not change with monthly kilowatt-hour sales. Those costs exist whether a customer uses 200 kWh or 2,000. When rates are designed to recover those costs primarily through the per-kWh charge, any decline in sales can create a revenue shortfall.
Rooftop solar accelerates that dynamic
A customer who installs a 10-kilowatt system may reduce their net purchases from the utility by 70% or more yet still depends on the grid for nighttime power and backup needs. Under many current net metering policies, the customer receives a full retail credit, or close to it, for every kilowatt-hour exported. That credit reflects not only the utility's energy costs but also the fixed infrastructure costs all customers share. As adoption grows, the fairness question and the financial exposure become more pronounced.
Battery storage adds another layer
A customer who pairs solar with a home battery can now choose when to draw from the grid and when to rely on stored energy, timing purchases to minimize their bill. That customer may be making rational choices within the utility’s existing rate structure, but the effect is reduced revenue from a grid that remains fully in place with all its operating costs.
Electric vehice charging
Electric vehicle charging presents another challenge. While EV adoption offers opportunities for load growth and revenue, charging patterns associated with Level 2 and Level 3 chargers can create relatively short but intense demand peaks that are difficult to forecast. These patterns are often not well-suited to the existing rate structures, which are designed around more gradual, predictable consumption. An increase in charging activity can also strain the local grid, requiring substantial infrastructure investment.
While these challenges to the utility business model are significant and growing, municipal electric utilities do have tools to respond effectively. Each comes with its own considerations, and the approach that works best will vary depending on a utility's customer mix, metering infrastructure, and the local context in which rate decisions are made.
Time-of-use rates
Time-of-use rates vary the price of electricity based on when it is consumed, with higher rates during peak demand periods and lower rates during off-peak hours. When implemented well, they can send meaningful price signals, encourage EV owners to shift charging to overnight hours, and help moderate system peaks. The prerequisites are an advanced metering infrastructure (AMI) capable of recording interval data and customer education to help guide customers through the new rate structure. Without both, customers may not fully benefit from the new structure, making it harder to achieve the load-shifting outcomes the utility seeks.
Fixed monthly charges
Fixed monthly charges recover a portion of infrastructure costs through a flat charge that applies regardless of electricity usage during the period. They can provide a more stable foundation for cost recovery, though they raise equity considerations that warrant careful attention. A fixed $20 monthly charge, for example, represents a meaningfully larger share of the bill for a low-usage customer than it does for a higher-usage household. Utilities that have moved in this direction have often paired the change with assistance programs or introduced the new charge gradually, giving customers time to adjust.
Demand charges
Demand charges for residential customers, pricing based on a customer's peak usage during a billing period, have a sound conceptual basis, but can be challenging to implement in residential markets. Residential customers may find them hard to understand and manage, and they have raised concerns in several states where utilities have attempted to introduce them. As with time-of-use rates, demand charges require careful attention to customer education.
Net energy metering
Export compensation can be a difficult rate design issue for municipal utilities. Net metering at full retail value may be an effective policy to encourage early solar adoption. As solar penetration grows, however, crediting energy at rates that include fixed utility costs can become harder to sustain, and utilities may find it worthwhile to explore alternatives. These include credits that reflect the actual value of solar at the hour it is produced or avoided-cost compensation that credits the utility's marginal energy cost.
The starting point is an up-to-date cost-of-service study. The study establishes what it actually costs to serve different customer classes and whether current rates accurately recover those costs. It provides the analytical foundation for rate design work and potential changes.
AMI investment is another important building block. Interval data opens a range of options that are otherwise difficult to pursue, including time-of-use rates, more meaningful modeling of customer response, and the bill analytics that help customers better understand and manage their energy use.
Voluntary opt-in pilots for new rate structures allow a utility to gather real-world data on customer response before committing to system-wide changes. They also offer customers a chance to experience a new structure on their own terms, which can help build familiarity and ease the transition over time.
Utilities that make progress on these foundational steps will be in a stronger position to respond when revenue challenges arise.
If your electric utility is ready to assess rate design options to address current challenges to sustained revenue and financial performance, we can help.
Contact Steve Courtney at scourtney@raftelis.com or Amanda Guci at aguci@raftelis.com to learn more.
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