181 Introduction

Purpose and Limitations

The main focus of this chapter on rates is to provide information on how an average commercial or industrial customer can identify potential rate-related ways of reducing its energy costs. The basic costs incurred by electric and gas utilities are described and discussed. How these costs are reflected in the final rates to commercial and industrial customers is illustrated. Some examples of gas and electric rates and how they are applied are included. In addition, this chapter identifies some innovative rates that were developed by electric and gas utilities as a response to the increasing pressure for the development of a more competitive industry.

Because of the breadth and complexity of the subject matter, the descriptions, discussions and explanations presented in this chapter can not cover every specific situation. Energy consumption patterns are often unique to a particular commercial and/or industrial activity and therefore case by case evaluations are strongly suggested. The purpose is to present some general cost background and guidelines to better understand how to identify potential energy cost savings measures.

18.1.2 General Information

Historically, electric and gas utility rate structures were developed by the utilities themselves within a much less complex regulatory environment, by simply considering market factors (demand) as well as cost factors (supply). Today the increasing pressures to develop more competitive markets have forced utilities to reconsider their traditional pricing procedures. Other factors affecting today's electric and gas markets include rising fuel prices, environmental concerns, and energy conservation mandates. These factors and pressures have affected gas and electric utility costs and hence their rates to their final customers.

In general, electric and gas rates differ in structure according to the type and class of consumption. Differences in rates may be due to actual differences in the costs incurred by a utility to serve one specific customer vs. another. Utility costs also vary according to the time when the service is used. Customers using service at off-peak hours are less expensive to serve than on-peak users. Since electricity cannot be stored, and since a utility must provide instantaneous and continuous service, the size of a generation plant is determined by the aggregate amount of service taken by all its customers at any particular time.

The main cost elements generally included in rate-making activities are: energy costs, customer costs, and demand costs. Each of these is discussed in the next section.

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