Inverted Block Rates, the MCC, and why you should care

The Montana Public Service Commission (MT PSC) is currently reviewing a rate case by NorthWestern Energy that broadly addresses how Montanans are charged for the energy they consume.  Though much of the focus of the docket has been on the actual increases NorthWestern Energy has proposed, there are two other important proposals that are being addressed in the docket: Decoupling and Inverted Block Rates.

Inverted Block Rates would fundamentally change the way customers are billed for electricity and natural gas.  Under NorthWestern Energy's proposal (p. 24), residential customers would be split into two groups referred to here as low and high.  The low group, under  NorthWestern Energy's initial proposal, would consist of all customers that consume 0-350 kWh a month, and the high group would be those that consume greater than 350 kWh (there would be a similar design on the natural gas side).  Each group would be charged a different price on an incremental basis for the energy that they consume.  For instance, a consumer in the low group may have a rate of 4 cents/kWh, and the high group may be 6 cents/kWh.

The reason for separating the rates is to create a clear incentive for consumers to use less energy.  Energy conservation benefits all consumers, by delaying the need to construct expensive new power plants and new transmission lines, and generally reducing prices as demand falls and less expensive forms of energy can be used.

To illustrate the incentives created by Inverted Block Rates, take the following example.  Consumer A uses 350 kWh and Consumer B use 400 kWh.  Consumer A would pay $14 per month, and Consumer B would pay $24.  Consumer B would have  an incentive of $10 per month, or $120 per year, to lower their electrical usage by 50 kWh per month.

The MT PSC is still deliberating how they will act on NorthWestern Energy's proposal, but in a series of filings in the docket most of the groups involved are in favor of the proposal, but with one notable exception: the Montana Consumer Council (MCC).

The MCC has filed their post hearing testimony earlier this week, which highlights their opposition (p. 5).  I have immense respect for MCC's criticism of the economics of Inverted Block Rates, however i am not convinced that they come by the honestly.  It seams to me that regardless of the proposal, the MCC just has a philosophical disagreement with the idea.  I found the particular section telling:

"Some residential customers who require relatively large amounts of electric energy because they have electrically heated homes or large families will find their electricity bills rising by as much as 20 percent because of inverted block rates, while smaller consumers are afforded much smaller rate increases." (p. 11)


There are of course a lot more significant reasons why customers would have use more energy than just the number of family members.  I would suspect that individual income, or house size, are more relevant indicators.  And, in the case of electric heat, the Inverted Block Rate applies on both the electric and natural gas side, so customers who many not capture the lower rates on the electric side would capture them on the natural gas side.  It seams to me that the MCC is missing its objective on representing all consumers, to protect the largest consumers of energy in Montana.  Such as this 120,000 square foot home built by Tim Blixseth.

Of course, MCC is your representative in the case (they are an organ of the Montana Legislature).

As a final note, i will add that Professor Tom Power is strongly supporting NorthWestern Energy's proposal.