The Objective Rate Plan for Reducing the Price of Residential Electricity 9780231895910

Table of contents :
Preface
Contents
Tables and Charts
I. The Background of the Plan
II. The Development of the Plan
III. Results under the Plan
IV. Discrimination under the Plan
V. Appraisal of the Plan
Appendix
Index

Citation preview

THE OBJECTIVE RATE

PLAN

FOR REDUCING THE PRICE OF RESIDENTIAL

ELECTRICITY

THE

OBJECTIVE RATE PLAN FOR REDUCING T H E PRICE OF RESIDENTIAL

ELECTRICITY

BY W I L L I A M F. K E N N E D Y

NEW Y O R K : M O R N I N G S I D E H E I G H T S

COLUMBIA

UNIVERSITY 1937

PRESS

Copyright

1937

COLUMBIA UNIVERSITY PRESS Published

Foreign

1937

Agents

OXFORD UNIVERSITY PRESS HUMPHREY MILFORD, AMEN HOUSE LONDON, E.C.4, ENGLAND

KWANG HSUEH PUBLISHING HOUSE 140 PEKING ROAD SHANGHAI, CHINA

MARUZEN COMPANY, LTD. 6 NIHONBASHI, TORI-NICHOME TOKYO, JAPAN

OXFORD UNIVERSITY PRESS B. I. BUILDING, NICOL ROAD BOMBAY, INDIA

Printed

in the

United

Stales

of

America

PREFACE study started in March, 1936, as a report in Professor James C. Bonbright's seminar in public utilities at Columbia University, New Y o r k City. A satisfactory report could not be made from the few available magazine articles on the objective rate plan, and the author was obliged to consult original sources to obtain actual operating data. Letters addressed to the Arkansas Department of Public Utilities and the Wisconsin Public Service Commission, both of which had introduced state-wide plans of this character, brought replies explaining that statistics and operating data were not yet available in either state, since the plan had been in operation for only a short time. The only source of adequate statistics was the Commonwealth and Southern Corporation, the originator of the objective rate plan. For this reason the analysis of operating experience and results under the plan was based on the statistics of subsidiary companies of this corporation. THIS

Because of the numerous inquiries received by the Commonwealth and Southern Corporation and its subsidiary companies f o r information about the plan, the company was anxious to make the report available in book form. Through its generosity publication was made possible. The original report was revised on September 1, 1936, in order that more recent figures might be included. The opinions and conclusions in this book, for which the author alone is responsible, are identical with those expressed in the original report filed in the Library of Columbia University as a Master of Arts thesis. WILLIAM F. February

1,

193J

KENNEDY

CONTENTS

PREFACE

v

I. THE BACKGROUND OF THE PLAN

i

II. THE DEVELOPMENT OF THE PLAN

9

III. RESULTS UNDER THE PLAN

26

IV. DISCRIMINATION UNDER THE PLAN

60

V. APPRAISAL OF THE PLAN

65

APPENDIX

77

INDEX

79

TABLES AND CHARTS

TABLES

1. Objective Type Rates by States

20

2. Analysis of Annual Results under the Objective Rate Plan

28

3. Kilowatt Hours per Meter and Percentage Increase for Each Y e a r over Preceding Year

38

4. Distribution of Customers by Kilowatt Hour Blocks

46

5. Distribution of Customers by Type of Bill

51

6. Electric Appliances

54 CHARTS

1. Net Monthly Bill for Various Kilowatt Hour Consumptions, Tennessee Electric Power Company

11

2. Kilowatt Hours per Meter, Commonwealth and Operating Companies

37

Southern

3. Net Monthly Bill for Various Kilowatt Hour Consumptions, Wisconsin Power and Light Corporation

67

I THE

BACKGROUND

OF

THE

PLAN

THE objective rate plan is one of the most important developments in recent times in public utility rate making. It has been applied to residential gas service and commercial electric service, and one company has used it for its street lighting service. But its most common application has been in the field of residential electric service. 1 A subsidiary of the Commonwealth and Southern Corporation, the Alabama Power Company, introduced the first objective rate plan for residential electric service on October i , 1933, and since then fifty-six other electric companies have adopted residential schedules based on the principles of this plan. T h e purpose of the plan is to increase residential sales and thereby reduce unit costs of supplying electricity. T h e method is to have two rate schedules effective simultaneously—the immediate rate and the objective rate. T h e objective rate is the lower rate and benefits customers who increase their consumption sufficiently over that of the base period, generally taken as the twelve months preceding the adoption of the plan. In order to understand the significance of the objective rate plan it is necessary to consider the development of residential electric rates from 1920 to the present time. T h e major change in residential use since 1920 has been the in1 T h i s study is limited to a consideration of the objective rate plan as applied to residential electric service. F o r a compilation of companies having objective rate plans f o r residential gas service and commercial electric service, see A p pendix.

2

B A C K G R O U N D OF T H E

PLAN

crease in consumption of energy f o r the operation of household appliances. The accompanying table shows that sale^ of electricity for the operation of appliances accounted f o r about 20 per cent of the total residential sales in 1920, 35 per cent in 1926, and 60 per cent in 1933. 2 PERCENTAGE Year 1920 1926 1933

DISTRIBUTION OF TOTAL RESIDENTIAL SALES OF KILOWATT HOURS, U. S. Lighting Major Appliances Small Appliances Total Appliances 80 10 10 20 65 20 15 35 40 45 IS 60

Clearly the lighting load declined in relative importance during this period. In fact if these estimates of the Edison Electric Institute are applied to the actual kilowatt hour sales and the number of customers, it can be shown that the average use f o r lighting decreased from 265 kilowatt hours per customer in 1920 to about 250 kilowatt hours per customer in 1933, and that the average use f o r domestic appliances increased from 75 kilowatt hours in 1920 to 365 kilowatt hours in 1933. This apportionment probably attributes too much influence to appliances f o r the increase that was effected in average consumption. It does not seem reasonable that the average use for residential lighting purposes should show an absolute decline between 1920 and 1933. Although the efficiency of electric lamps did increase by about 25 per cent during this time (that is, from 10.6 average lumens per watt in 1920 to 13.4 average lumens per watt in 1 9 3 1 ) , other factors were present that should have tended to increase average use f o r lighting purposes.* The total number of lamps sold increased from 211,000,000 in 1920 to 'Edison Electric Institute Bulletin, II (1934), 132. 'National Electric Light Association Proceedings, L X X I X L X X X I X (1932), 211.

(1923),

176;

B A C K G R O U N D OF T H E P L A N

3

347,000,000 in 1931, and the average watts of these lamps increased from 53.3 in 1920 to 60.9 in 1931. T h e estimates quoted in this report apportioning the consumption between lighting and appliances should be somewhat discounted in view of these facts. The most rapid growth in consumption for the operation of appliances has taken place since 1926. This period coincides with the period of rapid growth of refrigerator and radio sales. A t the beginning of 1926 there were about 130,000 electric refrigerators in use, and at the end of 1934 their number was estimated at about 5,800,000.* They were the most important factors in appliance consumption in 1934, accounting for about 20 per cent of the total domestic sales. T h e number of radios increased from practically none in 1926 to about 16,500,000 in 1934. Their individual consumption is small, but owing to their widespread use they now rank third in total consumption, the electric range occupying second place. This last-named appliance caused a steady growth throughout the 1920's and was responsible for the largest consumption of any single appliance until 1930, when it surrendered first place to the electric refrigerator. The water heater has contributed a steady rather than a spectacular growth, accounting for 5 per cent of the total residential sales both in 1926 and in 1934. Small appliances, including flatirons, percolators, vacuum cleaners, toasters, fans, etc., accounted for about 10 per cent of the total domestic sales in 1920 and about 15 per cent both in 1926 and in 1933. PROMOTIONAL RATES

Electricity f o r the heavy-duty appliances, namely the range, refrigerator, and water heater, has always com* The estimates in this section are taken from William M. Carpenter, "Domestic Electric Service in 1934," Edison Electric Institute Bulletin, I I I (1935), 109-n.

