CO$T OF SERVICE
Study
By Pat McGonagle, Vice President & Chief Financial Officer The Energy Cooperative (TEC) reviews rate design annually as one of the first steps in the budgeting process for the upcoming year. Every four years the cooperative engages a third-party firm to prepare a Cost of Service Study for both Licking Rural Electrification (LRE) and National Gas & Oil (NGO). The Cost of Service study helps determine the Pat McGonagle revenue requirement for each cooperative which helps management with rate design for the upcoming year. The cost of service study is one of the most effective analytical tools that the cooperative can rely on for designing rates that equitably assign cost responsibility to each member rate class, to the mutual benefit of both the cooperative and its members. The Prime Group was engaged to prepare the cost of service study using standard methodologies that have been established by industry experts, accepted by regulatory commissions, and approved by the courts. Implementing cost-based rates helps ensure that one class of customers does not subsidize another class of customers. The three-step process used in the study involves the functional assignment, classification and allocation of all costs based on cost causation. In the first step, costs are assigned to the major functional groups related to providing service. A few of the functional assignments used in the study were MYENERGYCOOP.COM
purchased power costs, distribution costs and other costs. Functionally assigning all costs permitted TEC to examine our revenue requirement in finer detail and to assign cost responsibility more accurately in the next two steps of the study. In the second step, the major cost drivers were classified for each group of functionally assigned costs. Identifying the major cost drivers allowed the service characteristics that give rise to the costs to serve as a basis for allocation. Once the costs were functionally assigned, they were classified by the following major cost drivers: energy-related costs, demand-related costs, and customer-related costs. In the third and final step, the functionally assigned and classified costs were directly allocated to the customer classes based on an allocation factor that is representative of the service characteristic that drives the cooperative’s costs. Energy related costs were allocated based on the amount of electric (kilowatt hours) or natural gas (ccf) used by the customer class and demand related costs were allocated based on the appropriate measurement of the maximum demand that the customer class places on the system. The cost of service study prepared by the Prime Group allowed the cooperative to understand the impact of its costs more fully and to design rates that properly assign cost responsibility to each member rate class moving forward. This study ultimately provides mutual benefits to both the cooperative and its members as it helps eliminate any subsidies amongst member classes. These new rates will go into effect in January 2021 and affect each member class differently.
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