FTC Staff Comment Before the Massachusetts Department of Public Utilities Regarding Its Investigation of Time-Varying Retail Rates for Electric Power

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BEFORE THE COMMONWEALTH OF MASSACHUSETTS
DEPARTMENT OF PUBLIC UTILITIES
Investigation by the Department of Public Utilities 	)
Upon Its Own Motion into Time Varying Rates 	) 	D.P.U. 14-04
COMMENT OF THE STAFF OF THE FEDERAL TRADE COMMISSION1
March 10, 2014
I. 	Introduction
The staff of the Federal Trade Commission (FTC) welcomes this opportunity to submit a
comment on the Order Opening Investigation (Order)2 that the Commonwealth of Massachusetts
Department of Public Utilities (Department) issued regarding its investigation of time-varying
retail rates for electric power (part of the Department’s broader investigation of modernization of
the electric grid).3 As the Department’s Working Group on grid modernization reported, several
significant technical developments – including advanced-technology meters, often called “smart
meters” – have made it timely to consider the contributions that electricity pricing incentives at
the retail level can make to the achievement of substantial power system efficiencies and
improvements in the reliability of the electric system. Achievement of these efficiencies can
create benefits for all electricity customers.
The Order states the Department’s interest in developing an approach to maximizing the
benefits of time-varying rates. It is particularly appropriate to provide incentives (in the form of
bill savings) to customers who trim their electricity consumption from the grid when it is stressed
1 This comment expresses the views of the FTC’s Office of the General Counsel, Office of
Policy Planning, and Bureau of Economics. The comment does not necessarily represent the
views of the FTC or of any individual Commissioner. The Commission, however, has voted to
authorize the filing of this comment.
2 Order Opening Investigation, available at http://www.env.state.ma.us/dpu/docs/electric/14-
04/12314dpuord.pdf (Jan. 23, 2014).
3 We use the terms “time-varying rates” and “dynamic pricing” interchangeably to denote a rate
structure in which customers pay differing prices for units of electricity obtained at different
times from the transmission grid. Real-time retail electricity prices most closely match the
balance of supply and demand conditions on the grid because they are based in large part on
moment-to-moment wholesale energy prices and transmission congestion conditions at each
node of the grid.

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by unusually high demand. Customers who trim their power consumption in these circumstances
help utilities and grid operators to meet the challenge of continuously balancing supply and
demand on the electric system, to the benefit of all customers. The Department notes that several
medium and large commercial and industrial (C&I) electricity customers in the Commonwealth
are already on time-varying rates offered by marketers. By contrast, most residential customers
remain on basic service4 with flat rates.
The Department seeks comments on (1) whether to transition some or all basic service to
dynamic pricing; (2) how to educate residential and small commercial customers about dynamic
electricity pricing; and (3) how dynamic pricing of basic service is likely to affect the
Department’s efforts to maximize the overall benefits of dynamic pricing. The Department
specifically asks about the peak-time rebate (PTR) program of time-varying rates operated by
Baltimore Gas & Electric (BG&E).5
As a general matter, when retail time-varying rates are in place, customers who respond
to incentives to trim demand for electricity from the grid during peak demand periods – i.e., who
provide demand response (DR) – can save money, diminish harmful environmental impacts, and
reduce the costs and improve the reliability of the electric system. Lowering the costs and
improving the reliability of the electric system work to the benefit of all electricity customers,
not just those who respond to these incentives.6 During critical peak demand periods, wholesale
electricity costs – and thus wholesale electricity prices – greatly exceed flat-rate retail prices.
Dynamic pricing gives retail customers economically efficient incentives to reduce demand
4 In Massachusetts, “basic service” is the electricity that the distribution utility provides to a
customer who has not chosen an alternative supplier. Other jurisdictions – as well as comments
submitted in those jurisdictions by the FTC and its staff – often refer to this arrangement as
“provider of last resort” (POLR) service.
5 A description of BG&E’s Smart Energy Rewards program is available at
http://www.bge.com/smartenergy/smart-energy-rewards/pages/default.aspx. Pepco proposed a
similar approach to the District of Columbia Public Service Commission (DC PSC), as we
discussed in the recent Reply Comment of the Staff of the Federal Trade Commission Before the
District of Columbia Public Service Commission Concerning a Proposed Program for Dynamic
(Variable) Pricing of Electricity for Residential Customers, Formal Case Nos. 1086 and 1109
(Jan. 13, 2014), available at http://www.ftc.gov/policy/policy-actions/advocacy-
filings/2014/01/ftc-staff-reply-comment-district-columbia-public.
6 As we discuss elsewhere in this comment, our overall view is that it is critical for all customers
to migrate to dynamic pricing as soon as practicable.