4

B A C K G R O U N D OF T H E

PLAN

peted with other methods of heating and refrigeration. T o build up the heavy-duty appliance load the rates have to be low enough to be competitive. The purpose of the promotional rate was to provide such low rates. In order for the follow-on rates to be low enough to be competitive it was necessary that they be free of the greater portion of customer and demand charges. One method whereby this might be done would be to levy a lump sum on a customer for his customer and demand costs, but owing to the consumers' objections to this type of rate and to the fact that some states have declared meter rents or service charges illegal, the more subtle method of including the greater portion of the customer and demand charges in the initial blocks of consumption has been commonly adopted. The purpose of the promotional rate is to encourage increased use and larger revenues. The consequent larger output leads to lower unit costs of production and distribution. This in turn makes possible further reductions in rates and further increases in use. The social justification of such a rate scheme is that consumers are enabled to use electricity more freely, thereby improving the standard of living and adding to the amenities of the home. The introduction of the promotional rate encountered many obstacles, chief of which was the strong opposition to the increased rates in the initial blocks, which were high because of the necessity of covering customer and demand charges. The small consumers formed a politically important majority. A recent study by the Federal Power Commission revealed that 50 per cent of the residential bills were for 25 kilowatt hours per month or less, and that 75 per cent were for 40 kilowatt hours or less. The state commissions

B A C K G R O U N D OF T H E P L A N

5

have consequently been solicitous for the welfare of the small consumer. In at least one case the small consumers were given the lion's share of a rate reduction because service to them was less competitive than that to the larger consumers and they were therefore in need of greater protection. 5 In another case it was held that the small consumers' ability to pay should be considered and that the full costs of service should not be levied on them because they could not afford to pay the necessarily high charges. 8 Opposition to recovering customer and demand costs in the initial blocks made it necessary to burden the followon rates with an appreciable amount of these costs. In order to make these rates promotional the companies would have to make sacrifices in their revenues in the hope that after a period of waiting increased use would justify the reductions. Many companies were loath to sacrifice their revenues on such an uncertain basis. Optional rates were introduced in an attempt to meet this situation and proved of some value because the customer who wished to use appliances could obtain his energy at a rate that was more promotional than the old one. This did not make possible any great reductions other than those that could eventually be made because of the gradual increase in average use. Optional rates did not solve the problem, since the small consumer was still billed at the old rate, which was unprofitable. The rates for larger consumption had to bear this burden. Widespread opposition to optional rates was voiced by consumers, rate experts, and commissions on the ground that the rates were too complex. The demand arose f o r simple rates which could be easily understood. The con" R e Alabama Power Co., 3 P.U.R. ( N . S . ) 355 (1933). •Application of the Los Angeles Gas and Electric Co., 13 C.R.C. 724, 733.

6

BACKGROUND OF T H E

PLAN

sumers had a further objection in that they could never be certain that they were being billed under the lowest possible rate, f o r the burden of choice was upon them. 7 Special heating and cooking rates were introduced in an attempt to increase the appliance load. About 20 per cent of all the rate schedules in the 1932 rate book of the N a tional Electric Light Association were special schedules of this type. 8 Despite their wide use these schedules met with the disapproval of some commissions for two reasons: first, because they were discriminatory, and, second, because they unnecessarily complicated the rate schedules. Discrimination was charged on two counts: first, that special rates for off-peak use for water heating were discriminatory against the consumer using off-peak current for other uses ;9 and second, that the consumer billed under the regular rate would pay a larger price for a specified number of kilowatt hours than a consumer using the same number of kilowatt hours under the special rates. 10 Furthermore, it was held that rate schedules would be less complicated and that heating and cooking service could be equitably supplied under a progressive block meter rate. 11 EFFECTS

OF T H E

DEPRESSION

T h e major effect of the depression was to reduce drastically the incomes of residential consumers. T h i s led to an T Paul M. Downing, "Rate Simplification as an Industry Need," National Electric Light Association Proceedings, L X X X I X (1932), 23-25. 8 Luther R. Nash, Public Utility Rate Structures (New York, 1933), p. 162. " R e New Y o r k State Electric and Gas Corp., 6 P.U.R. (N.S.) 113 (1934), and Re Niagara, Lockport and Ontario Power Co., 6 P.U.R. (N.S.) 321 (1934). 10 Re Interstate Power Co., Wisconsin Docket No. 2-U-450, P.U.R. Annual (1934), 652, and Re River Falls Municipal Utility, Wisconsin Docket No. 2-U-597, P.U.R. Annual (1934) 618. 11 Re T w i n State Gas and Electric Co., 5 P.U.R. (N.S.) 388 (1934); Re East Andover Light and Power Co., 8 P.U.R. (N.S.) 212 (1934) ; and Wilson v. Wisconsin Hydro Electric Co., 10 P.U.R. (N.S.) 61 (1934).

BACKGROUND

OF T H E P L A N

7

insistent demand for lower rates, which found political expression and stimulated the state commissions to more aggressive action. Increased appropriations were granted to commissions and in many states their powers were augmented by legislation. T h e power to issue interlocutory or emergency orders for rate reductions was granted to commissions in some instances. These factors, plus the threat of governmental competition, led to widespread rate reductions. A study made at Northwestern University in 1934 showed that all consumers received rate reductions between 1930 and 1933 and that the residential consumers received the largest decreases. The percentage decrease from 1930 to 1933 for residential consumers in the United States was 4.64 for a bill of 25 kilowatt hours, 6.43 for 50 kilowatt hours, and 8.78 for 100 kilowatt hours. 12 The total revenues of the electric light and power companies declined $165,000,000 between 1929 and 1933. T h e financial condition of the companies no longer made it possible to reduce rates and withstand the consequent reduction in revenues until use increased sufficiently to restore them. Economic conditions were too depressed to make such a procedure advisable. T w o facts became evident. First, most companies had surplus capacity, due mainly to the decline in the industrial load. T h e capacity factor for the industry dropped from 36.2 per cent in 1929 to 26.3 per cent in 1933. 13 Second, residential consumers were willing to use more electricity. While all other classes curtailed their use, these consumers increased their consumption from 9,773,000,000 kilowatt a "The Trend of Electric Utility Rates," Journal of Land and Public Utility Economics, X (i934)> 359" E. W. Morehouse, "Public Utilities in the Depression," American Economic Review, X X I V , March supp. (1934), 11.

8

BACKGROUND OF T H E PLAN

hours in 1 9 2 9 to 11,960,000,000 kilowatt hours in 1 9 3 3 and increased their expenditures for the service by $37,000,000. Although all classes of persons had cut their expenditures for practically all other goods, they had expanded their purchases of electricity. It w a s evident that the additional kilowatt hours would cost the companies very little. However, to offer highly promotional rates at this time seemed out of the question because the finances of most companies did not permit a further reduction in revenues. The problem was to protect existing revenues while offering the consumer who wanted more electricity additional hours of use at very low rates. T h e objective rate plan w a s the solution proposed by the Commonwealth and Southern Corporation in 1 9 3 3 .

II THE

DEVELOPMENT

OF

THE

PLAN

THE first objective rate plan went into effect on October I, 1933, in the territory of the Alabama Power Company, a subsidiary of the Commonwealth and Southern Corporation.1 Inasmuch as the Alabama Public Service Commission had ordered a rate reduction, the company decided that the inauguration of this plan, which had been under consideration, would now be appropriate. The objective rate plan, formulated and thus initiated by the Commonwealth and Southern Corporation, was then installed in two more of its Southern operating companies, the Georgia Power Company and the Tennessee Electric Power Company, the former on January 1, 1934, and the latter on February 1, 1934In addition to the universal demand for lower rates because of the depression, these companies had also to contend with the yardstick program of the Tennessee Valley Authority. Although the inauguration of the plan preceded the announcement of the T . V . A . rates, the companies must have recognized the necessity of reducing their rates in as short a time as possible. The objective rate plan was formulated to reduce residential rates without too drastic sacrifices in revenues. 1 The Consolidated Gas, Electric Light and Power Co. of Baltimore had a gas rate schedule based on the fundamental principles of the objective rate plan from 1916 to 1929. It was not adopted by any other company during this period, and the Commonwealth and Southern Corporation experts were unacquainted with it when they inaugurated their plan.

D E V E L O P M E N T OF T H E

PLAN

METHOD OF OPERATION

T h e objective rate plan provides two separate schedules effective coincidentally. One is the immediate rate and the other is the objective rate. 2 T h e immediate rate, adopted in Tennessee and Georgia, is: 6.5^ net per k w . hr 5.0^ net per k w . h r 3.0^ net per k w . h r 1.5^ net per k w . h r M i n i m u m bill

first

2 5 k w . hrs.

next 3 5 k w . hrs. n e x t 1 4 0 k w . hrs. o v e r 200 k w . hrs. $ 1 . 0 0 per c u s t o m e r per month.

The Alabama immediate rate is similar but is based on the number of rooms. T h e objective rate in effect in the three territories is: $ 1 . 0 0 net per m o n t h

for

1 5 k w . hrs.

4.5^ net per k w . h r

next

50 k w . hrs.

2.oi net per k w . h r i.25(J net per k w . hr

n e x t 1 3 5 k w . hrs. n e x t 500 k w . hrs.

i . o ^ net per k w . h r

over 700 kw.

hrs.

