Page 32 - EPSI Magazine Issue 8 final 2018.indd
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Tariff composition
depends on (NB: Return× RAB = Return on
Investment)
Operation and Maintenance costs
• Based on cost of plant and Equipment invest-
1. Repairs and maintenance, ed, less accumulated depreciation.
2. staff costs, • In some regulatory jurisdictions, Working
3. transport, Capital Allowance is added to the asset base
(i.e. Net plant value)
4. administration costs, • The resulting Rate Base then becomes: Net
5. insurance etc Plant plus Working Capital Allowance.
Investment related costs
Customer categorization
1. Debt service/ capital recovery,
2. Return on Investment, • Different rates/charges may be set for
3. taxes different customer classes.
• Customer classes are determined by
Other Tariff Components grouping customers with similar usage
characteristics.
Incentives to reduce costs and • Customers with similar usage characteristics
operate efficiently impose similar costs on the utility.
• Examples of customer classes include: resi-
dential, commercial, medium industrial, large
Cost of capital and rate of return industrial, street lighting.
• Some classes are further divided into
Investors commit funds in the utility business in sub-classes as needed.
anticipation of earning a ‘fair’ return on invest-
ment
Customer categorization
A return on investment is deemed to be “fair” if it
satisfies the following conditions: Customer Cost Allocation or Cost of Service, is the
second step of the tariff design process. (NB: First
• Enables the utility to operate successfully
Step: Revenue Requirements and identification
• To maintain the financial soundness of of various cost).
the company
Cost Allocation requires good insight of utility
• To attract sufficient capital business :
• To compensate investors for risk assumed. 1. Engineering and Operations
Return on Investment: Cost of Capital × Net Fixed 2. Economics and Finance
Asset.
3. Customer Issues
Regulatory asset base (or rate base) First step of the cost allocation process is CUS-
TOMER CLASSIFICATION. Factors used for cus-
It is the regulator’s view of the investment that tomer classification are:
a utility has made to provide the regulated • voltage level
product.
• Load Profile: Load Factor, Coincident Factor,
Determining the rate base is very crucial because: Diversity Factor, Time –of-use etc.
• The total amount of money allowed investors • Economic activity
