What are the goals of tariff design?

The foundational principles of tariff design guide policymakers to ensure that rates achieve and support the following goals:

  • economic efficiency and performance: rates should provide sufficient funding to maintain reliability consistent with customer expectations, while recognizing that such preferences are increasingly varied. Rate design should also encourage productivity enhancement in remaining natural monopoly portions of the business;

  • customer focus and bill impacts: rates should encourage the pursuit of opportunities for better cost containment, and to the extent possible, cross-subsidies must be avoided;

  • stability of the sector: rates should send investment signals that are proportional to the associated risk and market returns; remuneration should take into account the impact on debt service coverage ratios and associated parameters for maintaining an efficient capital structure;

  • evolving utility structure to facilitate innovation: the rate framework must balance incumbent opportunities against market participation, reducing barriers to the third-party providers of services. In addition, capital expenditure (“capex”), ownership, and technology biases should be eliminated to emphasize the focus on a long-run, least-cost approach for determining solutions to identified system and customer needs; and

  • regulatory simplicity: ratemaking must balance appropriate oversight with administrative simplicity to avoid an overly burdensome process for all parties. Moreover, the framework must have built-in decision and evaluation criteria to increase accountability and advance strong stakeholder support.
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