The Ratemaking Process
A utility must have an opportunity to recover its prudently incurred costs. The ratemaking process determines the
amount of revenue needed and how revenue should be collected from a utility customer.
Revenue Requirement
What costs should be recovered from the customer? A utility’s Revenue Requirement is determined based on the costs incurred by
the utility during a 12-month period that represents the level of costs expected going forward.
Cost Allocation
Which customers should pay the costs? A Cost of Service Study is done to determine how to allocate the revenue requirement among customer classes according to the relative cost to serve each customer class. The cost to serve a customer class is primarily determined based on the number of customers, the peak demand of the customers, and the annual energy consumption/usage of the customers.
Rate Design
What are the standards, and how should charges appear on a monthly bill? Rates are designed to satisfy many objectives; some objectives are in competition with each other.
- Sufficiency: Rates should be designed to produce revenues sufficient to recover utility costs.
- Fairness: Rates should be designed so that costs are fairly allocated among different customers, and undue discrimination in rate relationships is avoided.
- Efficiency: Rates should provide efficient price signals and discourage wasteful usage.
- Customer acceptability: Rates should be relatively stable, predictable, simple, and easily understandable.
For more information, please view Electric Ratemaking Fundamentals (PDF).