Unraveling Your Electric Bill in Nashville

As this is the time of year when many are seeing really big power bills, and also since many local power companies are in the process of increasing their retail charges, I recently wrote this piece for a monthly publication I've been doing for my neighborhood. Most of the issues addressed here are also applicable to other utilities, especially those who purchase power from TVA. I hope you enjoy the read.

There is a good chance that the most recent electric bill you got from NES is the most expensive you’ve seen for your Stephens Valley home. It is also likely that you don’t spend a lot of time studying your NES bill. That might be exactly the way you want it, but if you decide to read this issue, you’ll learn some interesting facts about your energy consumption here in SV, the way NES bills you for that energy, and how your billing could be a lot fairer, and more effective.

Looking at the bill, you don’t get a lot of information, and, unfortunately, that is by design. The generic electric bill in the United States only shows you the difference between your meter readings for the current month and the preceding last month. Those readings are used to determine your kWh consumption for the month. The kWh usage is then multiplied by just over eleven cents and that becomes your simple energy charge. The net bill also includes a NES customer charge of $16.90 (unless you’ve had a month in the last year where your home used over 2,000 kWh, which makes your customer charge $24.90) and a TVA grid access charge of $6.66 for a total Customer Charge of $23.56 for an average residential account. This simplistic billing seems to best suit the customers who are not energy experts, but is that reason enough to use it?

Just how are these simple rates derived? If you want to know that answer, prepare yourself for a little mathematical discussion that will reveal some intrinsic, yet bizarre issues with the way NES (and, for that matter, all retail rates presently implemented by TVA’s local power companies) designs its retail electric rates. Where does the 11 cents per kWh cost come from, and what is the deal with the additional customer charge? Well, here goes. Out of that 11-cent charge, about 8.4 cents is collected just to pay for the power purchased from TVA (the TVA wholesale cost varies by time, day, and month, so that 8.4 cent cost is averaged here for simplicity). The remaining 2.6 cents per kWh is retained by NES to help cover their non-energy costs of accomplishing their mission (these are called Fixed Costs in utility speak). So, NES is using a volumetric adder to kWh consumption (which is sort of invisible to the customer) and a Customer Charge to collect the revenue needed to cover their Fixed Cost for serving each account.

Here we should discuss this important difference between volumetric charges and fixed charges, as that is the big argument among retail electric rate experts at the 3,000 electric utilities in the United States. Volumetric charges are derived by measuring the volume of something, then multiplying that volume by a per unit amount. That works fine for kWh, because utilities like NES also buy their kWh from a wholesale vendor that charges them volumetrically. The problem comes when a utility tries to collect a fixed amount, to cover a fixed cost, via an added amount to a volumetric per unit amount. Since the volume purchased varies wildly, it is certain that any volumetric collection of a fixed cost is going to be inaccurate, unjust, and discriminatory. NES, and scores of other local utilities, try to skirt this issue by doing some of both, which guarantees that their rates are not actually cost-based, but it allows them to bury some Fixed Cost revenue collection by disguising it within the cost per kWh. Other utilities serving SV do the same thing. HVUD and Piedmont Natural Gas both employ the monthly fixed charge plus a per unit adder as well. This system isn’t fair because it is invisible to most customers. This situation is just another example of the struggle we all face in the search for equality of treatment from vendors we count on to make us feel secure.

For a residential electric customer of NES, the assigned Fixed Cost is somewhere around $54.00 per month (this is an educated guess from experience). So why are we charged $23.56 (or $31.56) per month for the customer charge? Why isn’t everyone charged $54.00 instead? This is where the commitment to ancient metering infrastructure, ancient rate architecture, and political philosophy rears its head, as discussed above. If everyone were paying a customer charge equal to the Fixed Cost of keeping our home attached to the NES grid, then we should only have to pay that average 8.4 cents per kWh, which is the wholesale cost, for our actual energy usage. Instead, mainly because of the momentum of the way electric utilities have operated for the last century, NES marks up each kWh by 2.6 cents to collect a portion of their Fixed Costs AND they also charge a customer charge which is also intended to collect another portion of the Fixed Costs. As explained above, this is a problem that results in practically no one paying their fair share of a utility’s Fixed Costs.

