Rate Setting Process for Different Utility Types

Electricity is something that everyone purchases, but many people don’t take the time to think about how their rates are set. The process for determining and changing utility rates depends completely on the type of company. Investor-owned utilities are private companies that operate on a for-profit basis. They are usually owned by shareholders and their financial responsibilities and priorities lie with their owners. They are much more highly regulated than the other two main types of electric companies, because they often have a legal monopoly in their service area. Since their goal is to make as much money as possible, they must be overseen to make sure they are not taking advantage of customers. Municipalities are owned and operated locally by the government, so it is much easier for citizens to voice their opinions and make any disapprovals known to the company. Coops are owned directly by their customers, and work to make their rates as fair as possible so each customer is covering the cost of their own service. All three of them regularly must update their rates to account for changes in revenue requirements, and they all have different procedures to do so.

Investor-owned utility companies operate like many other businesses; they are owned by (and ultimately accountable to) shareholders. Many are quite large and have different divisions that allow them to serve customers with different energy requirements. They serve about 75% of the population and are subject to governmental regulation as they often have a monopoly in their service area. For Investor-owned utility companies to adjust their rates, they must go through a formal legal process overseen by their regulating agency. First, they must apply to their regulator for their desired rate or policy change. Sometimes, this process is done on a schedule where companies will reevaluate their rate requirements regularly, but not always. Once their application is submitted, interested parties can provide evidence to defend the proposed increase in rate, or to support an opposing argument. These parties can be statutory, i.e., the utility company itself or an appointed consumer advocate. Their right to participate in the process is guaranteed by law. Intervenors are sometimes permitted to present evidence after demonstrating their interest and why they should be allowed to participate. After the hearing process, there is typically a settlement where the parties negotiate and decide on an agreeable rate. The regulatory body will approve or deny the agreed upon changes and set effective dates. These decisions can be appealed by any of the involved parties until the effective date passes and the change is finalized.

Municipalities are electric companies that are owned and operated by the local government. They often provide other utility services, including water, gas, internet, phone service, or garbage disposal. Their financial and service responsibilities are to their citizens, and they operate as a not-for-profit entity. Because they are accountable first and foremost to their customers, they are highly incentivized to keep rates just and reasonable. Their regulation happens locally at city council meetings and public hearings, and they are ultimately held accountable with their citizens’ votes. In some places, they are also regulated by their state’s public service commission, but local public opinion is the biggest influence on their rate changes.

Coops are a hybrid of investor-owned companies and municipalities because their customers directly own the company. They are typically not-for-profit, but their responsibilities lie with their owners, who are also utilizing their service. They exist mostly in rural areas and were originally formed to provide service to places that investor-owned companies weren’t able to cover. They are usually run democratically, governed by a board who are elected directly by the customers/owners. Like investor-owned utilities, they are also sometimes governed by their state regulatory commission. Because all the customers are owners of the company, the coop will work to make sure that rates are equitable between all members. Rates are usually formulated so that the utility bill that each customer is responsible for covers the cost of service that customer as closely as possible. Rates can be changed as frequently as needed to accommodate any changes in revenue requirements.

With such a wide variety in utility companies across the country, it can be nearly impossible to keep up with all the rate changes happening on a daily basis. The processes are completed at different speeds, with different regulations, and can have drastically different results based on the type of company. RateAcuity provides accurate, up-to-date rates for all these different types of companies, so you can see current and historical rates, no matter where they might be in their adjustment process.

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