Utility ratemaking glossary
The vocabulary of cost-of-service studies and rate design, in plain English. Every term a board member, member-owner, or analyst runs into — defined without the jargon.
The study
- Revenue requirement
- The total amount of revenue a utility needs to collect over a period to cover its costs — operating expenses, depreciation, taxes where applicable, and a return on its investment. Every rate study starts here.
- Cost-of-service studyCOSS
- An analysis that splits the revenue requirement across customer classes based on how much each class costs to serve. It functionalizes, classifies, and allocates costs to reveal each class's fair share.
- Functionalization
- The first step of a cost-of-service study: sorting a utility's costs by the function they serve — power supply (generation), transmission, and distribution.
- Classification
- Sorting functionalized costs by what drives them: customer-related (connection and billing), demand-related (capacity for peak load), or energy-related (fuel and per-kWh costs).
- Allocation
- Spreading classified costs across customer classes using allocation factors that reflect how each class actually uses the system (for example, its share of peak demand or of energy consumed).
- Rate design
- The step that turns each class's cost responsibility into the actual charges on a tariff — customer, demand, and energy charges, plus any seasonal, time-of-use, or rider components.
- Cost causation
- The guiding principle of ratemaking: costs should be borne by the customers who cause them. Cost-of-service studies exist to apply this principle fairly.
- Cross-subsidy
- When one customer class pays more or less than the cost to serve it, effectively subsidizing (or being subsidized by) another class. Surfacing cross-subsidies is a core goal of a cost-of-service study.
Your bill
- Customer charge
- A fixed monthly charge that recovers the cost of connecting, metering, and billing an account — payable regardless of how much energy is used.
- Demand charge
- A charge based on a customer's peak power draw (measured in kilowatts), used to recover the cost of building capacity to meet that peak. Most common for larger customers.
- Energy charge
- A charge billed per kilowatt-hour (kWh) that recovers fuel and other energy-related costs, which rise with consumption.
- Billing determinants
- The measured quantities a bill is calculated from — kilowatt-hours used, peak kilowatts of demand, and the number of customers or accounts in each class.
- Customer class
- A group of customers with similar usage characteristics — for example residential, commercial, industrial, irrigation, or lighting — treated together in a cost-of-service study and rate design.
- Large-load tariff
- A special rate and set of terms for very large new customers such as data centers, designed with minimum-demand or contract provisions so the customer pays for the capacity it requires.
Capacity & allocation methods
- Coincident peak12-CP
- A customer class's demand at the moment of the system's peak. A 12-CP method averages the class's demand across the twelve monthly system peaks to allocate capacity costs.
- Minimum system
- A method for classifying distribution plant that estimates the portion of the system needed just to connect customers (customer-related) versus the portion needed to carry load (demand-related).
Financial metrics
- Rate base
- The value of the utility's used-and-useful investment (net plant plus working capital) on which a regulated utility is allowed to earn a return.
- Times interest earned ratioTIER
- A coverage metric — margins plus interest, divided by interest — that cooperative lenders use to gauge financial health. Many co-op rate studies target a minimum TIER.
- Debt service coverageDSC
- A coverage metric comparing available cash to required principal-and-interest payments. Like TIER, it is a target that can drive a utility's revenue requirement.
Standards & oversight
- NARUC
- The National Association of Regulatory Utility Commissioners, whose Cost Allocation Manual documents the standard cost-of-service methodology used across the U.S.
- Rural Utilities ServiceRUS
- The USDA agency that lends to electric cooperatives. RUS financial requirements (and its Form 7 report) influence how many co-ops set rates.
- Rate case
- A formal proceeding — at a state commission for investor-owned utilities, or before a board or council for co-ops and municipals — in which a proposed rate change is reviewed and approved.