Cost Allocation and Rate Design

Chymko Consulting regularly conducts cost allocation and rate design studies for a number of electric and natural gas utilities. A cost allocation study allocates the utility’s rate revenue requirement to each of its rate classes according to each rate class’ share of the utility’s costs. The result is then compared to the revenues collected from each of the rate classes. The resulting “Revenue to Cost” ratio assists the rate design process by answering the following questions:

  • How do the usage patterns of a given rate class contribute to costs incurred by the utility?
  • Are the revenues recovered from a specific rate class are enough to offset the associated costs?
  • What is the degree of cross-subsidization across rate classes?

Chymko Consulting’s rate design studies consider these issues as well as other factors such as rate stability, simplicity, and ease of administration.