July 17: Rate Design

Presentation Slides:

The Bill Please – Bruce Chapman


Media Links:

An Overview of Revenue Decoupling Mechanisms - Dan Hansen, CA Energy

Gas and Electric Decoupling in the US - Ralph Cavanagh, NRDC


Reading Files:

First Cost

German Experience with Promotion of Renewable Energy



Rate Terms

Block-rate structure:  An electric rates schedule with a provision for charging a different unit cost for various increasing blocks of demand for energy. A reduced rate may be charged on succeeding blocks.

Day-ahead and hour-ahead markets:  Forward markets where electricity quantities and market clearing prices are calculated individually for each hour of the day on the basis of participant bids for energy sales and purchases.

Embedded Cost:  The costs incurred from generating and providing energy.

Flat Rates: Rates that do not charge different amounts depending on current demand.

Fuel Adjustment Clause:  A mechanism to adjust rates when a utility’s cost of energy to meet the needs of its customers falls outside of a predetermined range.

Marginal cost:  The change in cost associated with a unit change in quantity supplied or produced.

Market-based pricing:  Prices of electric power or other forms of energy determined in an open market system of supply and demand under which prices are set solely by agreement as to what buyers will pay and sellers will accept. Such prices could recover less or more than full costs, depending upon what the buyers and sellers see as their relevant opportunities and risks.

Market clearing price:  The price at which supply equals demand for the Day-ahead or hour-ahead markets.

Operating expenses:  Segment expenses related both to revenue from sales to unaffiliated customers and revenue from intersegment sales or transfers, excluding loss on disposition of property, plant, and equipment; interest expenses and financial charges; foreign currency translation effects; minority interest; and income taxes.

Rate base:  The value of property upon which a utility is permitted to earn a specified rate of return as established by a regulatory authority. The rate base generally represents the value of property used by the utility in providing service and may be calculated by any one or a combination of the following accounting methods: fair value, prudent investment, reproduction cost, or original cost. Depending on which method is used, the rate base includes cash, working capital, materials and supplies, deductions for accumulated provisions for depreciation, contributions in aid of construction, customer advances for construction, accumulated deferred income taxes, and accumulated deferred investment tax credits.

Rate class:  Customers grouped by similar characteristics in order to be identified for the purpose of setting a common rate for electric service. Usually classified into groups identified as residential, commercial, industrial, and other.

Rate of return:  The ratio of net operating income earned by a utility is calculated as a percentage of its rate base.

Spot price:  The price for a one-time open market transaction for near-term delivery of a specific quantity of product at a specific location where the commodity is purchased at current market rates. See also spot market terms associated with specific energy types.

Used and useful:  A concept used by regulators to determine whether an asset should be included in the utility’s rate base. This concept requires that an asset currently provide or be capable of providing a needed service to customers.


Cost of Service Terms

Avoided Cost:  The cost for a utility to produce one more unit of power in addition to their current capacity.

Degree Day:  A measurement of how many days a customer is heating or cooling their property, and by how much.

Fixed cost:  An expenditure or expense that does not vary with volume level of activity.

Fuel cost:  The costs from purchasing and moving a fuel used for generation.

Functionalization :  The process of assigning costs to ~~~~~

Maintenance expenses:  That portion of operating expenses consisting of labor, materials, and other direct and indirect expenses incurred for preserving the operating efficiency and/or physical condition of utility plants used for power production, transmission, and distribution of energy.

Minimum Demand:  The lowest amount of energy that is demanded over a period of time.

Test Year:  A consecutive 12-month period representing a normal year for a utility in terms of costs and revenues.

Load Terms

Coincident Peaks:  When two peak loads occur in the same time period.

Load Factor:  The average load divided by the peak load over a period of time.

Load Following:  Increasing the amount of power generated to match increasing demand.

Load Pocket:  An area where there is not enough transmission capacity to guarantee energy without relying on energy produced within the pocket.

Load Shape/Profile: A graph showing the load over a period of time.

Load Shifting: Moving energy from one point on the grid to another point.

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