When NES (and nearly every other electric utility) tries to collect the $54.00 Fixed Cost per residential customer (which covers all their costs that are not directly related to your volume of energy consumption) with a customer charge AND a markup on each kWh, practically no one pays an amount equal their cost of being served. Nearly everyone either overpays or underpays. In Nashville, the average monthly kWh usage is currently about 1,250 kWh, so if we multiply 1,250 kWh by 2.6 cents, we get $32.50, which is more than half of what NES needs to pay their Fixed Coster per residential customer! If you add that $32.50 to the $23.56 Customer Charge, then NES neatly collects nearly exactly $54 to cover the Fixed Cost for the average residential customer (this makes sense because retail rates are designed around the average customer). So, for the handful of residential accounts that regularly consume the average 1,250 kWh per month, the NES rate architecture works quite well. But it gets remarkably unfair (and remember, this is not a NES exclusive problem), when we examine what happens to residential accounts whose monthly consumption of kWh is lower, or higher, than average.

Stay with me now. That 8.4 cent per kWh average wholesale cost has several components besides the varying cost of a wholesale kWh. For example, a very large component of the wholesale power cost is the monthly peak demand charge. This can amount to 40% of NES’s monthly wholesale power bill from TVA, and while modern electric meters like the ones on our houses in SV can determine just how much each home contributes to that peak demand, the local power companies choose to ignore the opportunity to determine that amount and bill each account for their actual contribution to that cost. Rather, the local power companies choose to socialize the demand charge and include that cost as a portion of the 11 cent per kWh charge for a residential account. A residential account’s contribution to NES’s monthly peak demand charge can vary wildly. In the summer, NES’s peak demand will always happen between noon and 6 PM on a weekday. If your home is only using air conditioning during the peak, it is likely that the socialized rate over-estimates your contribution to peak demand such that you over-pay. If you throw a roast in the oven, or wash and dry clothes during the peak hour, your actions might drastically eclipse the amount NES has estimated in the socialized retail rates, which means that you under-pay. This is a demonstration of how no one really pays the true cost of buying electric power using the simple rate architecture employed by NES and most other local power companies.

In summary, NES needs to collect a bit over $54 from each residential customer over and above what the actual wholesale energy cost is for each customer. To accomplish that, they have implemented a Customer Charge of $16.90+$6.66 ($23.56) for those accounts who use something near 1,250 kWh per month, and that works quite well. But this system fails for any residential accounts who use less than the average amount. Those accounts are served at a loss, and it might amaze you to know that many of us in SV fall into that category! For those who use more than 1,250 kWh per month, things go really off the rails. At present NES published retail rates, if an account has used over 2,000 kWh in the last year, the Customer Charge goes to $24.90+$6.66. Also, that 2.6 cent markup would produce about $55 in net income (for a residential account using just 2,100 kWh). For that volume of kWh (an amount used by many homes in SV), NES is thus collecting about $87 to cover its Fixed Cost estimated at $54 per month. As consumption goes beyond 2,100 kWh per month, the problem just gets worse. These customers are being forced to subsidize the Fixed Costs of those who use less than 1,250 kWh per month. That bears repeating. That large home just down the street from you is likely averaging over 2,000 kWh per month of electricity consumption, and they are being forced to pay more than their actual Fixed Cost for being connected to the grid. The Fixed Cost of serving each residence in SV does not vary, but what those residential accounts are being charged for Fixed Cost recovery varies greatly!

