Sunday, October 6, 2013

How are electric utility rates set?

How are your electric utility rates set?

Image courtesy lydiashiningbrightly

If you answered, "THE FREE MARKET!" you would be wrong!

The process for setting electric rates varies from state to state. Generally speaking, privately owned electric companies are highly regulated by the Federal Energy Regulatory Commission and state regulatory commissions.

In a case about whether the state of Illinois could regulate grain elevator rates, the Supreme Court held in 1876 that the government can regulate businesses involving "the public interest."

Many of the state electric regulatory commissions grew out of railroad commissions founded in the 19th century. Private electric utilities initially resisted regulation, but they changed their tune when municipal electric utilities started to spring up. By 1917, there were commissions regulating electricity in 33 states.

Today, utility ratemaking occurs in rate cases before the public utilities commission. The utility submits its financial information to the commission. The commission then analyzes how much revenue the utility company needs, then determines what a reasonable rate will be for the utility to charge consumers. A rate case is similar to a court case, with evidentiary hearings, records, and a written report and order.

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