Moving an influential customer to their cost of service sometimes takes a soft touch

In some communities that are served by an electric co-op or municipal utility, the electric load is dominated by a large industrial customer. As the large customer may also be a significant employer in the community, there is sometimes a hesitancy when approving needed rate increases. The oversight board may get "cold feet" at decision time and not approve the full rate increase required to recover the large customer's cost of service, leading to other customer classes subsidizing the large customer's rates.

That situation is changing, as the trend in electric ratemaking is towards more cost of service-based rates.

Key Points on moving rates to the cost of service for each customer class

1. Rates that are not at cost of service require some customers to subsidize other customers.

2. Moving a large customer (who is also a large employer in the community) to cost of service rates require that the co-op or utility work face-to-face with the customer.

3. Transparency of cost-of-service and rate design is helpful in cultivating understanding with the customer.

4. Using a multi-year phase-in will smooth the impact of a large rate increase for the large customer.

The situation

 An electric utility developed a cost of service study and found that its largest customer had rates that undercharged it by 10%. The utility wished to move the customer to cost of service rates and end the subsidies from the other customer classes.

The approach to a solution

We worked with the utility to analyze its overall cost of service analysis to determine that it was correct and based on the most recent customer class load profiles. We also worked with the large customer to provide them with an understanding of the cost of service analysis. The large customer understood the need for the utility to move to cost of service rates but was also concerned about the impact of increased electric rates on its manufacturing costs.

The large customer had a consultant provide its own cost of service study, which we also analyzed, discussed with them, and jointly developed a rate strategy.

The Outcome

We worked with the utility and customer to develop a time-of-use rate that allowed the customer to shift a portion of its load towards the off-peak period. Part of the rate strategy agreed to by the customer was a phase-in period of three years from the current rate structure to the total cost-of-service rate. This time of use rate required changes in workers' regular hours but did not result in significant turnover at the customer's facility.

To determine the impact of the large customer load shift, we performed an annual cost of service study for the utility, and the rate phase-in was modified as the utility's costs shifted. As more costs shifted to the large customer, rates for the other utility customer classes were reduced.

Long story short, no one likes rate increases, but by working with customers, there can be common ground for a rate design as well as an opportunity to cultivate an understanding of the realities of the business on both sides.

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.