A Cost of Service (COS) study is the fundamental tool for evaluating and establishing utility rates. With industry and technology changes, utilities are expanding the scope and use of COS studies and are preparing studies that distinguish full and partial requirements customer classes. This is due to the increasing presence of distributed energy resources and/or to accommodate customers’ expectations of having more control over their usage and utility bills.
Revenue Requirements: The first step of a COS study is determining the total revenue requirement needed to pay all expenses and achieve an adequate return.
- Total revenue requirements can be based on historical, historical with adjustments, budget test years, or multi-year studies
- Multi-year approach allows for anticipation of future revenue needs and the development of a rate strategy that supports the utility’s strategic goals
- Various approaches are used to determine the appropriate level of margin, including TIER, DSC, or Rate of Return
Cost of Service: The COS is aimed at identifying each rate classes cost responsibility for the revenue requirement.
- Employ industry-accepted and regulatory commission-approved methodologies to ensure the fair and non-discriminatory allocation of the revenue requirements
- Integrate AMI/MDMS data for greater precision in assigning peak and time-sensitive costs responsibility
- Assess cross-class (inter-class) subsidization occurring under present rate schedules
- Provide bundled and unbundled cost data needed by retail, wholesale, and vertically integrated utilities
- Provide clear information on unit costs to help evaluate rate designs
- Provide cost analysis to help evaluate line extension, and other policies
Rate Design: The design and setting of utility rates is a fundamental, yet extremely important task. Rate design impacts everything from the utility’s finances to customer education and satisfaction. Learn more by clicking on “Rate Design” in the navigation box, top left.
Cost of Service Study Example