It can be seen that the objective rate, which applies to consumers who increase their use, is the lower rate. The method of application of the plan may be described as follows: Base bills are determined for each consumer by applying the immediate rate to the consumer's actual consumption in each of the twelve months preceding the inauguration of the plan. Whenever a bill under the immediate rate equals or is less than the consumer's base bill, the immediate rate applies. Whenever a bill under the objective rate exceeds the ' R a t e s taken from Objective tute, N e w Y o r k , A p r i l , 1936).

Type

Rates,

1933-1936

( E d i s o n Electric Insti-

CHARTi

D E V E L O P M E N T OF T H E

PLAN

base bill, the objective rate applies. Whenever the immediate rate results in a bill greater than the base bill, and whenever the objective rate results in a bill less than the base bill, the base bill applies. T o illustrate: if a consumer used 50 kilowatt hours in January, 1933, his base bill, computed under the immediate rate, would be $2.88. If in January, 1934, after the adoption of the objective rate plan, he used less than 50 kilowatt hours he would be billed under the immediate rate for whatever current he used. If he used exactly 50 kilowatt hours in 1934 he would be billed $2.88 under the immediate rate. If he increased his consumption beyond 50 kilowatt hours he would be billed under the objective rate. However, if the bill under the objective rate were less than $2.88 (the base bill), then the base bill would apply. Under the objective rate 56 kilowatt hours would cost $2.84, but the base bill would apply and the bill would be rendered for $2.88. If 57 kilowatt hours were used the bill would be $2.89. This illustrates the feature of free kilowatt hours. The consumer would receive 6 additional kilowatt hours at no added cost. These free kilowatt hours vary in amount, depending upon the consumption, and range from 1 kilowatt hour for a consumption of 19 kilowatt hours per month to 438 kilowatt hours for a consumption of 1,000 kilowatt hours per month. T h i s is shown graphically on Chart I by the horizontal dotted lines, which represent consumptions of 50 and 100 kilowatt hours. A horizontal line drawn from any point on the immediate rate curve to the objective rate curve will show the number of free kilowatt hours obtained for a particular consumption. A n inspection of the chart shows that as the consumption amounts increase, the longer the horizontal lines become, indicating that more free kilowatt hours are obtainable.

DEVELOPMENT

OF T H E P L A N

13

Even in the short distance from 50 to 100 kilowatt hours the increase is marked, f o r there are 6 free kilowatt hours at 50, and 3 1 free kilowatt hours at 100 kilowatt hours of consumption. It is clear that there is a definite incentive for increased use, since not only does the consumer who increases his consumption over that represented in his base bill receive free kilowatt hours but if he increases his use further he is billed under the objective rate, which is lower than that applying to his initial consumption. This leads to a very low price for the additional kilowatt hours. F o r example, a consumer with a consumption of 100 kilowatt hours in January, 1933, would have a base bill of $4.58. If he purchased a range and increased his consumption to 250 kilowatt hours in January, 1934, he would be billed $6.58 under the objective rate. His 1 5 0 additional kilowatt hours would cost him $2.00, or 1.33 cents per kilowatt hour. Rates as low as this offer great inducement to the increased use of electricity. The practice of charging a lower price to the consumer who increases his use causes discrimination against the consumer who does not increase his use. A consumer with a base use of 50 kilowatt hours who purchases 100 kilowatt hours in a particular month is billed $3.95 under the objective rate, while another consumer with a base use of 100 kilowatt hours who does not increase his use over the base amount is billed $4.58 f o r 100 kilowatt hours under the immediate rate. The whole question of discrimination will be dealt with more fully later in this study (see Chapter I V ) . The devices used to minimize this discrimination are indicated here. On March 1, 1935, the Alabama Power Company and the Tennessee Electric Power Company filed a provision

14

DEVELOPMENT

OF T H E

PLAN

under which no base bill would exceed $8.00. Formerly the base bill of a consumer with a base use of 300 kilowatt hours w a s $9.08. Under this provision his base bill became $8.00. H e would therefore receive 164 free kilowatt hours, and f o r a consumption above 364 kilowatt hours he would be billed under the objective rate. A n examination of Chart I shows that the difference between bills under the immediate rate and bills under the objective rate is greatest beyond $8.00. T h i s provision eliminated a considerable amount of discrimination. T h e original Commonwealth and Southern objective rate plan provides that base bills will be reduced by 5 per cent at the end of the first twelve months and that the resultant base bills will be reduced another 5 per cent at the end of the next twelve months. In Alabama this twelve-month period has been shortened to six months. T h i s provision allows the consumer who does not wish to increase his use an annual reduction in his bill, which gradually brings him down to the objective rate in three years. A further feature of this rate plan is the provision that the objective rate will become fully effective for all consumers at the end of a definite period, originally set at three years but shortened to two and a half years in A l a b a m a and to two years and two months in Tennessee. T h e time limit guarantees that any discrimination that might exist will be merely temporary; everyone will be charged according to one schedule at the expiration of the period. PURrOSE OF T H E OBJECTIVE R A T E P L A N

A n examination of the methods of administering the objective rate plan reveals the purposes of the plan clearly. First, there is the desire to increase the consumption of residential consumers. T h i s is to be achieved by offering

DEVELOPMENT

OF T H E P L A N

15

free kilowatt hours and charging a low price f o r consumption beyond the free kilowatt hours, as illustrated by the example cited above wherein a consumer who formerly used 100 kilowatt hours and increased his use to 250 kilowatt hours obtained the additional 1 5 0 kilowatt hours at the price of 1 . 3 3 cents per kilowatt hour. Another purpose of the plan is to maintain the total revenues of the company by use of the base bill device during the period when rate reductions are being effected. In the three companies mentioned the immediate rate is substantially lower than the former rate, and a reduction in level of revenues was to be expected. If the immediate rate were not lower than the former rate, the level of revenues would be maintained, assuming that the demand for electricity did not decrease. Lower prices would be given only to those who contributed to revenues as much as or more than they had contributed in the previous year. The objective rate plan aims to increase consumption so that at the end of the three-year period the company will be able to bill all its customers under the objective rate without losses. T o achieve this end two dangers must be avoided. First, the objective rate must not be so low that the revenues under it will be inadequate; and second, adequate incentives in the form of low rates must be offered to get increased consumption. These two principles are contradictory, f o r it is evident that the larger the incentives offered for increased consumption, the lower must be the objective rate. The determination of a proper balance between these two factors depends upon the conditions of demand in the available market and the possibility of increasing consumption. It is not enough that sufficient inducement be given f o r increased consumption and that the objective rate be high

i6

D E V E L O P M E N T OF T H E P L A N

enough to pay for the costs of service; the objective rate must conform to all the criteria of a good residential rate. The rate experts of the Commonwealth and Southern Corporation thought the policy of simple, uniform rates a sound one and made the objective rate uniform for all the territory served in Alabama (with the exception of the rural areas), in Georgia, and in Tennessee. The rate is the simple, block meter type. The criteria of a desirable rate probably vary with different companies and commissions, yet one standard is almost universal—the desirability of a promotional form of rate. This is necessary if the appliance load is to be obtained. The promotional requirement places a definite limitation on the form of the objective rate. Large inducements cannot be offered in the lower range of consumption because the objective rate might thereby be so low at these points that convenience users would be served at a loss; hence a burden, in the form of rates higher than otherwise necessary, would be placed upon other consumers, deterring increases in consumption. U S E OF T H E

O B J E C T I V E T Y P E R A T E BY O T H E R

COMPANIES

The inauguration of the objective rate by the Commonwealth and Southern Corporation led other companies to attack their own rate problems with new types of rates designed to dramatize the idea that increased consumption was obtainable at very low prices. The objective rate was probably the stimulus that caused the introduction of a variety of "bargain rates" in 1934. These bargain rates were of three different types.8 One scheme permitted the customer to use whatever amount of * The data on these bargain rates were compiled from the Edison Institute Rate Book, 1935 (Edison Electric Institute, New Y o r k ) .

