SETTING RATES
---by Marla Marshall, CFO
One of the toughest responsibilities of your board is setting rates. The directors are tasked with determining an approach that will be fair and reasonable, promote efficiency, and make enough money to meet the needs of the cooperative. It’s a big job and a balancing act, for sure!
Setting rates follows this three-step process:
- Revenue Requirement
DSO is a distribution cooperative, which means that it buys electricity wholesale and distributes it to you, the member. The cost of wholesale power purchased is about 50% of the total cost to serve you. The other 50% is made up of labor, materials, trucks and fuel, interest, and taxes. DSO needs enough revenue to cover all those expenses and enough revenue to generate the cash needed to cover principal payments and capital credit payments. The 2024 budget shows that the total revenue required is just under $23 million.
- Cost of Service Study
The cost-of-service study (COSS) works to identify what it costs to serve each class (or type) of service. The COSS takes all the costs into consideration then allocates those costs to each rate class. Some costs will be the same across rate classes, but others will vary. It is easy to see how a large industrial plant takes more distribution equipment to get the energy it needs than does a residence. Other matters, such as when power is used (time-of-use), or how often/regularly the power is used (load factor), are also taken into consideration. Another important factor is how much power is needed at the time of highest use (demand).
- Rate Design
Once the COSS is done, a decision is made as to how to charge each rate class for its share of the costs. Rates are then set to ensure costs will be appropriately covered.
DSO recently conducted a COSS through NRUCFC, a third party consulting/financial firm. We can happily report that the COSS showed DSO is bringing in an appropriate amount of revenue!
The board is now considering the number and types of rates, electric vehicle charging rates, and various ancillary issues identified in the COSS.