UTILITIES, ENVIRONMENTAL EFFICIENCY, AND CORPORATE RESPONSIBILITY SURROUNDING INNOVATIVE RATE DESIGN

INTRODUCTION

One common concern in electricity pricing is whether customers are shifting, or dumping, the cost of electricity or cost of service onto other ratepayers. The problem is connected with the current Entergy New Orleans billing standards and standard Advanced Metering Infrastructure (AMI) smart meter technologies. New Orleans' ratepayers are not encouraged or empowered to make smart purchasing decisions during off-peak demand times, which would save them money and reduce their CO₂ byproduct.

In addition to kilowatt hours (kWhs) being transported during peak demand time producing more CO₂, there is an extra cost to having high peak demand times that result in needing additional power plants to meet the high electricity demand, including type of fuel used, time of day, and any extra peak plants needed to provide electricity during peak demand times (US Energy Information Agency, 2022). In 2019, New Orleans supported a $210 million peaking plant that would help support the city of New Orleans meet peak demand. “Supporters of the plant said it would provide needed power for the city at times of peak demand or when other power sources are unavailable, such as after a hurricane” (Williams, 2019, p. 2). The 120 million dollar cost as ongoing maintenance cost for ratepayers, however, is avoidable when adopting a new program we suggest when looking closer at how our current electric bill is calculated.

Also, electricity price rates under the existing utility model,do not reflect the actual cost of electricity produced at the time that the electricity is used by the consumer. The new proposed program, titled Customer Lowered Electricity Price (CLEP), is aiming to address those issues by providing customers direct access to the wholesale electricity market, thereby encouraging choices that benefit consumers and the environment with a free-market solution without any government subsidies.

Although a reader may wonder whether this will have a negative effect on local coal and natural gas production, CLEP empowers ratepayers to choose when they use energy and and from which source. If, as an example, a ratepayer installs whole home batteries in order to charge their batteries during non-peak demand times and use the electricity throughout the day when there is overlap of residential and commercial electricity use, all that has happened is the avoidance of peak demand. Concerning job creations, implementations of CLEP as described above would create jobs surrounding battery installations and consulting, as well as building science consulting jobs for the local economy.

Each of these three effects (lowering CO₂ byproduct, reducing cost for utilities by rendering peaking plants obsolete, and accurately reflecting the total cost of energy to ratepayers, such as building and maintaining peaking plants) gives us a reason to adopt CLEP. We argue that utilities are obligated to do so in serving their ratepayers.

In this paper, we argue that some businesses, such as utility companies, have responsibilities above and beyond those expounded by Friedman's analysis. Namely, certain companies are in positions that require adopting particular innovative strategies and innovative solutions that serve efficiencies that benefit their customer base and the environment. In doing so, we will first articulate Friedman's account of corporate responsibility. Then, we will discuss the innovative solution, CLEP, and finally we will expound principles of total quality management and conclude that utility companies do have a duty, or obligation, to adopt innovative rate designs that expand the boundaries of Friedman's account.

FRIEDMAN'S ACCOUNT OF CORPORATE RESPONSIBILITY

Over the past 50 years, economists, businessmen, and philosophers have debated the role corporations play as agents in our society. Often, corporations participate in charity and in return their brand image is seen in a positive light and one might assume the company's leadership is compassion- and value-driven.

However, according to Milton Friedman's view of corporate responsibility, a business has only the responsibility to increase profits. “There is one and only one social responsibility of business—to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition without deception or fraud” (Friedman, 1970, p. 7). This dictate implies that corporate participation in charity is not an obligation and might only be justifiable if there is an expected return on investment, where the amount of revenue that is generated by the act of charity outweighs the cost of the initial charitable investment.

Friedman's account does not leave open the possibility that there could be obligations a corporation might have to other parties beyond just stakeholders, so long as laws are not broken.

CUSTOMER LOWERED ELECTRICITY PRICE

An issue facing electricity ratepayers is that rates under the current utility model do not reflect the actual cost of electricity produced at the time that the electricity is used by the consumer. The innovative solution discussed was the following simple CLEP formula:where CLEPm is the monthly cashflow that provides a utility bill credit for delivering power, or a charge for demanding power, but it is only charged or paid during the utility's peak demand hours. CLEP5 is the energy cost shift, which pays every 5 minutes. Much like the Net Energy Metering (NEM) tariff used by rooftop solar owners, CLEP is an optional electricity rate that will either pay a CLEP customer or charge them if used incorrectly. It does not change which rate governs your utility bill—it's an additional cashflow:where p = utility regulator percentage (0 < p < 2); n = number of kWhs purchased (if outbound, n is negative); e = monthly average cost of energy; and w = instantaneous wholesale cost of power (Katz, 2019, p. 19–20).

The target magnitude of CLEPm is to generate a cashflow equal to the same average demand charge as that levied on commercial customers, using dollars per kilowatt-year as the unit. The dollars per kilowatt-year means twelve times the monthly charge per kilowatt. For example, if the average demand charge is $10/kW-month, then this is equivalent to $120/kW-year.