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during peak load periods, dramatically reducing wholesale costs and prices and thus average
retail prices for customers generally.7
The Department raises important questions about the interaction between dynamic
pricing for basic service and the evolution of effective competition in the Commonwealth’s
approach that allows retail electricity customers to select from among several electricity
marketers. To answer these questions, one must analyze time-varying electric rates within the
broader context of product and service differentiation in retail electricity markets – a context that
differs from the way in which electricity market technologies and regulation traditionally have
been viewed. Traditional electricity technologies and regulation evolved to adopt a “one-size-
fits-all” approach toward rate variability, reliability, generation diversity, supply resiliency after
storms, and environmental sustainability. Recent technological developments and regulatory
innovations, however, have increasingly made a one-size-fits-all approach obsolete.
Differentiation in electric service can unleash increased benefits by allowing customers to
better match their preferences for many different electricity service characteristics with the offers
available to them. 8 But maintaining flat-rate regulation would stifle such innovation and the
benefits that flow from it. By averaging large, but brief, increases in electric system costs with
long periods of off-peak, lower system costs, flat-rate regulation massively dilutes incentives to
cut back electricity consumption in peak demand period. Once retail prices reflect the jumps in
wholesale prices during critical peak demand periods, customers have strong incentives to
provide DR, and the whole electric system can become less costly. Consequently, innovations
associated with DR flourish under time-varying rates. Similarly, when time-varying rates are in
place, there is greater differentiation in electric services aimed at facilitating DR.
7 BG&E’s PTR approach is an improvement over flat-rate electricity pricing, because it creates
economic incentives to trim demand in critical periods when the savings to the electric system
are greatest, although it falls short of the system savings that real-time pricing (RTP) can create.
As a transitional rate design, PTR allows many customers to benefit through the rebates while
leaving nominal rates unchanged, so that no customers are likely to be worse off than before the
plan took effect. Non-responding customers, however, will pay higher bills and may pay more
per unit of power consumed than they would if they trimmed consumption during critical
periods.
8 Differentiated services (stemming from differences in consumer preferences) may entail higher
or lower per-unit costs than homogeneous services. As in many markets, some customers may
prefer to pay high per-unit prices for power if they value certain characteristics that involve
higher costs (for instance, greater reliability). Customers may well also prefer to pay higher per-
unit prices if the higher price includes equipment or services that allow them to reduce their total
power bills through efficiencies or conservation, or if it enables the customer to purchase
electricity generated by a preferred resource (such as wind or other renewables).

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More generally, increased innovation regarding DR and new end uses for electricity –
such as electric vehicles (EVs) – may become more difficult to achieve under any form of
prescriptive rate regulation for basic service.9 When the pace of innovation accelerates and
service differentiation increases, as is foreseeable in retail electric services, the ratemaking
process is unlikely to be able to keep pace. A particularly difficult challenge for cost-based rate
regulation in retail electricity markets stems from the fact that electricity services involving time-
varying rates, such as assistance in automating responses to these rates, often are most effective
when various types of equipment are bundled with the electricity service. In addition, learning
curves associated with producing high volumes of products that incorporate an innovation often
result in cost changes so rapid that rate regulation cannot keep abreast. In the long run,
prescriptive rate regulation of basic service may hinder the development of differentiated
electricity services that, by means of innovative time-varying rate structures, would provide the
greatest consumer benefits.
Although a full-blown transition to dynamic real-time pricing for all electricity customers
would lead to the most efficient power system, a more limited transition to PTRs for basic
service customers in the near term will nonetheless generate consumer benefits because it may
well smooth customers’ adaptation to DR incentives, thus accelerating the process of
maximizing the benefits of dynamic rates in the long run. The experience of switching large and
medium-sized C&I customers’ basic service from flat rates to time-varying rates suggests that
marketers can offer attractive alternatives to residential customers in this context.10 It also
suggests that residential customers are interested in selecting differentiated offers that include
varying degrees of bundling with equipment and other services, and that they also are interested
in various price-hedging services provided by retail electricity marketers. We encourage the
Department to introduce time-varying rates into basic retail electric service in order to speed the
achievement of such rates’ maximum benefits.
9 There is a large literature describing incompatibilities between rate regulation and innovation or
product differentiation. For a recent summary of some of this literature, see Nancy L. Rose,
“After Airline Deregulation and Alfred E. Kahn,” 102:3 Am. Econ. Rev. 376 (2012). An early,
detailed study of how rate regulation discouraged innovation in the railroad industry is included
in Improving Railroad Productivity: Report of the Task Force on Railroad Productivity (Exec.
Office of the President, 1975).
10 Maryland, New Jersey, and New York, among other states, converted POLR service for large
C&I customers to RTP early in their restructuring efforts. Large C&I customers in these three
states switched to electricity marketers in 2013 at rates of 93.8, 85.7, and 83.1 percent,
respectively. Distributed Energy Financial Group, Annual Baseline Assessment of Choice in
Canada and the United States (Jan. 2014), available at
http://www.competecoalition.com/files/ABACCUS-2014-vf.pdf.