Electric

D E V E L O P M E N T OF THE P L A N

17

current he wished during April and May at no greater cost than his bill for the month of March. This offer was made by the Pacific Gas and Electric Company, the San Joaquin Light and Power Company, the Wisconsin Gas and Electric Company, and the Milwaukee Electric Railway and Light Company. Another type of bargain rate plan was the Share-theBenefits-Plan of the Hartford Electric Light Company. For an increase in use of 5 kilowatt hours over the use in the corresponding month of the preceding year, a customer was given 25 free kilowatt hours, and for an increase of 10 kilowatt hours he was given 50 free kilowatt hours. This plan was also used by other companies in Connecticut, including the Connecticut Power Company, the Manchester Electric Company, the Stamford Gas and Electric Company, and the Union Electric Light and Power Company of Unionville. The third type of bargain rate was the offer to credit against the purchase price of a range or water heater purchased from the company one-half the amount by which the monthly bills exceeded the average monthly bill for the twelve months preceding the purchase. This offer was made by three Massachusetts companies, the Central Massachusetts Electric Company, the Gardner Electric Light Company, and the Wachusett Electric Company, and is still effective. Although these bargain rates were not proposed as substitutes for the true objective type of rate, they were attempts to solve the same problem, that of increasing consumption. They have not been as popular as the objective rate plan, and in one case, that of the Share-the-BenefitsPlan, the objective type of rate replaced the bargain rate. Table 1 is a compilation and analysis of objective rate

18

D E V E L O P M E N T OF T H E

PLAN

plans as of January i , 1936. Data are shown for f o u r common features of the .plan: minimum base consumption, maximum base bill, pricing of cross-over kilowatt hours, and the time limit. T h e information was collected from a compilation made by the Edison Electric Institute, and although it listed sixty-one companies with objective rate plans, five of these were eliminated from the table because they did not have true objective type rates. T h e present study considers a true objective type rate to be any plan in which there are two rates effective coincidentally, the lower one being available to consumers who increase their consumption. T h e five companies eliminated are the Arizona Power Corporation, the Utica Gas and Electric Company, the Central Massachusetts Electric Company, the Gardner Electric Light Company, and the Wachusett Electric Company. T h e rates of these companies do not meet the test f u r nished by the above definition. PRINCIPAL

VARIATIONS IN

OBJECTIVE RATE

PLANS

T h e data in Table 1 indicate that subsequent plans departed from the pattern of the original objective rate plan in three major particulars; namely, in provisions for "stoppers"; in the policy of pricing cross-over kilowatt hours; and in the time limit of the plan. T h e term "stopper" refers either to a minimum base consumption or to a maximum base bill. T o illustrate the use of the f o r m e r : if a minimum base consumption of 30 kilowatt hours has been established, a consumer whose base use was 20 kilowatt hours and who increased his use to 30 kilowatt hours would not benefit by this increased consumption. However, if he increased his use beyond 30 kilowatt hours, the consumption in excess of 30 would be considered increased consumption. This provision reduces the billing costs of the company by

DEVELOPMENT

OF T H E P L A N

19

eliminating the necessity for determining all the small increases in consumption and applying the new rates to them. In some cases a minimum base consumption is present although the rate schedule does not specify one. The IowaNebraska Light and Power Company has an objective rate that is identical with the immediate rate for the first 40 kilowatt hours. This in effect provides a minimum base consumption, inasmuch as no benefits are given for increased consumption below this point. Seventeen of the forty-nine companies in Table 1 whose schedules are available have minimum base consumption stoppers. The maximum base bill is an "upper stopper." A maximum base bill of $8.00 was introduced into the Commonwealth and Southern Objective Rate Plan on March 1, 1935, and, as previously explained in connection with that revision, the purpose of the maximum base bill was to reduce some of the discrimination against the existing consumer of large quantities. Of the forty-nine companies analyzed in Table 1, twenty-three have provided maximum base bills. The maximum base bill is typically about $8.00 or $10.00 and represents a consumption of about 200 or 225 kilowatt hours. In the original rate plan the cross-over kilowatt hours, that is, the kilowatt hours of increased use by means of which the consumer passes from the immediate to the objective rate, were given free of charge. Since then there have been various methods of pricing these kilowatt hours. Of the forty-nine companies analyzed in Table 1, five allow a 50 per cent discount from the immediate rate f o r crossover kilowatt hours; seven charge 2 or 2 ^ cents per kilowatt hour; two have a combination of discount and flat rate; and the remaining thirty-five provide free kilowatt hours.

20

DEVELOPMENT

OF T H E

PLAN

TABLE i* OBJECTIVE T Y P E RATES BY STATES A S O F J A N U A R Y I, 1936 RESIDENTIAL ELECTKIC SERVICE

State and Company

Minimum Base Consumption (in kilowatt hours)

Alabama Alabama Power Co. Birmingham Electric Co. Arkansas Arkansas General Utilities Co. Arkansas Missouri Power Co.« Arkansas Power & Light Co. Oklahoma Gas & Electric Co. Southwestern Gas & Eleetrie Co.

Maximum Base BiU (in dollars) 8.00 8.00°

...

Pricing of Cross-over Kw. Hrs. Free 50% discount

Time Limit 2>i years d

Free

20 30

8 .00 8.00

50% discount 1 per kw. hr.

30

8.00

2Ì per kw. hr.

California Southern Sierras Power Co.* Colorado Colorado Central Power Co. Western Colorado Power Co. Connecticut Connecticut Power Co. Hartford Electric Light Co. Manchester Electric Co. Stamford Gas & Electric Co. Union Electric Light & Power Co.*

... 12

... ...

Free 50% discount

Free Free Free Free

• D a t a compiled from Objective Type Rates, 1933-1936 (Edison Electric Institute, New York, April, 1936). b Three dots indicate that the schedule does not provide the feature. • Maximum base bill is $8.oo, plus 50 per cent of immediate rate for all additional kw. hrs. d The objective rate will become effective for all customers when 50 per cent of all bills in a 12-month period are for 50 kw. hrs. or more. • Known to have an objective rate plan but schedule not available. ' Price of cross-over kw. hrs. shall not be less than 2 cents per kw. hr. « The objective rate shall become effective for all customers when 50 per cent of all bills in a 12-month period are for 35 kw. hrs. or more.

DEVELOPMENT TABLE i

OF T H E P L A N

21

(Continued)

OBJECTIVE TYPE RATES BY AS OF JANUARY

STATES

I, 1936

RESIDENTIAL ELECTBIC SERVICE STOPPERS

State and Company

Minimum Base Consumption (in kilowatt hours)

Florida Florida Public Service Co. Gulf Power Co. Southern States Power Co.

Maximum Base Bill (in dollars)

Pricing of Cross-over Kw. Hrs.

14.00

Free Free Free

Georgia Georgia Power Co. Illinois Central Illinois Light Co. Illinois Northern Utilities Co.

Free ... ...

(200 kw. hrs.) (175 kw. hrs.)

Time Limit

3 years

Free Free

Iowa Iowa-Nebraska Light & Free 40 Power Co. (Also effective in Missouri and Nebraska) Kansas Free Kansas Utilities Co. Louisiana Free Louisiana Ice & Electric Co. Michigan Free Houghton County Electric Light Co. Free Iron Range Light & Power Co. Free 8.00 Consumers Power Co. Mississippi Free Mississippi Power Co. Missouri Maryville Electric Light & Power Co.' Nebraska (see Iowa) Nevada Sierra Pacific Power Co. ... ... Free *• The objective rate shall become effective for all customers after the second consecutive month wherein 80 per cent or more of all bills are rendered under the objective rate and for an amount exceeding the base bill. 1 Known to have an objective rate plan but schedule not available.

22

DEVELOPMENT

OF T H E

PLAN

TABLE i (iContinued) OBJECTIVE T Y P E RATES BY STATES AS O F J A N U A R Y I, 1936 RESIDENTIAL ELECTXIC

Slate and Company

Minimum Base Consumption (in kilowatt hours)

SERVICE

Maximum Base Bill (in dollars)

New Merico New Mexico Utilities Co.

Free Free

North Carolina Carolina Power & Light Co. (Also effective in South Carolina)

31 months 31 months

Free

Free

($I.S°)

Free Free Free

SO

Free Free

Oklahoma Oklahoma Utilities Co.

Free

Pennsylvania Pennsylvania Power Co.

Free

South Carolina South Carolina Power Co.

Free

Tennessee Tennessee Eastern Electric Co. Tennessee Electric Power Co. Tennessee Public Service Co.

Time Limit

Free

New York Westchester Lighting Co. Yonkers Electric Light & Power Co.

Ohio Central Ohio Light & Power Co. Ohio Edison Co. (Akron Division) Urban Suburban Springfield (Urban) Youngstown Urban Suburban

Pricing of Cross-over Kit). Brs.

8.00

Free

3 years

8.00

Free

3 years

Free

3 years

DEVELOPMENT TABLE 1

OF T H E

PLAN

23

(Continued)

OBJECTIVE T Y P E RATES BY STATES A S O F J A N U A R Y 1, 1936 RESIDENTIAL ELECTRIC SERVICE STOPPERS

Stale and Company

Minimum Base Consumption (in kilowait hours)

Maximum Base Bill (in dollars)

Texas Texas Utilities Co.

