Cost Allocation for Regulated Utility Pricing: Regulated utilities are generally permitted to charge users with the costs
Question:
Cost Allocation for Regulated Utility Pricing: Regulated utilities are generally permitted to charge users with the costs to service the specific class of users. Cost allocations are required to share common costs. For example, for an electric utility, common costs include costs of generating and distribution facilities. Variable costs, such as fuel costs, are normally considered direct.
Common costs are distributed on the basis of the capacity demanded by each class of users. Capacity may be measured in terms of peak use in a day or peak seasonal use. An alternative measure is to use average demand for allocating capacity charges.
Average demand is the same as the actual use of electricity and. hence, is the basis for charging direct costs to users.
For example. Progressive Electric Company serves a three-county area. The area has two classes of users: ( I ) residential and (2) manufacturing. During the past year, the following data were generated:
The following costs were reported during the same period:
Required:
a. Calculate the portion of direct costs allocated to each user class (residential and manufacturing).
b. The $3 million in common costs can be allocated to each user class (residential and manufacturing) by selecting one of three alternative capacity measures (daily peak use, seasonal peak use, or average demand) as the allocation base. Calculate each of the three possible common cost allocations for each user class.
c. What are the three sets of rates per kilowatt-hour (common plus direct costs) charged to each user class under the three alternative allocation bases?
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