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The PTR approach is a reasonable initial candidate for incorporating time-varying rates
into basic service. It creates more efficient price signals to customers (stemming from the
benefits of helping the grid balance demand and supply) but does not impose additional risk on
customers who are just learning about this source of bill savings. If the Department adopts a
PTR approach, we see no reason why any customers should be denied the opportunity to save
money and help grid operators meet the challenges of balancing supply and demand on the grid.
Over time, as customers become familiar with time-varying rates, we encourage the Department
to transition to increasingly timely and accurate price signals for all electricity customers, so as
to maximize the benefits of time-varying rates. Because real-time rates provide the most
accurate pricing incentives to customers, they promote the efficient use of electricity and
eliminate deadweight losses.
Consumer protection and consumer education issues are likely to arise when basic
residential service is made subject to (or includes an option for) time-varying rates. For
example, there may be concerns about how public efforts to raise consumer awareness and
understanding of time-varying rates will affect retail electricity competition. In this vein, the
National Energy Marketers Association (NEM) apprised the DC PSC of its concerns over the
competitive neutrality of the consumer education programs that might follow from Pepco’s
proposal for time-varying rates.11 We agree that competitive neutrality should be a priority in the
design of public consumer education programs about time-varying rates and about the
alternatives that marketers offer to customers. NEM’s comment also discussed equal access to
meter data for marketers and basic service providers. We agree that marketers offering
alternative time-varying rate options to retail customers need access to such data at least
sufficient to operate their alternative time-varying rate offers, although we also urge the
Department (as we did the DC PSC) to ensure that appropriate safeguards are in place for the
privacy and security of customer information.
In the remainder of this comment, we elaborate on the timeliness of the Department’s
investigation, discuss some of the tradeoffs inherent in the PTR approach, and elaborate our
views concerning the competitive impact of public consumer awareness and education
campaigns.
II. 	Interest and Experience of the FTC
The FTC is an independent agency of the United States Government responsible for
maintaining competition and safeguarding the interests of consumers. The FTC does so through
11 Comments of the National Energy Marketers Association (Dec. 19, 2013), available at
http://dcpsc.org/edocket/docketsheets_pdf_FS.asp?caseno=FC1086&docketno=57&flag=D&sho
w result=Y. See note 5, supra, regarding our recent comment to the DC PSC.

