How do you design rates to recover the revenue requirement?

  • Once cost allocation is completed, the regulator needs to determine the rates that are applicable to each customer class. There are three main ways that rates can be charged: based on the number of customers (i.e., per customer costs), per kW of peak demand used, and per kWh of energy consumed. There is no “one size fits all” solution of what rates should be per customer, per kW, or per kWh, as the rates ultimately need to reflect the utility’s own circumstances – including the specifics of its customer base, its position in the investment cycle, and/or any policy-imposed objectives that require significant investments.

  • Within the rate components for each customer class, there is a range of options as well. For example, variable energy charges may take the form of flat rates, seasonally differentiated rates, tiered rates, or time-of-use rates.
Flat rates
Flat rate across all hours
Seasonally differentiated rates
Different rates according to the season (e.g., summer rate versus winter rate)
Tiered rates
For example, one rate for the first 1,000 kWh of consumption a month, and a higher rate for any usage beyond 1,000 kWh
Time-of-use rates
Rates that differ based on whether energy is consumed during on-peak hours, the afternoon mid-peak, or nighttime off-peak
rate design options for the energy charge
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