Utility Rate Design Overview

Rates are designed so that the utility can recover sufficient funds to cover costs and, in the case of investor-owned utilities (IOUs), generate a reasonable return on investment for its stockholders. The PUC first determines the level of allowable investment by the utility in its facilities (referred to as the rate base) and its level of operating expenses. It then determines the rate of return the utility may earn on its investment and adds to it the operating expenses. This sets the total revenue requirement, which is equal to the total cost to serve. Rates are then designed to allocate revenue requirements among the various customer classes and subcategories within the classes.

Typically, customer classes include residential, commercial, industrial, institutional, and municipal. They may be subdivided into many rate classes or lumped together into broader rate classes. Commercial and industrial (C&I) as well as institutional (CI&I) customers, for example, are commonly lumped together.

General rate classes include categories such as residential, small CI&I, and large CI&I. Residential rate classes are typically limited to single-family dwellings and to multi-family dwellings metered separately from one another. Master-metered multi-family dwellings can either be treated as a separate rate class or as part of a commercial rate class.

Two common distinctions between customer classes are size of load and usage profile, although distinctions are made between CI&I classes based on other criteria as well. Time-of-use (TOU) and load factor are, in many cases, even more significant factors than size of load. Additional rate classes sometimes exist for cogenerators, non-utility generators (NUGs), and other end use- or equipment-specific categories. Another major distinction is between firm and non-firm service. Many utilities are also able to offer special contracts that are customer-specific.

In assigning rate classes, utilities attempt to determine commonalties among customers within a class. This includes the assignment of load behavior. Contribution to a probability of a peak, for example, is an extremely important factor. Common characteristics within the class contribute to when the load occurs.

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