Cost of Service Studies
A cost of service study is an important ratemaking tool. It is generally recognized that a utility's rates should reflect the cost of providing service. A cost of service study helps to determine what it costs to provide service to a class of customers so that the utility can have assurance its rates are properly designed.
The first step in the study is to functionally assign all of the utility’s costs into major functional groups. Functionally assigning costs in this manner maximizes the effectiveness of the study for detailed pricing and marketing work, such as rate unbundling. The second step is to classify all functionally assigned costs as production-related, demand-related, customer-related, or specifically assigned (e.g. customer specific equipment). These classifications correspond to the major cost drivers and help in identifying cost causation. The third step is to allocate the functionally assigned and classified costs to all of the utility’s classes of customers. The classes of customers will generally correspond to the utility’s rate schedules and special contract customers.
The Prime Group provides unbundled cost of service studies for investor-owned utilities, generation and transmission cooperatives, distribution cooperatives, gas utilities, and water and sewer utilities.
The output of the cost of service study provides detailed information about the cost of serving each class of customers, such as operations and maintenance expenses, production costs, plant investment, operating margin and rate of return. We provide these results both as a final written cost of service report and as a cost of service spreadsheet model in electronic form so that you use the model for evaluating management decisions, for updating the models to keep them current or for further rate development. We can also demonstrate how to use the cost of service results for effectively targeting marketing and economic development efforts.
A current cost of service study is an important step in providing the necessary information for accurately pricing your services. It also provides the detailed financial information necessary for making cost effective management decisions.