The Grisly Truth about Cost of Service Studies


They’re baaaack!

No, not ghosts — rate cases. Specifically, electric utility rate cases, and the cost of service studies that come with them. As targeted energy policies and technology advances have deadened the overall growth in demand for electricity, utilities and regulators have been feeling a bit haunted by complex questions about the future of the energy utility industry. At the same time, aging infrastructure, the digital economy, and technological advancements have put pressure on utilities to increase investments, particularly in their distribution systems and software. As a result, the number of general rate cases has been creeping up in recent years.

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In these rate cases, many regulatory participants are coalescing around the use of the class cost of service study (CCOSS) as a direct tool of rate design. This is a break from tradition, where those parties considered CCOSSs informational, but not dispositive—in other words, more useful as a framework for discussing class revenue requirements and rate relationships than for determining the direct prices that customers pay for electric services.

A CCOSS works to allocate costs among rate classes, but does not work to set rates for individual customers in those rate classes. EQ Research addresses this topic in our new report, New Uses for an Old Tool: Using Cost of Service Studies to Design Rates in Today’s Electric Utility Service World.

This report explores the history of the CCOSS tool and rate making, and describes how the modern CCOSS is poorly suited for answering challenging rate design questions regulators face today. In doing so, we look at both regulatory economic theory, with a focus on James C. Bonbright’s foundational texts, as well as the CCOSS tool itself. (See below for an overview of Bonbright’s principles of public utility rates.) We highlight the many framing, data, and methodology choices and challenges facing those preparing and questioning the tool and its results.

In short, while certainly more useful than a Ouji Board, the CCOSS is an incomplete tool to make decisions about how individual residential and small commercial utility customers pay for electric service.

With this renewed focus on cost of service, old questions are new again. If the CCOSS cannot properly justify decisions about cost allocation among individual households and businesses, what should stakeholders do? Which rate structures are fair? Which services should a public utility provide? Which services should have a price and who should pay? And what do all these spirits want????

Not every question can be answered with a CCOSS, but with a better understanding of the history of cost of service and its expression in a modern CCOSS, regulators and stakeholders can use this tool to reach better outcomes for customers and utilities. This report offers that historical perspective, along with recommendations on how to think about rate structure and how to use CCOSSs in today’s rate proceedings. (See below for specific questions regulators can ask.)

So don’t be spookedclick here to check out the report. Also be sure to check out our Policy Vista services so you can stay on top of rate cases and rate design proceedings, or contact us about our custom consulting services from our policy experts.