Electric Cost-of-Service – Essential Concepts for a Changing Industry

Short breaks will be taken throughout the course (30 minutes total)

Course Overview and Introduction

This session will introduce the foundations of cost-of-service analysis, including its background, requirements, and points of overlap with broader pricing practices. It will familiarize participants with the instructors and provide a roadmap of the process that will frame the rest of the course.
Key ideas:

• Steps in the ratemaking process
• Steps in the cost-of-service process
• Developing cost-of-service analysis – different perspectives
• Interpreting cost-of-service results

Overview of Cost-of-Service Process

This session will provide a high-level overview of the entire cost-of-service process and the ecosystem in which it operates. It will introduce the key team members, identify the various stakeholders involved, and outline the critical regulatory frameworks—from state and local to federal mandates—that govern the practice.
Key Ideas:

• Overview of Cost-of-Service Process
• Process overview
• Introduction
• State regulatory process
• Local regulatory process
• Federal mandates
• The cost-of-service team
• Stakeholder

Study Preparation

This session will focus on the critical groundwork required for a successful cost-of-service study. It covers key preparatory steps, from selecting the study period and conducting essential load and system analyses to integrating financial planning and load forecasting.
Key Ideas:

• Introduction
• Four important considerations
• Common supporting analyses to ensure success
• Financial planning
• Study period selection
• Load research study
• System loss study
• Resource planning studies
• Minimum system studies
• Accounting for direct assignment
• Lighting study
• Load forecasting

Morning Break – 15 minutes

Policies, Objectives, and Strategies

This session will define the core policies and objectives that guide a cost-of-service study and shape its strategic outcomes. It explores key implementation strategies, including the choice between marginal and embedded costs, cost unbundling, and the design of various pricing and cost recovery mechanisms.
Key Ideas:

• Introduction
• Policies
• Objectives
• Strategies
• Marginal vs. embedded costs
• Cost unbundling
• Competitive pricing
• Time-of-use pricing support
• Real-time pricing support
• Varying return on investment
• Cost recovery through rules and regulations
• Other strategies

12:00 p.m. – 12:30 p.m. ::  Lunch Break

Revenue Requirement

This session establishes the critical concept of revenue requirement, which defines the total income a utility must collect from customers. It examines the different calculation methodologies for investor-owned utilities, cooperatives, and municipals, covering key components like rate base, the weighted average cost of capital (WACC), and test year adjustments.
Key Ideas:

• Introduction
• Steps in rate design process
• Definition
• What is included in revenue requirements
• Test year concept
• Known and measurable adjustments
• Used and useful adjustments
• Components
• Utility approach (IOU)
• FERC Uniform System of Accounts
• Rate base
• Components
• Definitions
• Return on rate base
• Weighted average cost of capital (WACC)
• Cost of debt
• Cost of equity
• Utility case studies
• Utility approach (regulated cooperative)
• Cash approach (municipal)
• Debt service coverage ratio
• Comparison
• Adjustments to base rates
• Introduction to cost-of-service model

Afternoon Break – 15 minutes

Revenue Requirement (continued)

This session provides hands-on practice applying key revenue requirement concepts through practical classroom exercises. Participants will work through test year adjustments for two common scenarios: integrating a new large customer load and adding a new generation resource.
Key Exercises:

• Classroom exercise No. 1: revenue requirement test year adjustment – adding a new load
• Classroom exercise No. 2: revenue requirement test year adjustment – adding a new resource

Cost Allocation Methodologies

This session will introduce the fundamental methodologies for allocating costs to different customer classes. It explores common approaches, including the distinction between embedded and marginal cost allocation, as well as bundled versus unbundled rate structures.
Key Ideas:

• Introduction
• Steps in ratemaking process
• Sample cost allocation methods
• Common approaches to cost allocation
• Embedded
• Marginal
• Common approaches to cost allocation
• Bundled
• Unbundled