Fixed
Customer Charge
A flat monthly charge to cover fixed costs incurred to provide service to the customer — the service line, the billing system, the customer service desk.
Electric Utility Rate Design
Understanding the complexities of utility cost of service and rate setting
§01 · Vocabulary
First, a vocabulary.
Rate cases are decided by people who read the same documents and use the same three words. Here are those words, in plain English.
- Tariff
- A published document setting forth the types of rates charged for specific utility services and the general terms and conditions under which such services will be provided.
- Rate
- A standard unit charge for service rendered by a utility to its customers, applicable under general circumstances.
- Rider
- A form of tariff representing a supplemental charge to specific customer classes. Costs recovered through a rider are not recovered through the base rates.
i.
ii.
iii.
Fig. A — The three nouns that frame every rate case.
§02 · The Bill
Anatomy of an
electric bill.
Four line items, four different stories. Customer charges cover the fact that you exist on the system. Demand charges cover the size of the hole you punch in it.
Hardware
Meter Charge
Traditionally folded into the customer charge, but itemized separately for electric delivery. Covers the meter and the cost of reading it.
Volume
Usage Charges
A cents-per-kWh charge multiplied by the customer's volume. The distribution charge is the "base rate" — set in a rate case and recovering most of the cost of delivering service.
Peak
Demand Charge
A flat charge multiplied by the size of the customer's load — the maximum kW used per month. Typically applied to medium and larger non-residential customers.
Fig. B — The four line items every commercial bill resolves to.
§03 · Cost of Service Study
Two paths,
three moves.
Before a single rate is drafted, the utility runs a Cost of Service Study (COSS) — to know how its costs flow. Two methodologies, three sequential moves.
Method A
Embedded Costs
Historical, verifiable, conventional.
- Based on historical information.
- Inputs can be verified against the books.
- Less complex than marginal.
Method B
Marginal Costs
Projected, complex, forward-looking.
- Built from projected information and assumptions.
- Much more complex than embedded.
- Most utilities don't have the capability in-house.
The three moves
Every COSS, however it is built, runs the same loop.
Functionalize
Identify the function.
Sort costs by the function they support — for an electric utility, how much is identifiable with generation, transmission, distribution.
Allocate
Apportion to classes.
Every functionalized cost is distributed across customer classes using allocation factors that weight cost responsibility appropriately.
Classify
Drop into a bucket.
Each allocated cost gets designated to one of four buckets — customer, meter, demand, or usage — which become the line items on the bill.
Fig. C — Functionalize → Allocate → Classify. The COSS pipeline.
§04 · Rate Design Principles
Five principles, in tension.
No rate design satisfies all five at once. A good one knows which it is choosing to favour, and can defend that choice in public.
01Principle
Cost Causation
Rates should reflect the costs incurred to serve each customer.
02Principle
Equity
Customers should pay their fair share of system costs.
03Principle
Efficiency
Rates should promote efficient use of electricity.
04Principle
Stability
Rates should be relatively stable from year to year.
05Principle
Simplicity
Rates should be understandable to the customers who pay them.
Fig. D — A good rate design defends which principle it favours.
How a rate gets set
Five steps from a budget gap
to a filed tariff.
- 01
Revenue Requirement
Decide what the utility needs to collect.
Calculate the total revenue the utility needs to collect from rates to cover its costs and earn a reasonable return on rate base.
Assign costs to residential, commercial, and industrial classes based on usage patterns and the service each requires.
02Allocate to Classes
Split the bill between customer classes.
- 03
Design Structure
Shape the line items.
Build a rate structure that recovers each class's allocated costs while honouring the five principles in tension.
Test the proposed rates against real bills. Adjust until impacts at the high and low end of the customer base are defensible.
04Bill Impact
Pressure-test the customer impact.
- 05
File for Approval
Submit, defend, approve.
File with the regulatory authority. Respond to interventions. Walk out with a tariff that holds.
Fig. E — The five-step path from a budget gap to a filed tariff.
▌ Open questions
What a modern rate design has to answer.
EST. 2026 ▌Balancing cost recovery against affordability — without trading one for the other.
Consumption patterns reshaped by efficiency programs and distributed generation.
Time-varying rates that reflect real-time costs without confusing the customer base.
Equity across classes — residential, commercial, industrial, and the new in-betweens.
Adapting to grid modernization, EV load, and storage — without rewriting the tariff every year.
These are the questions Muniworth is built to help your utility answer in public.
Talk to usFig. F — Five questions. One conversation.