What’s the point of increasing a product’s price if it will not increase revenues?

Posted on September 8, 2010. Filed under: Renewable energy - generally, Utility rates |

Summary of direct testimony submitted by RENEW Wisconsin witness Michael Vickerman in Madison Gas & Electric’s pending rate case (3270-UR-117), in which MGE asks authorization to increase the killowatt-per-hour price of electricity in the company’s Green Power Tomorrow program:

— Madison Gas & Electric (MGE) operates an award-winning renewable energy subscription program called Green Power Tomorrow. It has achieved one of the highest customer participation rates of any voluntary program in the country. Green Power Tomorrow has nearly doubled the supply of renewable energy serving MGE. In 2009 the volume of renewable energy purchased by Green Power Tomorrow subscribers displaced the production of more than 95,000 tons of carbon dioxide from fossil energy plants.

— MGE and all of its customers benefit from this reduction in CO2 production.

— MGE proposes to increase the program’s premium from 1.25 cents/kWh to 2.00 cents/kWh, effective January 1, 2011. This would constitute a 60% increase. MGE’s premium had been 1.00 cents/kWh until January this year.

— The proposed increase is not driven by rising renewable energy costs. MGE’s renewable energy costs have remained constant. The proposed increase accounts for the decrease in the wholesale price of fossil energy this year. The ongoing slump in fossil energy costs is expected to last through the 2011-2012 rate cycle.

— Green Bay-based Wisconsin Public Service (WPS) is also seeking approval from the Public Service Commission to increase its renewable energy premium, from 1.25 cents/kWh to 1.50 cents/kWh. The cost of wholesale power is essentially the same for both utilities. This raises the question, why is MGE’s request so much larger than WPS’s request?

— MGE is also seeking a 10% increase in general rates, for reasons that have absolutely nothing to do with its renewable energy supplies.

— MGE admits that a substantially higher premium would depress subscription volumes. In fact, MGE’s 2011 forecast for Green Power Tomorrow assumes no increase in program revenues. In other words, MGE is expecting the fall-off in purchases to cancel out the price increase.

— Some business customers have already cut back on their purchases, while others are planning to drop out of Green Power Tomorrow in anticipation of a hike in the premium.

— Here is the $64,000 question: what is the point of increasing one’s product price if doing so will not increase revenues?

— These wild swings in premium valuations can be avoided by changing the way the premiums are calculated. Instead of benchmarking the cost of the purchased renewable energy against wholesale fossil energy prices, utilities should adopt a different benchmark, which RENEW believes should be the cost to utilities of acquiring renewable energy to meet the state’s Renewable Energy Standard.

— MGE is subject to the state’s Renewable Energy Standard. Between now and 2018, the utility will need to add more renewable energy into its supply mix anyway to comply with the state law. Utilities are under no compulsion to add fossil energy to their energy mix. Therefore, it is illogical to base utility renewable energy premiums on fossil energy prices in states that require utilities to expand their renewable energy supplies.

— To boil the methodology down to its essence, the premium should represent the difference in cost between required renewable energy and optional renewable energy. All Wisconsin utilities should adopt this methodology going forward in setting their voluntary premiums.

— The difference in price between MGE’s required renewable energy and its optional renewable energy is attributable to 1) MGE’s solar program (Clean Power Partners), which is supported entirely by Green Power Tomorrow subscribers, and 2) the cost of marketing this service to customers. Clean Power Partners was launched in 2008, when the premium was 1.00 cent/kWh. There have been no significant changes to the program’s energy mix since then. Therefore, the appropriate premium size should be 1.00 cent/kWh using RENEW’s preferred methodology.

— RENEW’s testimony is supported by the City of Madison.


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