By predicating demand rewards on actions only done during the utility's peak demand hours, these cashflows pay customers to avoid the utility's most expensive equipment upgrades, which are those for providing power during peak demand times.where q = utility regulator determined percentage (0 < q < 2) and d = average demand during peak hour avoided (i.e., d = observed reference-building demand minus observed demand) (Katz et al., 2020, p. 27).

CLEP combines several powerful innovations that encourage deep investment in energy efficiency: a time-of-use rate paired with electrical storage, such as a whole-home battery. Further research opportunities surround the specificities in exact implementation and the return on investment (ROI) of investments in energy efficiency. However, quality dimensions, such as reliability, have not only a cost savings for ratepayers but also an insurance against disaster recovery, in which hurricanes and tropical storms annually effect the greater New Orleans area.

QUALITY MANAGEMENT AND INNOVATION

Quality management and quality dimensions ensure that a product meets the quality expectations of customers. Although Friedman was speaking generally about the role of businesses in a capitalist society, we assert that public utilities in particular in meeting quality standards should look into innovative rate designs, such as CLEP, to meet quality standards for their ratepayers and customers. The following list includes Garvin's product quality dimensions:

1. Performance: Performance in this context concerns efficiency with which a product achieves its intended purpose.

2. Features: Features are attributes that supplement the product's basic performance.

3. Reliability: Reliability is a product's propensity to perform consistently over its useful life.

4. Conformance: Conformance concerns a product's adherence to quantifiable specifications.

5. Durability: A durable product can tolerate stress or trauma without failing.

6. Serviceability: A product is serviceable if there is an ease and low cost of repair.

7. Aesthetics: Aesthetics concerns the degree to which product attributes are matched to consumer preferences.

8. Perceived quality: Perceived quality is the quality as the customer perceives it based on images, recognition, or word of mouth (Foster, 2016).

Each of these dimensions needs to be taken into account when implementing a new process that purports to create any product more efficiently.

CLEP's relation to Garvin's product quality dimensions include the following:

1. Performance: CLEP charges ratepayers the cost of energy at a price that fluctuates with the wholesale market price. When electricity is cheaper during off-peak demand, customers who buy during that time frame will save on their electricity bill.

2. Features: Because CLEP uses a time-of-use rate, supplemental technologies can be made available to ratepayers; e.g., a live price tracker that tracks the Midcontinent Independent System Operator wholesale price of electricity.

3. Reliability: CLEP solves a reliability issue for New Orleans ratepayers. Currently, becasue electricity storage among ratepayers is low, a downed powerline can leave a section of the New Orleans community without power for weeks. CLEP encourages deep investment into electricity storage, such as whole-home batteries that can be used as a microgrid.

4. Conformance: Specifications for how this rate design can be implemented are similar to how specifications for current time-of-use rates are implemented. The ability to have bidirectional flow of electricity does require smart meters. AMI smart meters are what New Orleans residents use, and current rooftop solar users are already adopting them through Entergy—the local public utility of New Orleans.

5. Durability: Because CLEP relies on a variety of processes that have already been used, although not conjointly, our assumption is that this innovative rate design will work seamlessly as an opt-in alternative rate structure with the public utilities' current operations.

6. Serviceability: In New Orleans, ratepayers already have AMI smart meters installed, so cost would be low and because CLEP-like functions are currently being carried out by rooftop solar participants, repairs and service would not be unlike how the utility company operates for its solar ratepayers.

7. Aesthetics: Customers' preferences around their electricity bills mainly consists in lowering their monthly bills. The CLEP rate will give ratepayers an opportunity to lower their bills by encouraging smart purchasing decisions; this would include storing energy during off-peak demand times and using the electricity during traditional peak demand times.

8. Perceived quality: Currently, very few households discuss electricity pricing rate structures; however, the city council of New Orleans has been open to implementing this structure. Other forward-thinking cities can also adopt this rate structure.

CONCLUSION

In this paper, we have argued that some businesses, such as utility companies, have responsibilities in providing a quality product that prima facie requires responsibilities above and beyond those expounded by Friedman's analysis. Namely, in adhering to quality dimensions for the products, certain companies are in positions that require adopting particular innovative strategies and innovative solutions that serve efficiencies that benefit their customer base and the environment. Public, nonprofit utilities would not be adversely affected since their funding does not stem per kWh sold. We expounded principles of total quality management and conclude that utility companies do have a duty, or obligation, to adopt innovative rate designs that expand the boundaries of Friedman's account and empower ratepayers to lower their electricity bill and help the environment. Doing so lowers CO₂ byproduct (by potentially hundreds of pounds per ratepayer, as is estimated in our previous research) created by electricity transactions during peak demand time, reduces the cost for utilities by rendering peaking plants obsolete, and gives ratepayers an accurate reflection of the cost of energy (Katz et. al., 2020). Future research concerns piloting such a program and demonstrating the theoretical benefits of shifting ratepayers from peak demand purchasing to off-peak demand times, alongside deeper distributed energy resource investments.