Law Academy Course 104

Cost-of-Service Ratemaking

Course 104

In this Energy Law Academy Course, students will learn the cost-of-service process from start to finish in detail. We will discuss the basics of the ratemaking concept. Our faculty will then address the components of a regulated service provider’s revenue requirement, including rate base and operating expenses. The course will then focus on rate design, and will include sessions on cost allocation (including functionalization and classification of costs) and types of rate design.

Energy Law Academy Certificate of Achievement: Course 104 or 105 is a requirement to obtain the Energy Law Academy Certificate of Achievement.


Introduction, Logistics​

Overview of Ratemaking Process

  • Basic Concepts (just and reasonable, non-discrimination, why rates are regulates and set by public service commissions)
  • Bonbright principles
  • Steps in ratemaking process
  • Steps in cost-of-service process
  • Rate design process
  • Some key terminology (rates, rate design, prices, fees, bills, formula rates

Revenue Requirement Basics 

  • (Rate Base x Allowed Rate of Return = Required Return) + (Operating Expenses) = Revenue Requirement

Rate Base 

  • Used and useful
  • Prudency
  • Return of and on rate base (ROE / ROR)
  • Cost of debt vs. equity
  • CWIP

Cost of Service Ratemaking 

  • Test Year (historical test year, known & measurable changes, etc.)
  • Operating expenses (O&M, A&G, etc.)
  • Exclusions (lobbying, management inefficiency, etc.)
  • Depreciation
  • Income taxes

Cost Allocation 

  • Cost-of-service study
  • Functionalization of costs (generation, transmission, distribution, etc.)
  • Classification of costs (demand, energy, customer; fixed vs. variable)
  • Rate class allocation

Rate Design 

  • Rate vs. rate design
  • Flat rate (energy only)
  • Two-part rate (customer / energy or energy / demand)
  • Three-part rate (energy / demand / customer)
  • Block rates
  • Declining
  • Inverted / inclining

Special Rate Provisions/Concepts 

  • Minimum Bills
  • Decoupling
  • Pre-paid service
  • Demand Ratchets
  • Power Factor
  • Service Voltage
  • Standby Rates