ABSTRACT

Electricity pricing is a multidisciplinary function involving accounting, economics, engineering, finance, and regulatory law. Engineering principles play a particularly key role in developing effective cost-based prices for electricity by taking into account these technical requirements of providing electric services. The chapter focuses on some of the essential engineering principles that are utilized in the production of an electric cost-of-service study and the subsequent rate design for retail electric service. It addresses key cost-of-service analyses that specifically rely on engineering principles and methodologies. The accounting data and the engineering inputs interact in the cost assignment step in accordance with the cost causation criterion. Allocation factors are based on cost causation criteria, which are driven by various technical characteristics of the power system. The chapter describes the minimum distribution system analysis of load diversity, and analysis of demand and energy losses.