Recently NES implemented their Power of Change Program, wherein they round up all energy bills to the next higher dollar (all accounts were automatically enrolled in this program, but all accounts are also allowed to opt-out if they contact NES and tell them) and many howled about this on social media, even though it would only add, on average, 50 cents to their monthly bill. What if those folks knew they are regularly forced to subsidize their neighbor’s power cost to the tune of maybe $30 per month?

Is it fair to make customers who consume more energy also shoulder more of the Fixed Cost burden, even though volume of energy consumed has no impact on Fixed Costs? Is it fair for customers who use less than average to skip by and not contribute their pro rata share of costs? The answer seems to depend on one’s perspective. While this rate practice is not equitable, and it certainly does not accurately ask each account to pay the real cost of the electricity they enjoy, nor does it properly collect NES’s Fixed Costs (no less and no more), it is a very common practice across our country. As stated earlier, a lot of this comes from the attraction to simplicity and history. The whole electric power community is wrestling with this issue now, and other utilities should be. Metering technology informs the utilities of the cross-subsidization issues, and that same technology enables the utilities to move to a time differentiated rate/billing system that would bring accuracy to bear, but it is widely resisted by the utilities and the customers alike, and that is a real shame. All too often, utility consumers would rather pay a socialized rate than endure a change.

We are in 2023, yet we are still consuming electric power, and paying for that power, using the same methods that were being used in 1953. The ancient rate practices dramatically impact the way the grid operates and the way we all use electricity. The signal from the utilities, through these good-old simple rates, is that there is an infinite amount of electric power available, and that we need not worry about how much we use and when we use it. But that signal is wrong, and it creates a feedback loop that just keeps making the grid more difficult to manage. Retail rates that have no cost differentiation for time-of-day result in spiraling consumption during peak hours. During those peak hours, utilities like TVA use generation resources that are heavy on greenhouse gas emissions. The more we use, the more we emit greenhouse gases and, in turn, globally, the hotter it gets. This loop goes on and on, and there is no need for it! In fact, the demonstrable need is for customers and utilities to partner in the goal to change our energy consumption patterns such that less non-renewable generation is needed.

If we moved to a real cost-based retail rate environment, several good things would happen. First, the electric power marketplace would become comply with our capitalistic system. No one would be forced to subsidize other accounts, and everyone would pay their fair share of fixed costs. This simple outcome would make the change worthwhile, but, if you hold the view that we should also be reshaping electric power demand to reduce capital costs of generation and reduce carbon contribution to the atmosphere, cost-based rates can deliver on that as well. In 2023, the technology is readily available in the form of smart HVAC thermostats and smart appliances to take the signals delivered by these new rates and dramatically reshape demand while lowering our energy bills. Those small changes would, when multiplied by the millions of customers modifying their usage, reduce the amount of fossil fuel used to generate on-peak power. Improving the ratio of off-peak consumption to on-peak consumption would reduce the need to build new generation and the greenhouse gas production attendant thereto.

As you can see from the last issues of The Valleyist wherein we have discussed this, the subject could easily become a book, so we will stop here. But the point is that socialized electric power rates were a reasonable solution before time-differentiated metering was available, but that is no longer the case. We deserve true cost-based rates in 2023, and all the improvements attendant thereto.    

There is a good chance that the most recent electric bill you got from NES is the most expensive you’ve seen for your Stephens Valley home. It is also likely that you don’t spend a lot of time studying your NES bill. That might be exactly the way you want it, but if you decide to read this issue, you’ll learn some interesting facts about your energy consumption here in SV, and the way NES bills you for that energy.

Looking at the bill, you don’t get a lot of information, and, unfortunately, that is by design. The generic electric bill in the United States only shows you the difference between your meter reading for this month and last month. Those readings are used to determine your kWh consumption for the month. The kWh usage is then multiplied by just over eleven cents and that becomes your simple energy charge. The net bill also includes a NES customer charge of $16.90 (unless you’ve had a month in the last year where your home used over 2,000 kWh, which makes your customer charge $24.90) and a TVA grid access charge of $6.66 for a total Customer Charge of $23.56 for an average residential account.

