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In this article from the November 2009 issue of The Electricity Journal, NERA Special Consultant Dr. Hethie Parmesano responds to a proposal introduced in the May 2009 issue of the journal by David Magnus Boonin, the National Regulatory Research Institute’s director of electricity research and policy, regarding straight fixed-variable (SFV) retail electricity rate design. Mr. Boonin suggested a new twist on SFV rate design that recovers allocated fixed embedded costs on a fixed, per-customer basis and only average variable costs on a variable basis. Because the price per unit consumed in an SFV rate structure would be well below marginal cost, his proposal would overlay a fee and rebate (“feebate”) scheme to improve its efficiency. In this article, Dr. Parmesano examines whether the SFV rate structure with feebate overlay is likely to achieve its stated goals, as well as its consistency with other traditional ratemaking goals such as revenue adequacy, price transparency, equity, and administrative feasibility. Dr. Parmesano concludes that the proposal fares poorly by these and other criteria. In fact, she argues, standard real-time pricing approaches and decoupling mechanisms are a more efficient and equitable way to achieve not only Mr. Boonin’s goals but also other traditional ratemaking goals.

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