Pricing of Cross-over Kw. Ilrs. Free

Utah Utah Power & Light Co.

50% discount

Vermont Green Mt. Power Corp.

Free

Wisconsin Coleman-Pound Light & Power Co. 1 Commonwealth Electric Light Co.' Interstate Power Co. k Lake Superior Co. k Menominee and Marinette Light & Traction Co. Midland Public Service Co. Pioneer Power & Light Co.' Northern States Power Co. Superior Water, Light & Power Co. Westfield Milling & Electric Light Co.' Wisconsin Power & Light Corp. Wisconsin Public Service Co.

Time Limit

l y i t per kw. hr. 1

30 30 30

7 •15-7 •57 7 .25-8 .00 7 .25-8 .00

30

7- 25-8 .00

2Ì per kr. hr.

30 30

7- 25-8 .00

2)! per kw. hr. 50% discount

30

7- 25-8..00

1

30

7- 25-8. 00

21 per kw. hr.

2)! per kw. hr.

' Known to have an objective rate plan but schedule not available. k Based on Supplementary Orders, Public Service Commission of Wisconsin, Docket No. 2-U-810, July 3 and 15, 1935. 1 Between base use and 50 kw. hrs., 50 per cent discount from present rates; over 50 kw. hrs. at 2 cents per kw. hr.

T h e original rate plan specified a time limit of three years, after which the objective rate would be effective for all bills. This feature seems to have been the least popular of all the devices of the original plan, since only four of

24

D E V E L O P M E N T OF T H E

PLAN

the forty-six companies which subsequently adopted the plan followed the practice of the original plan in this respect. T w o other companies specified that the objective rate would become effective when a certain percentage of the customers were billed for a specified consumption. Another company promised to make the objective rate effective for all bills when 80 per cent of the bills f o r each of two consecutive months came under the objective rate. Only ten of the forty-nine companies studied provide any guarantee as to when the objective rate will become completely effective; in the other thirty-nine cases the assumption is that the commission or the company will order the lower rate when consumption increases sufficiently to justify its complete application. In adopting the objective rate plan some companies used it as a transitional device to pass from an objectionable form of rate, such as a room-basis rate, to a more desirable form, such as a block meter rate. Although the original objective rate plan in Alabama encompassed a transition from a room-basis rate to a block meter rate, the primary purpose of the plan was to increase consumption and achieve lower rates; the transitional aspect was incidental. Since then objective rate plans have been introduced in which the transitional aspect carried greater weight. In the instance of the adoption of objective rate plans by the Illinois Northern Utilities Company and the Central Illinois Light Company, the Illinois Commerce Commission stated, " I t is important to note that in both cases the Objective Rate is of the simple block type and that this rate will come to replace present room rates wherein the basis of charging f o r electric energy depends upon the number of rooms in the consumer's residence. The Objec-

DEVELOPMENT

OF T H E P L A N

25

tive Rate plan . . . thus makes possible an orderly transition from complex rate forms to the simple block rate." 4 A recent instance in which the usefulness of the plan as a transitional device received even greater weight was the rate introduced on April 1, 1936, by the Consumers Power Company in Michigan. The Michigan commission held that the old rate, which was based on wattage of installation, was unsatisfactory and discriminatory and that a block type of rate should be substituted. 5 But the change from the old form of rate to the block type in one step would be impracticable because of the resultant increase to a large number of consumers, which could not be avoided unless revenues were reduced by an unwarranted amount. A "standard domestic transition rate" was ordered. The charges under this rate were computed on an installation basis, and the rate corresponded to the immediate rate in an ordinary objective rate plan. A block rate, called the "standard domestic objective rate," was made effective simultaneously for the benefit of consumers who increased their consumption. This rate was eventually to be effective f o r all consumers. Of the forty-nine companies analyzed in Table 1, nine had room-basis rates before the plan and adopted an objective rate of the block meter type. However, it is impossible to say how much weight each company gave to the fact that the objective rate plan is a useful transitional device when it decided to adopt the plan. * Eighteenth Annual Report of the Illinois Commerce Commission,

1934-1935,

p. 16.

' Commission Release to City and Village Order D-2916, March 23, 1936.

Clerks of Michigan

Relating to

Ill RESULTS UNDER THE

PLAN

A STUDY of the results under objective rate plans can best begin with the experience of the Southern operating companies of the Commonwealth and Southern Corporation for a number of reasons. First, an intensive study of a limited group of companies offers a better basis for conclusions than a study of general experience throughout the entire country. Second, these companies originated the plan, and because of that fact a longer period of operation is available for the observation of results. Finally, the fact that three of the six Southern operating companies had objective rate plans for a period of about a year during which the other three companies did not have objective rate plans affords an opportunity for a comparative study to ascertain the effects of the plan. The measurement of cause and effect in most economic phenomena is difficult because the student does not have the controlled conditions of the laboratory which are available in the pure sciences. The measurement of the results of an objective rate plan is difficult because its operation is entangled with other disturbing factors. Certain observed effects may not be attributed solely to the objective rate plan, inasmuch as other factors have changed during the period of the study—for instance, the purchasing power of the consumers or changes in the character of customers' demand because of advertising or increased interest in electrification. With these limitations in mind, a comparison is attempted here of revenues, kilowatt hour

RESULTS

UNDER

THE

PLAN

27

sales, and customers f o r a period before the plan and a like period after the plan. COMPARISON

OF REVENUES, SALES A N D

BEFORE A N D AFTER T H E

CUSTOMERS

PLAN

A comparison of revenues, kilowatt hour sales, and customers under the residential rate is made for each of three companies for a period of twelve months preceding the adoption of the objective rate plan and for twelve months ending April 30, 1936. T h e period ending April 30, 1936, was selected because on that date two of the companies completed their objective rate plans and the figures represent the first final results of objective rate plans in this country. T h e comparisons between the twelve months preceding the plan and the twelve months ending April 30, 1936, do not cover the same span of time for each company because the plan became effective on a different date in each territory. It went into effect on October 1, 1933, in the A l a b a m a territory, on January 1, 1934, in the Georgia territory, and on February 1, 1934, in Tennessee. Comparison of results in these territories cannot be fairly made on account of these differences. Therefore no attempt is made to contrast the results of one company with those of another. The data compiled in Table 2 were taken from the annual reports of the companies or f r o m reports made available by the statistical department of the Commonwealth and Southern Corporation. A l l other data in this chapter relating to these companies are from the same sources unless otherwise noted. Total revenues for each company were greater in the year ending A p r i l 30, 1936, than in the twelve months preceding the plan. T h i s shows that in spite of large rate re-

•tf ° «o

o 3« M

I 00

a

l/î M O M hJ

m

00

N. J

M » O

O »r, »v.

m 00 IO

«

00 1 00

00 ÛQ ^

11

3

(«

ti

y

fc

U

*r¡ f t

»o o

N

I

V

V ^

•Ml

p R

° 2

ü

i

s

« i ¡ «

§ C

a tí

Pi




ja

c

S. H

a se g 43 g g * s s 4J > •=•» > V -a

3 O J3 ä co ¡£ O 3 &

T3 H a O jO 4J

M IO oo

O

2

o

M

M

ui

oo

M

o* ç

a

« aS„ o.
1 O IH C4 M

« , r- O O l o o

0000 r—

00 00

.. » 0 0 0 0

©.

1

f)

o. o M « N f O fO fO " ) Ov o » o ©> o »

¿

¿

¿

¿

¿

i

i 4

à

¿

i

i

-3

£

i

13

o'

¿

s'-S

J

f>»

IO

>o

^

Qv »-« ^ N ^ (HO O O IN O O »C c O O C 00 C Q 00 ^ Ol a o> O» ^ O O O

8 ^

^ M C O ~ O O O n n fo ^ Tf ï o o 00 1

i M ^ s N «o M oo O ^ O »O t-i »-« « f) v)>û r- ¡^ O ro O — t 00 O» ! 00 00 oo 00 oo 00 00 o. ^ ^ ^ o>

Ol t>. W) (O s M «o 0 O" O O ^ i *0 00 ^ N Oi V) H 00 Oí lo >0 O N fsOO oo O ©« i o O — -I — ** ^ fO ^ ^ "O r-- 00 o o io io io i/j io io io V) ios O "O -o o ^o ^O O O O O O O t~>.

