How are utility rates set?

The investor-owned utilities periodically submit an Application to the CPUC requesting to collect a certain amount of revenue from its customers. This amount of revenue is intended to cover the utility’s costs plus a pre-approved rate of return, established in the Cost of Capital proceeding. The CPUC reviews this request and approves or modifies the amounts requested. This is the General Rate Case Phase 1 Process. Think of this as determining the size of the “pie” that the utility can have.

Next, the utility submits an Application to determine how much of the revenue (or “pie”) should be collected from different customers. For example, how much of the pie residential customers should pay for versus commercial or agricultural customers. This is determined by examining what and how much of each of the utility’s services are used by different types of customers. In most cases, all types of customers use all of the utility’s services, but some types of customers may use more or less of some services than others. This is part of the General Rate Case Phase 2 process. One can think of this as "slicing the pie."

Lastly, the utilities propose different methods for collecting the 'slice' of the pie from each customer class (e.g. residential, commercial, agricultural). At its most basic, a utility divides the amount that needs to be collected from each class by the forecasted or historical amount of sales in that class, resulting in a ¢/kWh rate. Other rate components are also derived from this process.

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