How Rates are Set
Public power utilities identify electricity rates based on cost of service while keeping customer needs and the community’s objectives front and center. As a customer-owned utility, OPPD does not answer to shareholders and is not driven by profit. Revenues are consistently invested back into the utility and community.
- OPPD determines the REVENUE REQUIREMENT – basically the revenue needed from customers to cover all costs incurred by OPPD to provide electricity.
- OPPD conducts a COST-OF-SERVICE STUDY that equitably allocates revenue requirements across all customer classes.
- OPPD DESIGNS RATES that specify how revenue is recovered through a variety of charges.
Add up the costs = REVENUE REQUIREMENT
The revenue requirement represents the total cost to provide electric service to its customers. At OPPD we determine our revenue requirement through a budgetary exercise, where all costs, including capital, operations and maintenance, and administrative, are considered. Additionally, OPPD’s revenue requirement must meet Strategic Directive 3 (SD-3), Access to Credit Markets, which requires OPPD to maintain specific financial metrics.
Divide Revenue Requirements = COST OF SERVICE STUDY
The cost-of-service study allocates revenue requirements across all customer groups. The allocation reflects actual costs of providing service to each customer group. The cost-of-service study process includes:
- Functionalization divides the total revenue requirement into three cost components- generation, transmission and distribution following the standards provided by the Federal Energy Regulatory Commission (FERC).
- Classification takes functional costs and classifies them based on the driver of the costs into demand, energy, and customer costs.
- Allocation is the assignment of costs to customer groups.
These three steps of the cost-of-service study are necessary to ensure equitable allocation of OPPD’s revenue requirement across all customer groups.
OPPD recovers costs through rate elements within each customer group. There are three fundamental rate elements:
Demand charges recover fixed costs based on maximum electricity demand - or the highest amount of power, measured in kilowatts (kW), during a particular period of time.
Energy charges recover variable costs based on energy produced by OPPD. This charge varies based on the total amount of energy, measured in kilowatt-hours (kWh), used by a customer over a billing period.
Customer charges recover fixed costs associated with being a customer like billing and metering. These costs do not change regardless of energy or demand needs.
The design of utility rates affects OPPD’s finances and customer satisfaction. As the industry changes and new technologies emerge, OPPD will have future options to implement more advanced rate structures.