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law enforcement, policy research, and advocacy. For example, in the field of consumer
protection, the FTC enforces Section 5 of the Federal Trade Commission Act, which prohibits
unfair or deceptive acts or practices. In its competition mission, the FTC enforces antitrust laws
regarding mergers and unfair methods of competition that harm consumers. In addition, the FTC
often analyzes regulatory or legislative proposals that may affect competition, allocative
efficiency, or consumer protection. It also engages in considerable consumer education through
its Division of Consumer and Business Education. 12 In the course of all of this work, the FTC
applies established legal and economic principles as well as recent, innovative developments in
economic theory and empirical analysis.
The energy sector, including electric power, has been an important focus of the FTC’s
merger review and other antitrust enforcement, competition advocacy, and consumer protection
efforts.13 The FTC and its staff have filed numerous comments advocating competition and
consumer protection principles with state utility commissions, state legislatures, the Department
of Energy (DOE), and the Federal Energy Regulatory Commission (FERC).14 In particular, we
have filed a number of advocacy comments concerning DR, dynamic pricing, and their
interactions with retail competition.15 The FTC’s competition advocacy program also has issued
12 For an overview of the FTC’s education efforts, see the FTC staff’s comment to the Consumer
Financial Protection Bureau concerning “Request for Information on Effective Financial
Education,” Docket No. CFPB-2012-0030 (Nov. 2, 2012), available at
http://www.ftc.gov/os/2012/11/1211cfpb.pdf.
13 See, e.g., Opening Remarks of the FTC Chairman at the FTC Conference on Energy Markets
in the 21 st Century: Competition Policy in Perspective (Apr. 10, 2007), accessible at
http://www.ftc.gov/news-events/events-calendar/2007/04/energy-markets-21st-century-
competition-policy-perspective. FTC merger cases involving electric power markets have
included DTE Energy/MCN Energy (2001) (consent order), accessible at
http://www.ftc.gov/enforcement/cases-and-proceedings/cases/2001/05/dte-energy-company-and-
mcn-energy-group-inc; and PacifiCorp/Peabody Holding (1998) (consent agreement), available
at http://www.ftc.gov/sites/default/files/documents/cases/1998/02/9710091.agr_.htm.
14 A listing, in reverse chronological order, of FTC and FTC staff competition advocacy
comments to federal and state electricity regulatory agencies is available at
http://www.ftc.gov/policy/advocacy/advocacy-
filings?combine=&field_matter_number_value=&field_advocacy_document_terms_tid=5290&f
ield_date_value%5Bmin%5D%5Bdate%5D=2013-
10&field_date_value%5Bmax%5D%5Bdate%5D=&=Apply.
15 For example, the FTC or its staff discussed electricity dynamic pricing, DR, and competition
issues in the Reply Comment Before the District of Columbia Public Service Commission, supra

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two staff reports on electric power industry restructuring issues at the wholesale and retail
levels.16 In addition, the FTC staff (along with staff from FERC, the Department of Justice, the
note 5; Comment Before the Public Service Commission of the State of Delaware In the Matter
of the Adoption of Rules and Regulations To Implement the Provisions of 26 DEL. C. CH. 10
Relating to the Creation of a Competitive Market for Electric Supply Service, PSC Regulation
Docket No. 49 (Nov. 13, 2013), available at
http://www.ftc.gov/sites/default/files/documents/advocacy documents/ftc-staff-comment-public-
service-commission-state-delaware-concerning-its-proposal-revised-its-
rules/131114delawareretailelectric.pdf; Comment Before the Public Utility Commission of
Texas in the Rulemaking Regarding Demand Response in the Electric Reliability Council of
Texas (ERCOT) Market, Project No. 41061 (Mar. 11, 2013), available at
http://www.ftc.gov/sites/default/files/documents/advocacy_documents/ftc-staff-comment-public-
utility-commission-texas-concerning-rulemaking-regarding-demand-
response/1303texaspuccomment.pdf; Comment Before the New York State Public Service
Commission in the Proceeding To Assess Certain Aspects of the Residential and Small Non-
residential Retail Energy Markets in New York State, Cases 12-M-0476, 98-M-1343, and 06-M-
0647 (Jan. 24, 2013), available at
http://www.ftc.gov/sites/default/files/documents/advocacy_documents/ftc-staff-comment-state-
new-york-public-service-commission-ny-psc-concerning-ny-pscs-
review/130125nypsccomment.pdf; Comment Before the Federal Energy Regulatory Commission
in Matter of Demand Response Compensation in Wholesale Energy Markets, Docket No. RM10-
17-000 (Oct. 13, 2010), available at
http://www.ftc.gov/sites/default/files/documents/advocacy documents/ftc-comment-federal-
energy-regulatory-commission-concerning-demand-response-compensation-organized.rm10-17-
000/1010wholesaleenegrymarkets.pdf; Comment Before the Federal Energy Regulatory
Commission in the Matter of Discussion Draft of Possible Elements of a National Action Plan on
Demand Response, Docket No. AD09-10-000 (Dec. 11, 2009), available at
http://www.ftc.gov/sites/default/files/documents/advocacy documents/federal-trade-
commission-comment-federal-energy-regulatory-commission-concerning-possible-
elements/v100002ferc.pdf.
16 FTC Staff Report, Competition and Consumer Protection Perspectives on Electric Power
Regulatory Reform: Focus on Retail Competition (Sept. 2001), available at
http://www.ftc.gov/reports/competition-consumer-protection-perspectives-electric-power-
regulatory-reform-focus-retail; FTC Staff Report, Competition and Consumer Protection
Perspective on Electric Power Regulatory Reform (July 2000), available at
http://www.ftc.gov/reports/competition-consumer-protection-perspectives-electric-power-
regulatory-reform (containing edited compendium of excerpts from previous comments that the
FTC and its staff provided to various state and federal agencies).

