Cost of Service Ignores Load Factor

Fortnightly Magazine - February 1 1995
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In his recent article, "Cost-of-Service Studies: Do They Really Tell Us Who's Subsidizing Who?" (Nov. 15, 1994), Mark Quinlan proposes an alternative cost-of-service methodology. He claims that under current cost-allocation methods (and given adequate capacity to meet demand) a rate class with increasing sales subsidizes a rate class with decreasing sales. This may not be true, depending on how costs have previously been assigned to rating periods, classified, and allocated.

As the article notes, between 1984 and 1991, United Illuminating Co.'s (UI's) industrial sales have decreased by 25.4 percent while its residential sales have increased by 12.7 percent. Contrary to Mr. Quinlan's assertion, however, a higher proportion of costs has not been supported by residential sales. UI has never used major customer classifications (residential, commercial, industrial) to establish its cost-of-service rate classes; instead, UI uses rate schedules based on customers' load characteristics. Therefore, what Mr. Quinlan refers to as large industrial rate classes are actually a mix of commercial, industrial, and a few high-use residential customers. These rate classes, general service time-of-use (GST) and large power time-of-use (LPT), have increased usage much more over time than UI's primary residential rate (R) class. From 1983 to 1993, GST's usage increased by 1,302,705 percent, from 44 megawatt-hours (Mwh) to 573,234 Mwh. LPT usage increased 36.3 percent, from 1,305,316 to 1,779,278 Mwh. In this same time period, R usage increased by 23.7 percent, from 1,143,905 to 1,414,781 Mwh.

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