183 Rate Structures

18.3.1 Basic Rate Structure

The rate tariff structure generally follows the major cost component structure. The rates themselves usually consist of a customer charge, an energy charge, and a demand charge. Each type of charge may consist of several individual charges and may be varied by the time or season of use.

Customer Charge

This is generally a flat fee per customer ranging from zero to $25 for a residential customer to several thousand dollars for a large industrial customer. Some utilities base the customer charge to large industrial customers on the level of maximum annual use.

Energy Charge

This is a charge for the use of energy, and is measured in dollars per kilowatt-hour for electricity, or in dollars per therm or cubic foot of gas. The energy charge often includes a fuel adjustment factor that allows the utility to change the price allocated for fuel cost recovery on a monthly, quarterly, or annual basis without resorting to a formal rate hearing. This passes the burden of variable fuel costs (either increases or decreases) directly to the consumer. Energy charges are direct charges for the actual use of energy.

Demand Charge

The demand charge is usually not applied to residential or small commercial customers, though it is not always limited to large users. The customer's demand is generally measured with a demand meter that registers the maximum demand or maximum average demand in any 15-, 30-, or 60-minute period in the billing month. For customers who do not have a demand meter, an approximation may be made based on the number of kilowatt hours consumed. Gas demand is determined over an hour or a day and is usually the greatest total use in the stated time period.

Another type of demand charge that may be included is a reactive power factor charge; a charge for kilovolt-amp reactive demand (kVAR). This is a method used to charge for the power lost due to a mismatch between the line and load impedance. Where the power-factor charge is significant, corrective action can be taken, for example by adding capacitance to electric motors.

Demand may be "ratcheted" back to a period of greater use in order to provide the utility with revenues to maintain the production capabilities to fulfill the greater-use requirement. In other words, if a customer uses a maximum demand of 100 kW or 100 MMBtu one month, then uses 60 kW or 60 MMBtu for the next six months, he/she may have to pay for 100 kW or MMBtu each month until the ratchet period (generally 12 months) is over.

18.3.2 Variations

Utilities use a number of methods to tailor their rates to the needs of their customers. Some of the different structures used to accomplish this include: seasonal pricing; block pricing; riders; discounts; and innovative rates.

Seasonal Pricing

Costs usually vary by season for most utilities. These variations may be reflected in their rates through different demand and energy charges in the winter and summer. When electric utilities have a seasonal variation in their charges, usually the summer rates are higher than the winter rates, due to high air conditioning use. Gas utilities will generally have winter rates that are higher than summer rates, reflecting increased space-heating use.

Block Pricing

Energy and demand charges may be structured in one of three ways: 1) a declining block structure; 2) an inverted block structure; or 3) a flat rate structure. An inverted block pricing structure increases the rate as the consumption increases. A declining block pricing method decreases the rate as the user's consumption increases. When a rate does not vary with consumption levels it is a "flat" structure. With the declining or inverted block structures, the number of kWh, MMBtu, or therms used is broken into blocks. The unit cost (cents per kWh or cents per MMBtu or therm) is lower or higher for each succeeding block.

A declining block reflects the fact that most utilities can generate additional electricity or provide additional gas for lower and lower costs—up to a point. The capital costs of operation are spread over more usage. The inverted block structure reflects the fact that the incremental cost of production exceeds the average cost of energy. Hence, use of more energy will cause a greater cost to the utility.

Most utilities offer rates with more than one block pricing structure. A utility may offer some combination of inverted, declining and flat block rates, often reflecting seasonal energy cost differentials as well as use differen tials. For example, a gas utility may use an inverted block pricing structure in the winter that reflects the higher energy costs in that period, but use either a flat or declining block pricing structure in the summer when energy costs are lower.


A "Rider" modifies the structure of a rate based on specific qualifications of the customer. For example, a customer may be on a general service rate and subscribe to a rider that reduces summer energy charges where the utility is granted physical control of the customers air conditioning load.


The discount most often available is the voltage discount offered by electric utilities. A voltage discount provides for a reduction in the charge for energy and/or demand if the customer receives service at voltages above the standard voltage. This may require the customer to install, operate and maintain the equipment necessary to reduce the line voltage to the appropriate service voltage. Each customer must evaluate the economics of the discounts against the cost of the equipment they will have to provide.

Innovative Rates

Increased emphasis on integrated resource planning, demand-side management and the move to a more competitive energy marketplace has focused utility attention on innovative rates. Those rates designed to change customer load use, help customers maintain or increase market share, or provide the utility with a more efficient operating arena are innovative. Most rates offered today fit into the innovative category.

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