8
Department of Agriculture, and DOE) contributed to the work of the Electric Energy Market
Competition Task Force, which issued a Report to Congress in the spring of 2007. 17
III. 	Electricity Industry Innovations Warrant Consideration of Retail Dynamic
Pricing To Benefit Customers through Lower Costs, Increased Innovation, and
Expanded Variety of Services
One of the most significant technological developments in the electricity industry over
the past 25 years has been the wide deployment of smart meters that measure and report power
use in small time intervals and also can communicate price and power system status information
to customers. 18 Dynamic pricing – offered either by utilities or by retail electricity marketers –
can present many benefits to power customers, including enabling them to better match their
preferences for bill savings and increasing power system reliability. For example, under
dynamic pricing, customers can lower their electricity bills by shifting power use away from
periods when the power system depends on more costly generation resources or faces challenges
to its reliability.
When technological developments and economically appropriate dynamic pricing
incentives are adopted, customers are in a position to help address the challenges of balancing
supply and demand in the power industry, either locally or on a wider geographic scale. When
customers are compensated for providing this help, the response is often substantial.19 Customer
responses to higher power prices or equivalent credits for reducing power use can be automated
through equipment that cuts back or delays power use at pre-set price points or credit levels.20 In
17 That report is available at http://www.ferc.gov/legal/fed-sta/ene-pol-act/epact-final-rpt.pdf.
18 Other important developments in the industry have included (1) a trend toward smaller, highly
efficient generation units; (2) the increased use of wind, solar, biofuel, and geothermal renewable
energy sources for generation (some at the utility level and some on the customer’s side of the
meter); (3) the automation of generator dispatch and of transmission and distribution operations;
and (4) advances in energy storage technology.
19 For a bibliography of papers on DR prepared by Brattle Group, see Toni Enright and Ahmad
Faruqui, “A Bibliography on Dynamic Pricing and Time-of-Use Rates, Version 2.0” (Jan. 1,
2013), accessible at http://papers.ssrn.com/sol3/papers.cfm?abstract id=2178674. Dr. Faruqui
(together with colleagues Sanem Sergici and Eric Shultz) summarized several reviews of DR
projects in “Consistency of Results in Dynamic Pricing Experiments – Toward a Meta Analysis”
(Jan. 29, 2013), available at
http://www.brattle.com/system/publications/pdfs/000/004/400/original/Consistency_of_Results_i
n Dynamic Pricing Experiments Faruqui et al DistribuTECH 012913.pdf?1378772104.
20 Robert Letzler, “Using Incentive Preserving Rebates to Increase Acceptance of Critical Peak
Electricity Pricing,” Univ. of Cal. Energy Inst. Working Paper 162R (rev’d May 31, 2010),

