'Tilted' Industrial Electric Rates: A New Negative Variable for Energy Engineers

The cost of purchased electricity for industry is rising even faster than for other sectors. Conventional means of reducing power costs include internal techniques like load management, demand controls and energy conservation. External mechanisms such as contract negotiations with the serving utility can also help keep unit costs of purchased power down. But regulatory policy by agencies governing the serving utility can also have a major impact on electric rate design, by imposing rate structures that require the industrial user to pay above-cost power prices. New trends in electricity ratemaking depart so radically from traditional cost-of-service standards that power-intensive manufacturers could soon end up paying up to 25% more for their electricity than it actually costs to generate and deliver it. Political pressure to mitigate the impact of high energy prices on residential customers led to enactment of the Public Utility Regulatory Policies Act of 1978 (PURPA), requiring every state to consider implementing alternatives to traditional cost-of-service ratemaking techniques. Increasingly, state legislation is also being introduced to achieve similar goals. The stakes for a manufacturing company can be great. If a company is small or unstable, or otherwise unable to absorb or pass on above cost energy prices, it may go out of business. Alternately, it may increase the price of its product in order to recover the new cost of electricity, plus all the administrative costs of handling what is in effect a straight cost pass-through. Traditionally, energy engineers have managed costs by securing favorable power contracts, and by using electricity efficiently. Increasingly, however, they will have to become involved in the public policy debate on electricity rate making in order to help assure that industry has equitable rates in the future