How Electric Rates are Determined
By Chris Schweitzer, General Manager, Auburn Electric
Periodically, we receive inquiries from customers to explain how electric rates are determined. The answer can be somewhat complex. Not only because there are multiple components that make up your electric bill, but also because of how utilities like electricity are regulated. To help our residential and business ratepayers have a better understanding of electric rates, we’re sharing a series of blogs that explain electric rates and regulations and, more importantly, what a critical asset Auburn Electric is to our community. This first blog outlines how rates are calculated. Over the next few months, look for blogs on how utilities are regulated, how we purchase power and how the electric utility impacts economic development.
The cost of electricity is determined by two primary components: the cost of wholesale power and the cost of delivering that power to customers.
Cost of Wholesale Power
Cost of power is a significant component that makes up your electric bill. Cost of power is just what it sounds like—the cost of the generated electric power itself. Some utilities generate their own power, while many others like Auburn Electric purchase it from wholesale producers of power. In our case, we are currently under contract to purchase power from Indiana & Michigan Power, or I&M, a division of American Electric Power (AEP). This contract has been in place since 2009 and was approved by the Federal Energy Regulatory Commission.
The power is generated by I&M and transmitted to Auburn Electric over the regional transmission grid. Under this arrangement, Auburn Electric does not own or control the physical infrastructures to deliver wholesale power to the edge of our community. For example, I&M owns the transmission elements—the large poles you see along highways and the large substation located on Center Street.
The cost of wholesale power is our most significant expense, comprising about 80% of the overall rate for the utility. The amount we pay I&M for power is based on I&M’s cost of service study and our contract with them. It is important to note that Auburn Electric does not have control over these costs, but we monitor them and participate at regulatory venues when aspects of those costs are under review or consideration for change.
Cost of Local Delivery Service
Once Auburn Electric receives the wholesale power from I&M, we then distribute the power to our customers throughout the community over our own infrastructure, which includes distribution substations and all the electric infrastructure to homes and businesses. The cost to do this is what we refer to as cost of service. It is the total costs incurred by Auburn Electric in providing service to all ratepayers, divided among the different classes of service (residential, commercial, industrial, etc.). Cost of service, which comprises 20% of our overall cost, also includes the fixed operational costs of our infrastructure, buildings, equipment, technology, salaries and wages, supplies, etc.
Cost of Service Study
The costs to serve different types of customers is determined through a cost of service study. Utilities typically do a cost of service study every few years to ensure costs are well defined and understood. These studies—which are done by an independent professional—examine usage, delivery type, power and maintenance costs, and capital expenditures. They help the utility understand the fair and equitable allocation of the costs to each rate class. Our most recent cost of service was completed in 2013, and we have begun efforts on an updated study to reflect current costs. This cost of service study will play a critical role in updating our rates.
AE is constantly working at actively managing our costs to ensure sound investment in our infrastructure, operations, service and staff—the aim is always to provide appropriately balanced system safety, reliability and cost.
Delivering Quality Power for Years to Come
As a municipally-owned and -operated utility, Auburn Electric is committed to being good stewards of this community asset. Our focus is on safety, people, customer service and system health. We’ve put the right people and processes in place over the past few years. Additionally, we’ve been reinvesting in our infrastructure to solidify our system and service. Every action we take is with the intent of delivering reliable quality power to ratepayers and the community that counts on us.
Next time, we will cover how utilities are regulated and what that means for rate-setting. Follow us on the City of Auburn Facebook page to see when the next blog is out.