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Cost Allocation Considerations and Methods for Electric Rate Analysis and Design for Rural Distribution Systems

The continuing increase in the cost of wholesale and retail electric rates has caused both consumer and regulatory attention to focus on the reasonableness of the rates being charged by utilities. Rate increases generally precipitate concern over discriminatory pricing questions. Because the resolution of rate discrimination issues in part involves a cost allocation study, it is important for the rural electric system to be aware of the general considerations involved in the development of a cost of service study. A complete allocation of electric service costs is not an exact procedure, and any cost allocation effort must also involve an analysis of the assumptions that are a part of the cost of service study, particularly if comprehensive customer demand data are not available. The general considerations involved in developing a cost of service study are outlined to define a technique to evaluate the impact of the assumptions that are a part of the allocation of demand related costs.