9
the alternative, customers can manually adjust their air conditioners or other heavy power uses
when meters (or other communication sources) alert them either that rates are going up or that
they can earn credits for reducing power consumption.
Customer responses to retail price signals that accurately reflect wholesale market
conditions reduce system costs, support reliability, and provide environmental benefits.21 For
example, a DR program that entails reduction of power use during periods of high wholesale
prices can reduce overall system costs by utilizing lower-cost generation units and reducing the
need for high-cost peaking generators to meet demand spikes. It can support reliability by
cutting power consumption when the system is at greatest risk of blackouts or is recovering from
a service interruption. It can provide environmental benefits by facilitating integration of
renewable energy sources and avoiding the use of older, higher-cost generators with higher
pollutant emissions during peak demand periods. This DR process is a critical justification for
grid modernization. Collectively, the term “smart grid” encompasses systems that support DR
and the sophisticated monitoring of conditions on many components of the power grid.
Some recent developments appear to underscore the importance of gaining customer
assistance in balancing the power system. EVs illustrate this point well.22 Recharging EVs off
peak (overnight) helps flatten load profiles (reduce peaks and fill troughs in consumption), so
that the fixed costs of more fully utilized generation and distribution assets are spread over more
power volume, at a lower per-kilowatt unit rate. Conversely, recharging EVs during peak
demand periods could cause significant demand increases during the most costly time of day for
power generation and could stress the grid, to the detriment of reliability. These harmful effects
could occur either on a local distribution line or over a larger area. Consequently, all consumers
benefit if EV owners respond to incentives to avoid recharging their EVs during peak demand
periods, even if that is not always convenient for EV owners. Both EV owners and electricity
customers in general could obtain even more benefits if EV owners schedule their vehicle
available at http://www.ucei.berkeley.edu/PDF/csemwp162r.pdf; see also Baltimore Gas &
Elec., “MADRI: All About Peak-Time Rebates” (Feb. 2, 2012) (presentation to the Mid-Atlantic
Distributed Resources Initiative Working Group), available at
http://sites.energetics.com/MADRI/pdfs/Hindes_MADRI_Feb_2_2012.pdf.
21 See, e.g., Charles J. Black, “Dynamic Pricing Evaluation for Washington” (Jan. 2011),
available at http://www.naruc.org/Publications/SERCAT Washington 2010.pdf; Ahmad
Faruqui, “The Case for Dynamic Pricing” (Aug. 23, 2010), available at
http://www.brattle.com/system/publications/pdfs/000/004/517/original/The_Case_for_Dynamic_
Pricing_Faruqui_SG_Latin_America_Aug_23_2010.pdf?1378772111.
22 See, e.g., Ahmad Faruqui, Ryan Hledik, Armando Levy, and Alan Madian, Brattle Group
Discussion Paper, “Will Smart Prices Induce Smart Charging of Electric Vehicles?” (July 2011),
available at http://papers.ssrn.com/sol3/papers.cfm?abstract id=1915658.

10
charging to coincide with abundant supply and uncongested transmission conditions. For
example, an EV owner could set the recharging equipment to draw power only (or primarily)
when the rate net of credits is below a specified level.
Flat-rate electricity pricing at the retail level – in the face of volatile generation and
transmission prices at the wholesale level – in effect results in large subsidies for customers
consuming power in peak demand periods and large penalties for customers consuming power in
demand troughs. Without price signals that reflect the cost of consumption to the power system,
retail electric power customers frequently make consumption decisions that result in
inefficiencies in the power system, to the detriment of all electricity consumers. An approach
like BG&E’s can be an important step toward helping customers make informed consumption
decisions and reducing inefficiencies caused by flat-rate pricing of electricity.
Further, flat rates – which cause all customers to face higher average system costs and
lower system reliability – distort incentives to invest in methods to improve energy efficiency or
in devices to shift consumption to off-peak periods (when system costs and wholesale electricity
prices are lower). As with any market, pricing electricity closer to marginal cost improves the
overall efficiency of the consumption of the good and reduces deadweight losses.23 When a
customer with distributed generation (DG) facilities (e.g., solar panels on the roof) faces flat
rates, the rates discourage investment in energy storage devices that could help balance supply
and demand, especially when the power system is under stress and close to shedding load or
allowing a voltage sag in order to prevent a larger blackout.24
23 For further discussion of opportunities to improve the performance of the electricity sector, see
Executive Office of the President, National Science and Technology Council, A Policy
Framework for the 21st Century Grid: Enabling Our Secure Energy Future, esp. § 4.2 (Demand
Management) (June 13, 2011), available at
http://energy.gov/sites/prod/files/oeprod/DocumentsandMedia/nstc-smart-grid-june2011.pdf. (In
“Key Action 5,” this report (at 31) states: “Federal, state, and local officials should strive to
reduce the generation costs associated with providing power to consumers or wholesale
providers during periods of peak demand and encourage participation in demand management
programs. Innovative rate designs will be more feasible as smart grid technologies become more
widely available.”) See also Paul L. Joskow and Catherine D. Wolfram, “Dynamic Pricing of
Electricity” (Jan. 2012), available at
http://faculty.haas.berkeley.edu/wolfram/Papers/AEA%20DYNAMIC%20PRICING.pdf.
24 For example, wind DG units generally produce power most abundantly during off-peak,
windier hours. If retail prices are flat, there is less incentive for a wind DG owner to store power
produced in the off-peak hours (in order to sell it during peak hours) than there would be if peak-
hour prices considerably exceeded, and prices in off-peak hours were less than, flat-rate prices.

