After the Commission has determined the utility's revenue requirement and decided the appropriate revenue allocation method, the Commission must then set rates to recover each class' assigned revenue burden.
In the rate design phase, the Commission must set each class' customer charge, demand charge and energy charge in such a manner that the utility collects the allocated amount of revenue requirement from each class. In setting each of these rates, the Commission may consider many factors. For instance, rates should be designed in a way that customers' prices are fair (i.e. not unduly favoring certain customers over others) and efficient (i.e. giving customers proper price signals).
In general, the "customer charge" should reflect the fixed costs of serving the customer, such as meter reading, billing and other costs. The "demand charge" should reflect the costs that vary based on customers' highest demands on the system (or demands during critical on-peak hours) to cover costs, such as the fixed cost of transmission and generation capacity. Finally, "usage charges" should reflect costs that vary by unit of energy consumed, such as utility generation fuel and the variable cost of purchased energy.
Copyright © 2017 Midwest Energy Consumers Group - All Rights Reserved.