Calculating and allocating costs for non-traditional utility services.
Ralph Zarumba (email@example.com) is a director in the energy practice at Navigant Consulting. Koby Bailey (KABailey@Integrysgroup.com) is counsel at Integrys Business Services. Benjamin Grunfeld (firstname.lastname@example.org) is an associate director at Navigant. This article reflects the authors’ opinions and not necessarily those of Navigant, its clients, or Integrys Business Services.
Many public utilities are facing an expanded mission beyond that of providing traditional utility services in a safe, reliable and least-cost manner. More frequently, utilities now are being required to implement programs or deliver services to achieve broader societal goals. Statutory mandates are directing the public utility regulatory process through orders and tariffs to implement utility programs that promote job creation and environmental goals, and to implement certain technology applications.
Cost-of-service regulation – either embedded or marginal cost based – is at the heart of traditional utility pricing. The concept was conceived under the premise that a utility will aim to provide the services sanctioned by its license at the lowest possible cost. In a traditional cost-of-service regulatory environment, a utility functionalizes its costs as generation, transmission, and distribution. Generation costs are then further classified into demand (i.e., capacity), energy, or reliability (i.e., ancillary services), and allocated accordingly to customers or customer classes.