Cost of Service Study: 101, by Eric Eriksen

The electric utility rate making process consists of three parts:
1. Cost of Service Study
2. Revenue Requirement
3. Rate Design
The first step in the utility rate making process is performing a Cost-of-Service Study (COSS), which allocates the cooperative’s costs to members based on their power usage patterns. We all have unique usage and only want to pay for the portion that is used to serve us electricity.  
For example, the way we heat our home, when we wash our dishes, how many loads of laundry we clean or when the grandkids visit all contribute to our individual needs. The cooperative incurs a unique cost for serving each one of us.
SLVREC hires an independent third-party expert to perform the Cost-of-Service Study using an industry standard methodology provided by the National Association of Regulatory Utility Commissioners (NARUC). This standard process uses the three steps shown in the figure below:
Functional Assignment – separating costs into categories based on their primary function, Ex. How much cost is associated with Purchased Power Costs, Distribution Costs and Other Costs?
 Classification – grouping costs into categories based on fixed or variable components, i.e. the 3-part rate design we use today (Customer, Demand, Energy).
 Allocation – distributing classified costs associated with member usage patterns (Rate Class).

Data collected from a “test year,” which includes 12 months of data ending December 31, is used.  Since we performed the most recent COSS in 2024, then we used 2023 test year data. Cost data is based on audited financial statements and member data is based on 30-minute interval readings for over 13,000 meters across 12 months. This is a very detailed process consisting of large quantities of data to analyze.
The classification step associates costs with the three-part rates in place today (refer to graphic below). Before automated smart metering devices were available, utilities were only able to measure energy usage (KWH). At that time the industry used two-part rates consisting only of energy (KWH) and a customer charge for other costs. The benefit of smarter metering devices is that we can now associate usage with precise time and electric system demand (KW). Utilizing this more comprehensive data results in costs being allocated more closely to an individual member’s power usage patterns. In the future, perhaps in 10 to 20 years, we will see the industry shift to a four-part rate as metering devices become even smarter.

Once the study is completed, then the cooperative can see if costs and member usage patterns have changed over time. Typically, costs are rising, and members’ usage patterns change with technology and better utilization of time-of-day rates. This information helps the cooperative realign costs with members to minimize subsidies between rate classes. This ensures you are paying only the portion of electric system costs associated with serving you rather than other members. SLVREC’s practice has been to conduct a COSS about every three years to maximize cost efficiency. The changes we experience all around us today are faster than we remember decades ago, and technological improvements are making it easier to perform a COSS. So, we likely will see studies performed more frequently in the future.
We’re here whenever you need us. Connect with us online, in person, or through our social media channels. However you choose to connect, please let us know how we can serve you better.