CARY, North Carolina – A new EQ Research study examines the use of electric utility class cost of service studies (CCOSS) in utility rate cases and rate design and explains why a CCOSS is an incomplete tool to make decisions about how customers pay for electric service. The report, New Uses for an Old Tool: Using Cost of Service Studies to Design Rates in Today’s Electric Utility Service World, also explores the history of the CCOSS tool in ratemaking and how the industry can best use the tool in reaching better outcomes.
After a lull in the 1990s and 2000s, the number of general rate cases has been surging in recent years. Aging infrastructure, the digital economy, and new technologies and customer needs are driving investments in distribution systems and software, all while many utilities experience stagnating electricity demand.
“The electricity regulatory arena has started the conversation about changing industry circumstances. The CCOSS, however, can muddy this conversation as much as it is purported to inform it,” says report coauthor Pamela Morgan, an Energy Policy Expert for EQ Research.
In today’s rate proceedings, utilities, regulators, and industry stakeholders are coalescing around the use of the CCOSS as a direct tool for rate design; but traditionally, CCOSSs were considered informational – useful as a framework for discussing class revenue requirements and rate relationships, but not for determining the actual prices charged for electric service. The modern CCOSS is poorly suited for answer the challenging rate design questions the industry faces today.
“The use of cost of service studies has assumed new importance as more data is available, but the CCOSS is not innately objective. CCOSSs provide perspective, but not answers,” says Morgan. The report offers recommendations to stakeholders and regulators on how to think about rate structure and the role of the CCOSS. Co-authors Morgan and Kelly Crandall also offer suggestions for refreshing the CCOSS methodology and making studies more transparent and usable for non-utility parties.
The report is available to download here, and a blog summarizing the report findings is available here.
EQ Research provides policy research, analysis, and incentives data services to businesses, non-profits, and other energy stakeholders. EQ Research’s areas of energy policy expertise include state legislative and regulatory policy, local government policy, financial incentives, renewables portfolio standards, renewable-energy credits, solar policy, net metering, interconnection procedures, general rate cases, rate design, distributed generation, energy storage, and electric vehicles.