Administrative ratemaking is an alternative to cost-of-service ratemaking in which a government agency determines rates rather than setting them in a regulatory proceeding like a rate case. In some cases of administrative ratemaking, rates are set by a government ministry in consultation with various stakeholders such as the utility, large industry users, and key government officials. This results in an untransparent process.
An alternate method with more transparency uses the “model utility” concept. In this case, rates are set based on a calculation of what rates would be for an efficient utility. This may be an actual utility that the regulators have chosen or a theoretical model utility. Here is an example used in Chile to set rates for electric distribution utilities:
Rate = Energy cost (pass-through) + Transmission fee (pass-through) + Distribution rate
The distribution rate is set based on a theoretical model utility: