Electric Cost of Service Rates and Rates for New Technology - One Utility’s Approach
Case study - Moving to cost of service electric rates is the pathway to equitable customer rates - But you must address rate history first
Electric cost of service studies allocate the costs of electric service to each customer class. But, the actual rates charged to each customer class may over or under collect their cost of service. Why is that?
The cost of service is the science, and the rate design is the art. The electric rate structure of any utility has decades of embedded history and political decisions. Until the 1980s, it was common for industrial rate classes to subsidize the rates of the residential classes to “keep residential rates low and reasonable.” As the political climate turned more towards economic development, the pendulum swung in the other direction, increasing residential rates faster than industrial rates to “catch up.”
The approach now is more towards basing rates on the cost of service. There are still inter-class subsidies in rate design, but more focus has been on closing those gaps.
A recent study shows a case study of one electric utility’s approach to cost of service and ratemaking.
Key Points on how this approach benefits ratepayers
Rates that are not at cost of service require some customers to subsidize other customers
The utility waited until its smart meter deployment was completed, in order to obtain more accurate load information
The utility coupled the rate change with an information campaign to explain the process and outcome
Electric meters drive electric load information
The situation
An electric utility recognized that it needed to increase electric rates after developing its budget for the coming year (also known as a revenue requirement). The utility had not increased rates in 5 years and wanted to take the opportunity to move customer rates towards their cost of service and to incorporate distributed energy resources (DER) and electric vehicle charging into their rate structure.
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The approach to a solution
The utility obtained a portion of its power supply from a joint action electric agency and the remainder from the day-ahead power market in its region. The utility had a high level of electric heating and wished to drive down its peak to smooth power costs. The utility had just undergone an extensive smart meter installment for all customers and had detailed load data for all customer classes.
We worked with the utility to develop a cost of service study with the refined metering data. Deep analysis of customer load curves was done to set the groundwork for a rate design more closely matching each customer’s service cost. There was also a more significant effort to incorporate a DER generation forecast into the utility’s power supply mix. This was not spurred on by FERC Order 2222, but by recognizing that DER load was becoming a more significant portion of the overall utility load and was impacting their load curve and open market purchases.
The goal was also to provide customers with pricing signals and incentives to change their consumption patterns if they wished, with the benefit of an overall reduction in their power cost.
About Russ Hissom - Article Author
Russ Hissom, CPA is a principal of Utility Accounting & Rates Specialists a firm that provides power and utilities rate, expert witness, and consulting services, and online/on-demand courses on accounting, rates, FERC/RUS construction accounting, financial analysis, and business process improvement services. Russ was a partner in a national accounting and consulting firm for 20 years. He works with electric investor-owned and public power utilities, electric cooperatives, broadband providers, and gas, water, and wastewater utilities. His goal is to share industry best practices to help your business perform effectively and efficiently and meet the challenges of the changing power and utilities industry.
Find out more about Utility Accounting & Rates Specialists here, or you can reach Russ at russ.hissom@utilityeducation.com.
The material in this article is for informational purposes only and should not be taken as legal or accounting advice provided by Utility Accounting & Rates Specialists. You should seek formal advice on this topic from your accounting or legal advisor.