N O N »/> fs.O « ^ f-. « o o O O »O n O oo m io oo ©» w « W 5 ^ ") ^ ^^ ^ ^ ^ V) ÍOO O fN.00 o >-> ™ »o «o t^Ov rs t«. N N N N NNNNNNNNNNNOOOOCOOOOOOOOO

«i ? „! i N ^ N fO ^ ^o ^ O Ifl U) N o Tf" M i » H « " i O O 00 00 00 oo 00 00

O M so O Ó M M I r ä ÍÜ 2 S S M 8 V V •r .a .a c E l s i s

i M »o »o ^ ^ H ©< ç> oo O w w io o t-» 00 0> O w r-»oo O lOOOOOOOQOOOOOOOOOOOOOO O« o» Ô O O O^ Ô> Ó>

o « 1

.3 3 3 a 73 N W Ä 5

sut s.-

i Í^ S f

¿ li d i

S S S ' S i ï S "

¿ si n i

I s a 2 2 2

S s < S

40

RESULTS UNDER THE

PLAN

Power Company, January I, 1934; Tennessee Electric Power Company, February 1, 1934) can be compared with three other companies which introduced their plans much later (South Carolina Power Company, December 1, 1 9 3 4 ; Mississippi Power Company, July 1, 1 9 3 5 ; and Gulf Power Company, August 1, 1 9 3 5 ) . During the year 1934 three of the companies had objective rates in effect for the whole period (the Tennessee company lacked one month to fulfill this requirement), and the three other companies did not have objective rates during this whole time, with the exception of the South Carolina company, which started its objective rate plan on December 1, 1934. Disregarding the two exceptions as unimportant, the results of the two groups of companies during 1934 may properly be compared. This comparison is limited to the question, How have objective rate plans affected the average kilowatt hour consumption per meter? Table 3 presents the data on kilowatt hours per meter and Chart 2 illustrates the same material graphically. The table on page 41 compares the kilowatt hour increases of companies having objective rate plans and companies without such rate plans. The average number of kilowatt hours per meter for the first group in 1934 increased 14.9 per cent over 1933; the second group had an increase of 8.4 per cent for the same period. The larger increases in consumption per customer achieved by the companies with objective rate plans may not be attributed solely to the effects of the plan. It is difficult to determine the extent of the influence of the plan, inasmuch as other factors affected the results. The table indicates that the purchasing power in the territories of the objective rate plan group was greater

RESULTS UNDER THE PLAN

41

COMPARISON OF 1934 KILOWATT HOUR I N C R E A S E S A N D S P E N D A B L E INCOME P E R CAPITA W I T H I N T H E R E S P E C T I V E T E R R I T O R I E S

I . Objective Rate Group Alabama Power Co. Georgia Power Co. Tennessee Electric Power Co. Weighted average

Kw. Hrs. per Meter % Increase IQ34 over 193?

Retail Sales per Capita 193? (in dollars)

Spendable Income per Capita I93f (in dollars)

New Car Sales per Thousand of Population 1934a

9.8 10.6 26.5 14.9

$ 84 30 122.20 131.00 I I I . 10

$176.80 279.20 304.90 249.60

8.9 il.7 10.2 10. s

I I . Other Group Gulf Power Co. 299.40 120.20 134 31 183.00 67.20 Mississippi Power Co. 6.7 7-2 173.10 South Carolina Power Co. il.7 70.90 9 5 8.2 $196.00 Weighted average $ 75 00 8.4 • Adopted from Table 3. b Estimate based on figures from U. S. Bureau of the Census. See Sales Management, April 10, 1935, p. 413. • Based on National Bureau of Economic Research figures on net income and income tax returns. Op. cit. d Based on figures from R. L. Polk & Co. Op. cit.

than in the other group in the year 1934, spendable income in the first group being $249.60 per capita and $196.00 in the second group. This would tend to f a v o r larger sales of electricity in the richer territory, just as it favored larger sales of new motor cars. However, this does not give a complete explanation for the increases in consumption; a relatively poor territory might have had a larger increase in purchasing power f o r 1934 as compared with 1933 than a territory with much greater purchasing power, and consequently might have shown a greater increase in sales of electricity. The effect of relative increases in purchasing power is not shown in the table. Another factor that influenced consumption of electricity was the reduction in rates made during the period under study and in the period immediately preceding it. A s a matter of company policy, large outright reductions were

42

RESULTS

UNDER THE

PLAN

made in connection with the objective rate plans. T h e table "Residential Rate Reductions" shows that the companies of the objective rate plan group offered larger percentage rate reductions. Reductions that influenced 1934 consumption, expressed in percentages, were 14.2 and 1.7 for A l a bama, 2.1 and 15.6 for Georgia, and 9.5 and 13.7 f o r Tennessee. In the other group, reductions were 0.5 and 4.3 f o r the Gulf Power Company, 13.0 for Mississippi, and 10.5 for South Carolina. T h e 5.8 per cent reduction made in 1934 in the South Carolina territory is not included, since it was made available December 1, 1934, and had a negligible influence on 1934 consumption. OUTRIGHT RATE REDUCTIONS COMPARED

WITH

OBJECTIVE R A T E P L A N S

T h e South Carolina Power Company achieved an increase of 11.7 per cent in average kilowatt hours per meter for 1934 over 1933. This company did not have an objective rate plan until December 1, 1934, but it had offered an outright rate reduction on A u g u s t 1, 1933, when the old schedule was superseded by new rates giving a reduction of 10.5 per cent. T h e Alabama and Georgia companies, both of which had objective rate plans in force throughout the year 1934, achieved smaller increases in average kilowatt hours per meter for 1934 than the South Carolina company, the percentage increases being 9.8 in Alabama and 10.6 in Georgia. Furthermore, as the following table shows, these companies offered larger outright rate reductions than the South Carolina company. T h e reductions affecting 1934 kilowatt hour consumption were 14.2 and 1.7 per cent reductions in Alabama, 2.1 and 15.6 per cent reductions in Georgia, and a 10.5 per

R E S U L T S UNDER T H E PLAN

43

RESIDENTIAL RATE REDUCTIONS* '933 1934 1935 Company Amount Amount Amount % % % Alabama Power Co. $367,000 14.3 $ 39.400 1 7 $ 68,000 2.6 2.1 Georgia Power Co. 66,000 1.6 685.500 IS 6 94.380 Gulf Power Co. 1,400 ° S 1.500 0 4 12.305 4-3 Mississippi Power Co. 115,000 13 0 6,000 0 . 7 South Carolina Power Co. 64,660 10.S 37.000 S« 415,000 13 7 84,000 2.9 Tennessee Electric Power Co. 297,312 9 S Total $1,189,205 I225.S00 $939,752 • The per cent reduction in revenue is based on the ratio between the amount of reduction and the total revenue of the company for the year preceding the date of reduction.

cent reduction in South Carolina. (The 5.8 per cent reduction of the South Carolina company was too late to affect 1934 consumption because it was made available only on December 1, 1934.) These data might lead to the conclusion that objective rate plans of the Alabama and Georgia companies were not effective in increasing consumption, inasmuch as the South Carolina company, without an objective rate plan, attained a larger percentage increase in average consumption although it offered smaller outright reductions. Furthermore, the achievement of the South Carolina company cannot be attributed to the fact that it served an area of greater purchasing power. A comparison of spendable incomes per capita indicates that the South Carolina territory was slightly poorer than that served by the Alabama or the Georgia company, the figures being $ 1 7 3 . 1 0 f o r the South Carolina territory, $176.80 for Alabama, and $279.20 for Georgia. (See page 4 1 . ) The good showing of the South Carolina company might have been due to the change in its rate forms. Before the reduction of August 1, 1933, there were two optional schedules for residential consumers; one had a demand charge of $3.00 plus an energy charge of 3^ per kilowatt hour, and the other was a block meter rate of gt for the

44

RESULTS UNDER THE

PLAN

first 100 kilowatt hours, for the next 100, for the next 300, etc. The new schedule introduced at this time was: 8.5^ 6.o4 3.0^ 2.5^

for the first 3 0 kw. hrs. for the next 4 0 kw. hrs. for the next 1 3 0 kw. hrs. excess

The simplicity and promotional aspects of this schedule, contrasted with former schedules, might have had a greater effect on consumption than the actual amount of reduction would indicate. The objective rate plans of the Alabama and Georgia companies were three-year programs designed to stimulate consumption over the whole period. It might have been too much to expect unproportionate gains in the first year. The second year was better in this respect, as indicated by the experience of these companies, for there were added 78 and 84 kilowatt hours per meter respectively in 1934 for increases of 9.8 per cent and 10.6 per cent over 1933, and 1 1 9 and 1 3 3 kilowatt hours in 1935, increases of 13.7 per cent and 15.1 per cent over 1934. It is clear that the materials available are not adequate to determine the relative efficiency of outright rate reductions and the reductions offered by an objective rate plan. The advantage that the objective rate plan has over an outright reduction is that it increases consumption without making any reduction in the level of revenues; it protects the finances of the company; and it may be used when there is uncertainty about future economic conditions. The value of this to the consumer is that lower rates will often be achieved by adopting the plan at a time when an outright rate reduction would be out of the question.