11
IV. 	Tradeoffs in Designing Dynamic Pricing Systems
Economists who study differences in retail electricity pricing regimes evaluate how
closely time-varying rates reflect the current wholesale market prices. They also evaluate the
impact of time-varying rates on customers’ consumption patterns and on their incentives to
invest in devices that will allow them in the future to respond more effectively to changes in
power prices. In these evaluations, RTP and various other forms of time-varying rates have been
found to offer benefits to customers in the form of lower average power bills if customers are
willing to experience greater potential fluctuations in rates over short time periods.
The Brattle Group discussed the risk/return tradeoffs associated with several variable rate
alternatives (dynamic prices) in its independent presentation to a technical conference of the
Ohio Public Utilities Commission.25 Brattle’s study examined these tradeoffs by graphing them
in terms of risk on one axis (measured as volatility of short-term prices) and rewards on the other
axis (measured as expected bill savings). Brattle’s review included nine rate designs.26 The
appendix to this comment (which is page 10 of the Brattle paper cited in note 25, supra)
reproduces this graphic representation of these alternative forms of dynamic pricing, showing the
25 Ahmad Faruqui, “Dynamic Pricing for Residential and Small C&I Customers” 9-13 (Mar. 28,
2012), available at
http://www.brattle.com/system/publications/pdfs/000/004/451/original/Dynamic_Pricing_for_Re
sidential_and_Small_C_I_Customers_Faruqui_Mar_28_2012.pdf?1378772106.
26 The nine rate designs in Brattle’s presentation to the Ohio PUC were:
Time-of-Use (TOU): Charges a higher price during all weekday peak hours and a
discounted price during off-peak and weekend hours.
Super Peak TOU: Similar to TOU, except that the peak window is shorter in duration
(often four hours), leading to a stronger price signal.
Inclining Block Rate (IBR): Customer usage is divided into tiers, and usage is charged
at higher rates in the higher tiers. IBR is meant to encourage conservation.
Critical Peak Pricing (CPP): Customers are charged a higher price during a few hours
and a discounted price during the remaining hours.
Variable Peak Pricing: CPP with added rate variability.
CPP-TOU Combination: A TOU rate in which a moderate peak price applies during
most peak hours of the year, but a higher peak price applies on limited event days.
Peak Time Rebate (PTR): Customers can earn a discount by reducing usage during
critical hours.
Real Time Pricing (RTP): A rate with hourly variation that follows locational marginal
prices (LMPs), but with capacity costs allocated equally across all hours of the year.
Critical Peak RTP: A rate with hourly variation based on LMPs and with a capacity cost
adder focused only during event hours.

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tradeoffs between potential benefits from lower power bills and risks from greater, short-term
price volatility.
The BG&E program falls within the PTR category in Brattle’s analysis. The appended
graph shows that PTRs provide potential benefits for customers who cut power use in the
designated periods, but PTRs do not increase the risks for other customers (in the form of
increased volatility in the rates). For this reason, the BG&E program is an attractive model
among the various forms of dynamic pricing regimes and represents a clear improvement over
flat-rate pricing. If the Department approves the offering of PTRs to any basic service
customers, we see no reason why consumer education or consumer protection concerns would
counsel against offering PTRs to all basic service customers.
The Department asks whether competitive suppliers can be expected to develop time-
varying products – and to effectively market these products and educate the public about the use
and benefits of time-varying rates – even if basic service remains a flat-rate product. We believe
they would. Competitive suppliers have incentives to develop and market time-varying products,
including the provision of consumer education about the benefits. As we observed above, retail
competition can help in a voluntary transition away from flat-rate pricing, particularly for
residential customers.27 Suppliers will compete by offering customers choices, such as time-
varying rates. Several pilot programs have shown that residential customers typically have lower
power bills under time-varying rates and generally prefer such pricing after experiencing it in a
pilot program. 28 Ideally, under retail competition, some retail electricity marketers will publicize
these findings and use them to grow consumer interest in retail electric service offers featuring
time-varying rates.
Under retail competition, marketers also will seek new customers by offering added
services, such as energy management, mixes of various types of renewable energy, and
assistance in recognizing and implementing opportunities for energy efficiency, onsite power
generation, and onsite energy storage. Some of these enhance a customer’s ability to provide a
larger DR more frequently.
27 Time-varying rates are not inherently infeasible in the context of an electric power monopoly.
Nevertheless, under the cost-based regulation that has been traditional in the electric power
industry, it appears administratively difficult to customize time-varying rates to match widely
varying customer circumstances and risk preferences.
28 Ahmad Faruqui & Jennifer Palmer, “Dynamic Pricing and Its Discontents,” Regulation 16
(Fall 2011), available at
http://www.cato.org/sites/cato.org/files/serials/files/regulation/2011/9/regv34n3-5.pdf.

