Rate Design

Rate Design

The rates that customers pay for electricity are set with multiple considerations in mind. First, in aggregate, the rates set for a utility's customers should allow it an opportunity to earn the overall revenue requirement deemed appropriate by the Commission. They should also recover the amounts assigned to each class in the revenue allocation process. Finally, they should be designed in a way that customers' prices are fair (i.e. not unduly favoring certain customers over others) and efficient (i.e. giving customers proper price signals).

Using electricity rates as an example, efficient rates occur when the charges reflect costs.  The "customer charge" should reflect the fixed costs of serving the customer, such as meter reading, billing and other costs. Similarly, the "demand charge" should reflect the costs that vary based on customers' highest demands on the system (or demands during critical on-peak hours) to cover costs, such as the fixed cost of transmission and generation capacity. Finally, "usage charges" should reflect costs that vary by unit of energy consumed, such as utility generation fuel and the variable cost of purchased energy. Rates designed on this basis are fair, because they reflect cost causation, and are "efficient" because they provide the economic signals that, if followed, will minimize the overall cost of the utility system.

An overarching goal traditionally used by most public service commissions is that rates should reflect continuity (i.e. are similar in structure and magnitude from rate case to rate case) and should avoid rate "shock" (i.e. large increases in charges all at once, rather than moderated or phased-in over time). Rate design, because it is not an exact science, requires the expert opinion of knowledgeable and seasoned experts in the field, in order to develop the best rates possible. Our professionals meet these criteria and often present evidence on rate design matters.

Unbiased and Objective Energy Advice!