RESULTS UNDER T H E PLAN ANALYSIS

OF T H E

DISTRIBUTION

OF

CUSTOMERS

45 BY

K I L O W A T T HOUR BLOCKS

A n analysis of the distribution of customers by kilowatt hour blocks reveals the nature of increases in total kilowatt hour sales under the objective rate plan. W e r e the increases in sales attributable to a few customers making enormous increases in consumption or to a large number of customers adding small increments to their former use ? Table 4 gives the distribution of customers by kilowatt hour blocks for the Alabama, Georgia, and Tennessee companies for various months. T h i s distribution was obtained by taking the actual bills f o r the month indicated and grouping them according to the kilowatt hour consumptions that they represented. One tendency noted in all the companies was a reduction in the proportion of customers billed for 20 kilowatt hours or less. A typical example w a s the Georgia company, which had 27.53 per cent of its total customers in October, 1933, in the 0-20 kilowatt hour block, and 22.47 P e r c e n t its total customers in October, 1934, in the same group. T h e actual number of customers in this group in October, 1933, w a s 29,484, and by October, 1934, this number w a s reduced by over 4,000, although during the period about 6,000 new customers were added and many of these were probably billed in the initial block of consumption. T h i s decline in the number and proportion of customers in the initial block of consumption would seem to indicate that the objective rate plan encourages small consumers to increase their consumption. In Chapter II it w a s pointed out that the Commonwealth and Southern objective rate plan offered but little inducement to the small consumer to increase his consumption in comparison with that

§ -

O < o w > 0 «O «i

§

H

f) to o W) J J r C> >0 w Oi N

N

fO W

f - oo

3

M

N í ^

O*

Pí w £

o p


L

l

i

l

i

Tt l o N

M

8 cn

L L L

o M

l o o M M

O ro

X o

£ 5

CQ

OC

00

00 O

" ¡a H S

O O h O Tf Í

h

fi

r-. \o f i

n m

s * H O H

ei oo oo • s h oo m « M>0 ^ ^ N OQ o 00 o 00 N f ) C) H

£

M loso "t I PO vo «O PO ». O N Wî N00 O

* t u' a.

fr

o U

£
a s o pò ^ N o ",M

S t rt a a> T3 •3

0 u 1 o

ß*

4) 5 • 4> . « ß Ä M V V V «j a xi g a

ë 2

| B

'«O «lä sTi i»3 ío M I I I i M VO N o M

8 8 8 ^ï 0 O

.§> » *1 ' S U. W W M « A • V

48

RESULTS UNDER THE

PLAN

offered to the larger consumer. The bill under the immediate rate was $ 1 . 3 0 f o r 20 kilowatt hours and $ 1 . 2 3 f o r the same consumption under the objective rate. Entire credit f o r increasing the consumption of these small consumers cannot be given to the mechanism of the objective rate plan. Other factors that influenced this increase were the rate reductions made at the inauguration of the objective rate plans and the economic recovery during 1934. Which factor was most influential in attaining this result cannot be determined. A n examination of the individual companies shows that the pattern of the distribution of customers has not changed uniformly under the objective rate plan. There is a general tendency of decrease in the proportion of customers in the lower blocks and increase of the proportion in the higher blocks, but the Tennessee company shows a variation from this. In the case of this company the months compared were October, 1934, and April, 1935. Any variation in distribution of customers might be due to a seasonal change rather than to any influence of the objective rate plan during the six months' period under scrutiny. Because of the scarcity of material of this sort, the analyses based on these months had to be used, since they were the only ones available. The comparison of the distribution of the customers of the Tennessee company in October, 1934, and April, 1935, shows that the proportion of customers in the 0-20 kilowatt hour block decreased, in the 2 1 - 7 0 block increased, in the 71-300 block decreased, and in the block over 300 kilowatt hours increased. There are two separate groups of consumers, the small consumers who use 70 kilowatt hours per month or less and the large consumers who use more than 70 kilowatt hours. In the group of small users the

RESULTS UNDER THE PLAN

49

tendency is for the consumers in the 0 2 0 kilowatt hour block to increase their consumption and enter the 21-70 kilowatt hour block; in the other group the tendency is f o r the consumers in the 71-300 kilowatt hour block to increase their consumption and pass beyond the 300 kilowatt hour line. It is significant to note that the large increase in the number of consumers over 300 kilowatt hours corresponds roughly with the decrease in the number of consumers in the 71-300 block. The shift in distribution of customers in the Alabama and Georgia companies followed an almost uniform pattern of decrease in the lower blocks and increase in the upper blocks. The change in the Alabama company from October, 1933, to October, 1934, consisted of a tremendous decrease in the first block (from 43.66 per cent to 31.42 per cent) and increases in all but one of the upper blocks. The change from October, 1934, to October, 1935, consisted of decreases in the proportion of customers in the blocks of 0-40 kilowatt hours and increases in all the blocks in excess of 40 kilowatt hours. In October, 1934, 57.23 per cent of the total customers used 40 kilowatt hours or less, while in October, 1935, only 49.89 per cent of the customers were in this group. The shift in distribution of customers in the Georgia company displayed the same tendencies evidenced in the Alabama company, but in the former company decreases occurred in all blocks in the 0-70 kilowatt hour range and increases occurred in the blocks beyond 70 kilowatt hours. This comparison was based on the October, 1933, and the October, 1934, distributions of customers. In the former distribution 74.71 per cent of the total customers used 70 kilowatt hours or less; in the latter case only 64.87 per cent were in this group.

50

RESULTS

UNDER

THE

PLAN

T h e conclusion cannot be drawn that the shift in distribution occurred because a large number of customers with a consumption of less than 70 kilowatt hours increased their use to some point higher than 70 kilowatt hours. T h e process of growth was probably one by which a certain percentage of the consumers passed from the 0-20 block to the 21-30 block and a larger percentage passed f r o m the 21-30 block to the 31-40 or 41-50 block, etc., with the final result that all blocks below 70 kilowatt hours showed a decline in the percentage of customers and the higher blocks showed a gain. These shifts of consumers into higher blocks indicate that large numbers of consumers have increased their individual consumption. T h e increase of individual consumption should be the aim of any desirable rate form, since such increases result in lower costs. Increased consumption makes possible a fuller utilization of the plant and this is usually attended with very small added cost. Furthermore, under a block meter rate the greater portion of the customer and demand costs are imposed on the initial block or blocks. In order to have each consumer pay such costs it is necessary that he consume the number of kilowatt hours upon which these costs are levied. Increased use by consumers who do not use this number of kilowatt hours is a special need of the industry. DISTRIBUTION

OF CUSTOMERS BY T Y P E S OF BILLS

A n indication of customer reaction to the objective rate plan can be seen by a study of the percentage of total bills rendered under the objective rate. Table 5 gives the percentage of bills rendered each month under the objective rate, the immediate rate, the base bill, and the minimum

RESULTS UNDER THE PLAN TABLE

51

5

DISTRIBUTION OF CUSTOMERS BY T Y P E OF BILL In Percentages Objective Rate

Base Bill

Minimum BiU

Immedii Rate

ALABAMA POWER COMPANY October, 1933 November December January, 1934 February March April May June July August September October November December January, 1935 February March April May June July August September October November December January, 1936 February March

25-2 29.2 30 I 35-4 35° 33 3 34 5 32 7 34 9 34 8 34 9 35 8 46-5 47 2 47.6 Si 4 52.6 51 9 567 SS 8 54-8 53-2 54 S 54 5 59 9 61.8 62.1 64.0 64 3 61.6

7-7 8.8 8.9 10.7 98 9 7 6-5 8.0 7 8 8.2 7.6 6.7 51 5-3 5-5 5 5 51 5-4 4 3 41 4 4 4.0 3 6 3-7

21.9 24.6 243 26.3 25-8 22.8 19.4 14.1 12.3 10.4 12.2 15 3 16.8 17.9 19.8 21-3 20.8 18-5 15 2 12.1 10.0 8.7 10.3 131

35 9 33 9 31 9 28.2 29 5 31 7 27.6 40.7 32 3 30.0 27.6 26.1 214 21 .c 19 g 20.0 19.6 21.6 20.6 21.9 23 S 23 3 21.8 21.6

TENNESSEE ELECTRIC POWER COMPANY February, 1934 March April May June July August September October November

27.0 30 9 31 6 308 34-3 33-6 35 7 367 38.8 43 »

10.7 10.4 10.1 9 4 9-7 9-7 9.6 9 7 9 9 li.5

19.6 22.7 23.6 27.8 27-3 30.0 28.4 23.2 19.0 14 S

42.7 36 0 34 7 32 0 28.7 26.7 26.3 3° 4 32 3 308

52

RESULTS

UNDER

THE

PLAN

TABLE s (Continued) DISTRIBUTION OF CUSTOMERS B Y T Y P E OF BILL In Percentages

December January, 1935 February March April

Objective Rate 42.4 44 7 52 9 Si' 52.3

Base Bill 11.8 12.4 9 4 8.S 7-8

Minimum Bill

Immédiat* Rate

13 0 9-7 12.2 16.8 17 3

32-8 33 2 2SS 23 6 22.6

(No data compiled after April, I93S) SOUTH CAROLINA POWER COMPANY December, 1934 January, 1935 February March April May June July August September October November December January, 1936 February March April

30 9 32 4 32.0 32 4 32-3 32.2 31 4 31 9 34 0 3 2 -7 33-4 36.3 43 0 4S I 46.0 483 46.0

164 183 16.4 iS-i 15 9 16.3 15-7 13.2 13-2 14.2 14.0 16.2 13-4 11.0 9.8 91 9 9

12.3 9 7 11.2 14 7 146 16.8 18.1 20.4 19.9 17.6 14 7 12.1 11.2 12.2 14.0 16.1 16.6

40.4 39 6 40.4 37-8 37-2 34 7 34 8 34 5 33 0 3S 5 380 35-4 32 3 31-7 30.2 26.5 27-5

bill. T h e figures f o r the Georgia P o w e r Company are omitted because this company changed its method of reporting them in January, 1935. O f the total bills rendered by the A l a b a m a company in M a r c h , 1936, 61.6 per cent came under the objective rate. Probably a larger percentage of the customers has at one time or another taken advantage of the lower objective rate, but even this percentage indicates a widespread acceptance of the opportunity f o r the customer to increase his consumption. T h e steady g r o w t h of the percentage of customers billed under the objective rate during the two years' use of the

RESULTS UNDER THE PLAN

53

plan from 25.2 in October, 1933, to 61.6 in March, 1936, shows the continued interest of the customers. The accompanying table, based on the months of April, 1934, and April, 1935, which can be considered typical months, shows a remarkable uniformity of conditions in both the Alabama and Tennessee companies. The South DISTRIBUTION OF CUSTOMERS BY TYPE OF BILL In Percentages Objective Rate

Base Bill

ALABAMA

April, 1934 A p r i l , 1935

POWER

34-5 56.7

ELECTRIC

31.6 52 3

Immediate Rate

COMPANY

21.9 16.8

7-7 5.1

TENNESSEE

A p r i l , 1934 April, 1 9 3 s

Minimum Bill

POWER

35-9 21.4

COMPANY

10.1 7-8

23.6 17 3

34.7 22

6

Carolina company was omitted because the information was not available for these months, the plan having gone into effect on December I, 1934, in its territory. A P P L I A N C E

SALES

A large part of the success of the objective rate plan in the Commonwealth and Southern Corporation's territory is attributable to aggressive merchandising. T h e dollar value of appliances sold in the first and second years of the plan compared with the year 1933 w a s : Alabama Georgia Tennessee South Carolina

$

1933 615,159 1,237,305 676,878 ...

1934 $i.i°7.35r 2.633.462 1,824,857 245,257

1935 $1,376,694 2,983,262 2,285,721 480,404

The Alabama, Georgia, and South Carolina companies doubled their previous year's sales in the first year of the plan, and the Tennessee company almost tripled its sales. Sales in 1935 were expanded even beyond the high points

•

ft IO M

OO O

í* o

^

S©

«o ^ o

«o o> »O

M m O*

' f O M M

J i ^ (i

>-l W

r ro «

o ^

m »O s o ^ M

T f (V) I f l t— O r t 0> sO

^ M O

V i 00

(*) V)

O" M IO 00 »O

O »o W

M

co

T "

i o n W « 00 NN 0 O f " » M

M

(i «

.

~

o o> ' WIQO

o o

O « O W O

»O On 0 0 O K O 0

•
0

W

M

Tf a i o -o W N

O ™ o

^ H

M

M

£< w • J m


-fa t?

4> C

o TJ

4) Ü > Z
1 oo

i

»

V) h» •

o N

^ (•) t v h O o> O i*) Ö r o c* M

CT"

sO N VO

^ 00 O» ^ M O « «

oO 00

O

r-» ^O

ai

w •£

2< S g

r-. O io M c* lO to »o O «

*
934), 31 sale of, under plan, 57, 58 R e v e n u e s : avoidance of losses in, 9, ' 5 . 74. 7 5 ; comparison of, before and after introduction of plan, 263 1 ; maintenance of, 1 5 ; per customer, 59; per kilowatt hour, 28-30,

3 5 ; per meter, 33-36; possibility of losses in, at end of plan, 66 R i v e r Falls Municipal Utility, 6 Room-basis rates : companies changing to block meter rates from, 25 ; discrimination under, 61 ; transition to block meter rates from, 24 Sales of electricity : comparison of, before and after introduction of the plan, 26-33; under the plan, 58. See also Consumption per customer or per meter ; Increase in consumption ; Increase in sales Sales Management, cited, 41, 58 S a n Joaquin L i g h t and P o w e r Co., 17 S a n f o r d Gas Co., 77 Savannah Electric and P o w e r Co., 78 Separable costs : and differential prices, 71 ; and free kilowatt hours, 72, 73 Share-the-Benefits Plan, 17 S i e r r a Pacific P o w e r Co., 21 Simplification of rate schedules : and cross-over kilowatt hours, 70; and optional rates, 5, 6 ; by use of the plan, 24-25 South Carolina P o w e r Co. : appliance sales of, 53-56 ; distribution of customers of, by type of bill, 52; introduction of the plan by, 40; rates of, 22, 78; results of the plan in, 40-44 Southern Sierras P o w e r Co., 20 Southern States P o w e r Co., 21 Southwestern Gas and Electric Co., 20 Special Rate Plans and Rate Applications, cited, 77 Special rates, 6 Stamford Gas and Electric Co., 17, 20 Stoppers : companies using, 19-23, 77, 78; criticism of, 65-68; definition of, 18, 1 9 ; justification for lower, 65-68. See also M a x i m u m base bill ; Minimum base consumption Street lighting, I Superior W a t e r , Light and P o w e r Co., 23 Tennessee

78

Eastern

Electric

Co., 22,

INDEX Tennessee Electric P o w e r C o . : introduction of plan by, 9 ; m a x i m u m base bill of, 13, 14; monthly bills of, for various consumptions ( C h a r t I ) , 1 1 ; rate schedules of, 10, 22; results of the plan in, 26-59; time limit in, 1 4 ; uniform rates of, 16 Tennessee Public Service Co., 22, 78 Tennessee Valley Authority: announcement of rates of, 9 ; yardstick p r o g r a m of, 9 T e x a s Utilities Co., 23 T h e o r y : of differential prices, 7 1 - 7 6 ; of objective rate plans, 7 1 - 7 6 ; of pricing of cross-over kilowatt hours, 68-70; of stoppers, 65-68; of time limits, 70 T i m e limit: advantages and disadvantages of, 70; benefits of, to large consumers, 14, 63; companies using, 20-23, 77-78; definition of, 23, 70; discrimination in a, 1 4 ; experience of companies using, 70; free kilowatt hours and, 69; losses in revenues and, 70 Transition to more desirable rate f o r m s : a factor in adopting the plan, 24; the plan as a method of, 24-25 T w i n State Gas and Electric Co., 6

83

U n i f o r m rates : discrimination under, 61 ; under the plan, 16 Union Electric Light and P o w e r Co., 17, 20 U t a h P o w e r and L i g h t Co., 23 U t i c a Gas and Electric Co., 18 W a c h u s e t t Electric Co., 17, 18 W a t e r heaters : consumption of energy (1926-1934) by, 3 ; sale of, under the plan, 57, 58; special rates for, 6 W a t e r heating : dangers of unrestricted, 75 ; diversion of, f r o m g a s industry, 76 W a t k i n s , G. P., cited, 71 Westchester L i g h t i n g Co., 22, 78 W e s t e r n Colorado P o w e r Co., 20, 78 Westfield Milling and Electric Light Co., 23 Wisconsin Gas and Electric Co., 17 Wisconsin H y d r o Electric Co., 6 Wisconsin P o w e r and L i g h t Corp., 23, 66, 67 Wisconsin Public Service Co., 23, 77 Wisconsin Southern Gas Co., 77 Y o n k e r s Electric Co., 22, 78

Light

and

Power