Rate design is the process of determining how authorized revenues will be collected from customers through utility charges. Once a revenue requirement has been determined in the rate case process and then allocated to the various customer classes, the structure of the rates that each customer class will pay is determined in the rate design phase of the proceeding. Rates for electric consumers are structured in various ways, but typically they are divided into three distinct components:
- Customer charge — A per-customer charge independent of usage typically stated in $ per month.
- Demand charge — A charge based on the maximum demand (kW) placed on the system during a specified period of time typically stated in $/kW or $/kVa.
- Energy charge — A charge based on actual usage (kWh) during a specified period of time typically stated in $/kWh.
Most commonly demand charges are applied only to larger customers, although some utilities have recently proposed demand charges for smaller customers due to the availability of demand data from electronic smart meters.
An example of a rate structure with customer, demand, and energy charges
For many customers the rates used to calculate usage charges stay the same no matter when the energy is used. Time-of-use or time-of-day rates where usage rates are different for different periods of the day are often applied to larger customers and are now being applied to small commercial and residential customers in some regions. In some cases rates may also differ by season (i.e., summer vs. winter rates) and/or may vary by usage blocks (for instance a base usage block may be charged one price, while usage above the block amount is charged a different price). In some regions, there are two energy charges: one for delivery and another for supply. That way if a customer purchases supply from a non-utility supplier they are only charged the delivery charge by the utility. In other regions, the two are bundled into one energy charge.
An example of a simple time-of-day rate structure
During the rate design process, the method of allocating revenue between the different types of rate charges is also determined.