13
Moreover, if the innovations associated with retail competition reduce reliance on flat-
rate pricing, then such competition is likely to enhance reliability by enrolling customers to help
balance supply and demand on the power system. By trimming demand peaks and filling in
demand troughs, DR eases the challenges that grid operators face. Further, retail competition
allows marketers to offer improved reliability as a specific service. For example, marketers
could offer installation and maintenance of energy storage devices or onsite generators that allow
customers to have electric power when the grid is experiencing a blackout or local distribution
lines are down.
An open question remains the timing of initiatives to provide education and otherwise
raise customer awareness about the benefits of time-varying rates. A reason to move away from
the regime of basic service provided by traditional distribution utilities is that basic service may
hinder efforts to educate customers about the benefits of time-varying rates.29 Switching basic
service to include PTRs is one way to jump-start this consumer education initiative, while
keeping in place the protections of a regulated rate for customers who lack adequate information
or have difficulty deciding whether to switch providers.
With respect to consumer education about time-varying rates, it is important for
preservation of competition that consumer education programs authorized by the Department be
competitively neutral. Thus, we urge the Department to guard against authorizing public
consumer education programs that focus exclusively on the virtues of any distribution utility’s
time-varying rates and may provide consumers with incomplete or misleading information about
offers from competing marketers. With respect to demand curtailments, it is also important for
preservation of competition that marketers have sufficient access to the data from smart meters to
operate their alternative time-varying rate offers. Relative to distribution utilities offering basic
service, marketers should not be competitively handicapped by discriminatory access to the
smart meter data needed to operate their alternative time-varying rate offers.
At the same time, however, we urge the Department to ensure that appropriate safeguards
are in place with respect to the personal information that smart meters generate about customers
and make available to marketers. Such information can be highly sensitive, including potentially
indicating when customers are at or away from home and when they are awake. All entities that
receive such personal information should protect it appropriately. We also encourage the
29 See, e.g., Harold Gruber & Pantelis Koutroumpis, “Competition Enhancing Regulation and
Diffusion of Innovation: The Case of Broadband Markets,” 43 J. Reg. Econ. 168 (2013); Richard
Schuler, “The Dynamics of Customers Switching Suppliers in Deregulated Power Markets”
(presentation at the Bulk Power Systems Dynamics and Control Conference, 1998), available at
http://e3rg.pserc.cornell.edu/files/Schuler Santorini.pdf.

14
Department to ensure that distribution utilities inform their basic service customers that they are
using their data for purposes of implementing time-varying rates.
We encourage the Department to revisit over time whether technology and customer
sophistication have increased enough to consider moving toward a system of time-varying rates
in which basic service customers receive price signals that even more closely resemble actual
wholesale prices in real time. As indicated by the appended Brattle graph, RTP provides the
most accurate price signals and applies them in all periods. Intermediate steps between the
BG&E approach and RTP include (1) adjusting the level of the credits to fit the specific
circumstances of each critical event and (2) adding classes of events that are less critical, but as
to which increased DR could improve system costs, efficiency, and reliability and could lower
customers’ bills.
V. 	Conclusion
The FTC staff appreciates the opportunity to submit this comment. If you have any
questions or comments, please feel free to contact John H. Seesel, Office of the General Counsel,
at (202) 326-2702.

Dynamic 	pricing 	facilitates customer
choice
Potential
Reward
(Di scount
from Flat
Rate)
Th e Ohio PUC
Less Risk,
Lower
Reward
PTR
Seasonal Rate
Super Peak TOU
Inclining Block Rate
More Risk,
Higher
Reward
RTP
1- 	------- 1--
Flat Rate
Increas ing Risk
Risk
(Variance in
Price)
The Brattle Group