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What is the total cost of running an electric utility? How much does each customer class contribute to that cost? Do the current rates and rate structure recover that cost appropriately? Do class subsidies exist within the current structure? These are some of the questions that can be answered by performing a distribution cost of service study.

The purpose of a distribution cost of service study is to ultimately determine the equitable portion of an electric utility’s distribution costs to allocate to each customer class. It will assign the total distribution cost to each class based on a series of factors such as contribution to peak and number of customers. Once this allocation is determined, it then establishes how to accurately recover those costs through a combination of fixed and variable rates. The results of the study can also be used as a form of justification to making adjustments to the current structure.

This study is foundational to rate making. Understanding how much of the total cost is fixed versus variable plays an instrumental part in rate design. If an electric utility recovers the majority of their fixed costs in a variable rate, they run the risk of over collecting when sales are above normal and under collecting when sales are below normal. In addition, if the rates and rate structures do not collect the costs appropriately, the risk of classes subsidizing others increases greatly.

As the books close for FY 2018 we encourage you to contact us about running a cost of service study for your electric utility. Our rate consultants will be glad to answer any questions you may have and will walk you through the result of the study once completed.