converting the revenue requirement into rates
Once the three core components of the revenue requirement are calculated (i.e., the rate base, rate of return, and operating expenses), the utility’s revenue requirement can be estimated. Again, this represents the total revenues that a utility requires to cover the costs it incurs in providing electric service. To assess whether the existing tariff is cost reflective, it is useful to compare the product of the average rate (i.e., the average of the existing rates charged across different customer classes) and the total volumes delivered by the utility, against the estimated revenue requirement. Simplistically, if the average revenues earned by the utility are not equal to the estimated revenue requirement, then the existing tariff may be deemed to not be cost reflective.
If the existing tariff is determined not to be cost reflective, an approach will need to be selected to reach cost recovery. Policymakers can choose from several approaches to evolve the tariff design to become more reflective of underlying costs: