MTEMC changes rate structure to help members in wake of TVA rate hike

As electric consumers face a hefty rate increase from TVA, Middle Tennessee Electric’s Board of Directors has approved a change to help lower the bills of most its members, especially helping those who consume less electricity.

“When TVA recently announced its largest rate increase in 30 years,” MTEMC President Frank Jennings said, “we felt compelled to look at ways to help our members.” Last month, TVA announced a rate hike that mean an average 15-percent increase for bill payers.

“What we’ve done in response is to ‘flatten’ our residential rate structure,” Jennings said. “For about the past decade, we’ve had a declining block rate. For now, though, we believe a flat rate is the best option for our membership.”

The “declining block rate” is characterized by a higher charge for the first 800 kilowatt-hours consumed during a billing period, and a lower rate for usage above that. About half of Tennessee’s electric distributors have a flat rate, with the other half featuring a declining block rate.

MTEMC’s Board of Directors approved the move to the flat rate in a recent special called meeting. It goes into effect at the same time TVA’s rate increase goes into effect – at the start of October.

As a result, about 60 percent of MTEMC’s residential members will see a slightly smaller increase than had been originally thought. According to Chris Jones, MTEMC vice president of marketing and communications, the rate increase could be more like an 10-percent increase rather than a 15-percent increase.

“On average, an MTEMC residential member uses about 1,500 kilowatt-hours a month,” Jones said. “For that average user, the rate increase will end up at about 14 percent instead of 15 percent. For the member who uses 1,000 kilowatt-hours a month, the rate increase will be closer to 10 percent rather than 15 percent.”

For members using more electricity, however, the rate increase will be steeper.

“By flattening the rate structure, the break even point will be 1,725 kilowatt-hours per month,” Jones said. “At that amount, whether on the old rate or the new rate, it would be a 15-percent increase. But as you move beyond that usage level on the flat rate, the increase goes beyond 15 percent. For example, members who use 2,000 kilowatt-hours a month will see closer to a 17-percent increase.”

Jennings said he hopes the rate change will also be a further call for conservation among the members of the electric cooperative.

“We have always preached efficiency and conservation,” he said. “The vast majority of our marketing dollars go to promoting those ideas, and that’s been the case for years. Now I think this rate structure change is another positive step toward encouraging the wise use of electricity. With every kilowatt-hour priced identically, we’ve given our members greater control over managing their costs and greater incentive to manage their usage.”


Questions and answers about the move to a flat residential rate...

What led to this change?

Following TVA’s announcement of its largest rate increase in 30 years, MTEMC’s Board of Directors approved the change to help the majority of members, to give members more flexibility in managing their costs and to better support energy conservation.

How do members benefit from this change?

The majority of members – just less than 60 percent – will see, on average, a smaller impact from TVA’s historic rate hike that takes effect at the beginning of October. Additionally, with each kilowatt-hour identically priced, members are in a stronger position to manage their costs.

How does MTEMC benefit from this change?

The change does not benefit MTEMC from a financial standpoint. The change is revenue neutral, and MTEMC is a not-for-profit organization.

What is a “flat” rate?

It simply means kilowatt-hours are priced the same no matter how many are used.

What was the “declining block rate” that was in place before?

There was a higher per-kilowatt-hour charge for the first 800 kilowatt-hours used and a lower rate for electricity used beyond the first 800.

What do other utilities have?

In Tennessee about half feature a flat rate and half a declining block rate. Most larger electric utilities in Tennessee have a flat rate, including Nashville Electric Service and those utilities serving Knoxville and Chattanooga.

What’s the comparison between what the TVA rate change would have been under the declining block rate to what it will be under the flat rate?

It will still be a significant increase anyway you cut it with an average impact of about 15 percent. But with the flat rate, the less power you use, the less the percentage of the increase. For example, if you were to use only 1,000 kilowatt-hours, the increase would be closer to 10 percent. At 1,500 kilowatt-hours, which is about the average MTEMC residential bill, the increase is closer to 14 percent. The break-even point is at 1,725 kilowatt-hours, where the flat rate would hit the 15-percent increase mark. A member who uses 2,000 kilowatt-hours will see about a 17 percent increase.

Aren’t residential members who are heavier users being penalized by this move?

Every kilowatt-hour is priced exactly the same. It could be said heavier users are no longer being rewarded with a lower rate, but with each kilowatt-hour identically priced, all members are treated the same.

Why did MTEMC have a declining block rate to begin with?

The declining block was implemented in the 1990s, when natural gas heating was a more popular choice for new home construction. As a result, the concern was that all-electric members were, in essence, subsidizing members heating with natural gas. A heavier rate on the front end of consumption balances that equation…hence the declining block rate.

What’s a more specific explanation of this “subsidizing”?

The cost for MTEMC to serve a new residence is more than $2,000 on average. The cooperative absorbs virtually all of that cost, so it is left to recover that money through rates over the years to break even. Heating represents more than 50 percent of the average bill during the cold weather season. A member heating with natural gas pays less back through rates than a member heating with electricity, so it takes the cooperative much longer to recoup its costs for a member heating with natural gas. Through the declining block rate, with its higher prices on the front end, the time required to recoup costs from a natural gas member was made more comparable to what time was required to recoup costs from an all-electric member.

Has this justification for the declining block gone away?

The percentages for new homes heated with natural gas vs. electric have flipped to the favor of electricity in recent years. Significant improvements in comfort and efficiency with electric units plus electricity’s more economical rates led to the reversal. So the concerns related to all-electric members subsidizing those who heat with natural gas are not as significant. What seemed more certain to the Board was that the current concerns with surging rates and encouraging conservation outweighed the justification for the declining block.

Posted on September 24, 2008.

 

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