But how are those charges derived? If you want to know that answer, prepare yourself for a little mathematical discussion that will reveal some intrinsic, yet bizarre issues with the way NES (and, for that matter, all retail rates presently implemented by TVA’s local power companies) designs its retail electric rates. Where does the 11 cents per kWh cost come from, and what is the deal with the additional customer charge? Well, here goes. Out of that 11-cent charge, about 8.4 cents is collected just to pay for the power purchased from TVA (the TVA wholesale cost varies by time, day, and month, so that 8.4 cent cost is averaged here for simplicity). The remaining 2.6 cents per kWh is retained by NES to help cover their non-energy costs of accomplishing their mission (these are called Fixed Costs in utility speak). So, NES is using a volumetric adder to kWh consumption (which is sort of invisible to the customer) and a Customer Charge to collect the revenue needed to cover their Fixed Cost for serving each account.

Here we should discuss this important difference between volumetric charges and fixed charges, as that is the big argument among retail rate experts as the 3,000 electric utilities in the United States. Volumetric charges are derived by measuring the volume of something, then multiplying that volume by a per unit amount. That works fine for kWh, because utilities like NES also buy their kWh from a wholesale vendor that charges them volumetrically. The problem comes when a utility tries to collect a fixed amount, to cover a fixed cost, via an added amount to a volumetric per unit amount. Since the volume purchased varies wildly, it is certain that any volumetric collection of a fixed cost is going to be inaccurate, unjust, and discriminatory. NES, and scores of other local utilities, try to skirt this issue by doing some of both, which guarantees that their rates are not actually cost-based.

For a residential customer in Nashville, the assigned Fixed Cost is somewhere around $54.00 per month (this is an educated guess). So why are we charged $23.56 (or $31.56) per month for the customer charge? Why isn’t everyone charged $54.00 instead? This is where the commitment to ancient metering infrastructure, ancient rate architecture, and political philosophy rears its head, as discussed above. If everyone were paying a customer charge equal to the Fixed Cost of keeping our home attached to the grid, then we should only have to pay that average 8.4 cents per kWh, which is the wholesale cost for our actual energy usage. Instead, mainly because of the momentum of the way electric utilities have operated for the last century, NES marks up each kWh by 2.6 cents to collect a portion of their Fixed Costs AND they also charge a customer charge which is also intended to collect another portion of the Fixed Costs. As explained above, this is a problem.

When NES (and nearly every other electric utility) tries to collect that $54.00 with a customer charge AND a markup on each kWh, practically no one pays the right amount. Nearly everyone either overpays or underpays. In Nashville, the average monthly kWh usage is currently about 1,250 kWh, so if we multiply 1,250 kWh by 2.6 cents, we get $32.50, which is more than half of what NES needs to pay their Fixed Coster per residential customer! If you add that $32.50 to the $23.56 Customer Charge, then NES neatly collects nearly exactly $54 to cover the Fixed Cost for the average residential customer (this makes sense because retail rates are designed around the average customer). So, for the handful of residential accounts that regularly consume the average 1,250 kWh per month, the NES rate architecture works quite well. But it gets strange (and remember, this is not a NES exclusive problem), when we examine what happens to residential accounts whose monthly consumption of kWh is lower, or higher, than average.

