Especially in today’s politically charged environment
Ken Costello serves as principal researcher for energy and environment at the National Regulatory Research Institute. Mr. Costello previously worked for the Illinois Commerce Commission, the Argonne National Laboratory, Commonwealth Edison Company, and as an independent consultant. He has conducted extensive research and written widely on topics related to the electric power and natural gas industries, and public utility regulation. Contact him at kcostello@nrri.org.
Ratemaking has always been a principal part of state utility regulation. It consists of three distinct phases: revenue requirements, cost allocation, and rate design. Ratemaking therefore determines how much revenue that utilities should collect from customers, from whom, and how.
Each of these decisions is contentious, requiring good information and judgment by regulators looking out for the public interest.
Ratemaking has far-reaching effects. It affects the ability of utilities to recover their costs, allocate costs between customer groups, and achieve predetermined regulatory and public policy objectives.
Primary objectives include the financial viability of utilities, the efficient use of utility service, and fairness to customers and the utility. A mantra often heard in regulation is just and reasonable rates, which translates into utilities recovering all of their legitimate costs, namely prudent cost serving customer interests.
Good ratemaking protects customers from incompetent utility management. And utility shareholders from capricious denial of cost recovery.
The public interest, or public good, refers to the common well-being or general welfare. It is central to policy debates, politics, democracy, and the purpose of government itself.