Rate Design Strategies

The purpose of rate design is to recover revenue requirements associated with the costs incurred by utilities to provide services to the customer classes, while also recognizing the different energy use profiles of customers between and within the customer classes. Rate design also sends price signals to consumers and can influence energy-use decision makers to favor more cost efficient energy use profiles. Price signals mean that a particular utility's rate design makes it clear when it is more or less costly to purchase a unit of energy.

If all customers had the same usage pattern, fixed and variable costs could be readily integrated into one simple cost recovery mechanism — a usage charge. To determine an average price per kWh or Mcf, the total revenue requirement would be divided by all of the kWh or Mcf to be sold. In reality, however, customers do not have the same usage patterns and, as demonstrated in the above load factor examples, distinctions must be made as to how varying customer load patterns affect system cost.

Block Rates

Block rates are rates in which the charges for a unit of service vary with consumption. The billing period's consumption levels within a rate are often broken down into blocks, or steps, with different charges for each block. There are several different common types of block rates:

• Declining block rates. Historically, the most common type of rates, declining block rates have lower usage charges as levels of consumption increase. The reasoning behind these rates is that increasing customer usage reduces the cost to serve the customer on a per-unit basis. These rates have been phased out in many utilities because they are believed to encourage greater consumption and discourage conservation. Figure 21-3 illustrates a natural gas declining block service rate.

• Increasing, or inverted, block rates. These rates charge more per unit as levels of consumption increase. They are relatively uncommon with natural

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