Cost-oriented Pricing

Abstract

The above passage from ICC shows that utility rates are a product of cost, with costs allocation a major determinant in arriving at a particular rate. However, even in such rate-setting procedure cost allocation is not done equally across the board, but rather is based on the type of electric user. Rates are reached by dividing customers into classes on the basis of related use.

In setting rates for public utilities, the Illinois Commerce Commission (ICC) traditionally allowed an immediate 100 per cent cost recovery for any new utility plant. Allocation of fully distributed costs to the rates gave the image of fairness and equality. A rate structure allowing for full recovery of costs is determined for each customer class and then phase-in rates are plugged in. This method was workable and effective because inflation, interest, and construction costs were low and stable and electricity demand was steady.

(Illinois Commerce Commission, Phase-in: An Alternative Regulatory Approach (Springfield, Ill.: Sunset Monographs, 1985) pp. 1–15)