Stay with me now. That 8.4 cent per kWh average wholesale cost has several components besides the varying cost of a wholesale kWh. For example, a very large component of the wholesale power cost is the monthly peak demand charge. This can amount to 40% of NES’s monthly wholesale power bill from TVA, and while modern electric meters like the ones on our houses in SV can determine just how much each home contributes to that peak demand, the local power companies choose to ignore the opportunity to determine that amount and bill each account for their actual contribution to that cost. Rather, the local power companies choose to socialize the demand charge and include that cost as a portion of the 11 cent per kWh charge for a residential account. A residential account’s contribution to NES’s monthly peak demand charge can vary wildly. In the summer, NES’s peak demand will always happen between noon and 6 PM on a weekday. If your home is only using air conditioning during the peak, it is likely that the socialized rate over-estimates your contribution to peak demand such that you over-pay. If you throw a roast in the oven, or wash and dry clothes during the peak hour, your actions might drastically eclipse the amount NES has estimated in the socialized retail rates, which means that you under-pay. This is a demonstration of how no one really pays the true cost of buying electric power using the simple rate architecture employed by NES and most other local power companies.

In summary, NES needs to collect a bit over $54 from each residential customer over and above what the actual wholesale energy cost is for each customer. To accomplish that, they have implemented a Customer Charge of $16.90+$6.66 ($23.56) for those accounts who use something near 1,250 kWh per month, and that works quite well. But this system fails for any residential accounts who use less than the average amount. Those accounts are served at a loss, and it might amaze you to know that many of us in SV fall into that category! For those who use more than 1,250 kWh per month, things go really off the rails. At present NES published retail rates, if an account has used over 2,000 kWh in the last year, the Customer Charge goes to $24.90+$6.66. Also, that 2.6 cent markup would produce about $55 in net income (for a residential account using just 2,100 kWh). For that volume of kWh (an amount used by many homes in SV), NES is thus collecting about $87 to cover its Fixed Cost estimated at $54 per month. As consumption goes beyond 2,100 kWh per month, the problem just gets worse. These customers are being forced to subsidize the Fixed Costs of those who use less than 1,250 kWh per month. That bears repeating. That large home just down the street from you is likely averaging over 2,000 kWh per month of electricity consumption, and they are being forced to pay more than their actual Fixed Cost for being connected to the grid. The Fixed Cost of serving each residence in SV does not vary, but what those residential accounts are being charged for Fixed Cost varies greatly!

Recently NES implemented their Power of Change Program, wherein they round up all energy bills to the next higher dollar (all accounts were automatically enrolled in this program, but all accounts are also allowed to opt-out if they contact NES and tell them) and many howled about this on social media, even though it would only add, on average, 50 cents to their monthly bill. What if those folks knew they are regularly forced to subsidize their neighbor’s power cost to the tune of maybe $30 per month?

Is that fair? Well, it seems to depend on one’s perspective. While this rate practice is not equitable, and it certainly does not accurately ask each account to pay the real cost of the electric power they consume nor does it equitably collect NES’s Fixed Cost, it is very common across our country. As stated earlier, a lot of this comes from the attraction to simplicity and history. The whole electric power community is wrestling with this issue now. Metering technology informs the utilities of the cross-subsidization issues, and that same technology enables the utilities to move to a time differentiated rate/billing system that would bring accuracy to bear, but it is widely resisted by the utilities and the customers alike, and that is a real shame.

We are in 2023, yet we are still consuming electric power, and paying for that power, using the same methods that were being used in 1953. The ancient rate practices dramatically impact the way the grid operates and the way we all use electricity. The signal from the utilities, through these good-old simple rates, is that there is an infinite amount of electric power available, and that we need not worry about how much we use and when we use it. But that signal is wrong, and it creates a feedback loop that just keeps making the grid more difficult to manage. If we moved to a real cost-based retail rate environment, we would have an incentive to reduce our usage during peak hours, while freeing us to use more to cool our homes and charge electric vehicles during off-peak hours. Immediately those small changes would, when multiplied by the millions of customers modifying their usage, reduce the amount of fossil fuel used to generate on-peak power. Improving the ratio of off-peak consumption to on-peak consumption would reduce the need to build new generation and the greenhouse gas production attendant thereto. Discussing that subject could become a book, so we will stop there, but the point here is that socialized electric power rates were a reasonable solution before time-differentiated metering was available, but that is no longer the case. We deserve true cost-based rates in 2023.