5.2 RATES AND BILLING Rates are set through regulatory processes designed to be transparent and to rigorously protect customer interests. Introduction to How Utilities Are Paid Utilities are paid based on the electricity rates charged to their customers. Rates charged cover the actual costs of electricity, including the initial and ongoing costs of generation, transmission, and distribution; the costs of all ancillary services; and electricity market costs and taxes. Regulated utilities are not allowed to earn profits in the way that private companies are, but they are permitted to earn a regulated rate of return, which will enable them to attract the capital they need for ongoing investment in their infrastructure.
How Rates Are Set Electricity rates are typically set on a multi-year basis through an extensive review process involving the utility, the associated regulatory body, and key stakeholders. This process is designed to include a full and transparent view of all costs associated with the full electricity supply chain, along with forecasted customer requirements. The regulatory process includes the opportunity for stakeholder input in the interests of helping ensure reasonable rates are set. 1. Prices are set based on a forecast of how much it will cost to supply customers with the electricity they are expected to use over the next rate period and the capital investment needed to support and expand the electricity grid. 2. Distribution utilities—as the customer-facing part of the electricity system—issue and collect on customer bills and transfer portions owed to generators and other supply-chain participants. 3. Regulators review prices regularly and reset them if necessary. Regulation varies from one province to another, and rates can vary from one utility to another within the same province. Variables impacting rates include the generation supply mix, the distance the electricity must travel, and the population of customers being served. 4. Remaining variances between forecast and actual costs, whether a surplus or shortfall, are factored into the next price-setting review.
Types of Expenditures Capital expenditures Capital expenditures refer to investments in infrastructure and equipment, which typically have a multiyear service life. The cumulative value of all such capital investments is what utilities are allowed to earn a rate of return on (the “rate base”). For accounting purposes, these assets depreciate over multiple years, often beyond the rates that are being set. Expenditures on large information and technology solutions, including both hardware and software, may also be capitalized. There is a lot of discussion now regarding “capitalizing the cloud”—meaning allowing utilities to include the value of their growing investments in cloud-based software in their rate base, even though these are not tangible in the same way that traditional capital investments are.
Electricity Canada | Electricity Fundamental in Canada: Student Handbook
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