EBF 483
Introduction to Electricity Markets

5.4 The Structure of Electric Utility Tariffs


5.4 The Structure of Electric Utility Tariffs

In this final section, we'll have a look at utility tariffs, which, remember, are the contracts between the utility and its different types of customers. These tariffs come out of rate cases, and they specify the prices that the utility may charge to each type or "class" of customer and other terms of service.

Since tariffs are determined by each individual utility for each of its types of customers, what is in the tariff varies widely. The tariff for your home or apartment may be a single page long (mine is about that long) with a single charge per kilowatt-hour of electricity that you use. If you have solar panels on your house and want to sell surplus electricity back to the grid, then your tariff will be a little more complicated, and would include the various terms and conditions (including the price) under which you may sell electricity back to the utility. If you work for a large company or manufacturing facility, you may find that the tariff is very long and bewildering, with an array of different charges.

In general, tariffs for larger customers (like manufacturing facilities) are much more complex than tariffs for smaller customers (like individual households). This does not mean that prices are lower for small customers - historically smaller residential and commercial customers have in many cases had higher electric rates than large commercial and industrial customers.

Electric utility tariffs are generally public documents and you can often find them on the internet. You can find examples of electric tariffs for Pennsylvania here:

Some of the types of charges that have traditionally shown up in electricity tariffs include:

  • Generation charge:
    The price paid by consumers to cover the cost of running power plants or purchasing power from generation companies.
  • Demand charge:
    A special charge based on the highest amount of electricity used over the course of a month. Imposing a demand charge requires that a utility has a special type of electric meter that is able to record electricity usage in specific time increments, such as an hour or half-hour, so that the utility is able to identify the point of peak demand for a given month.
  • Transmission charge:
    The price paid by consumers to cover the cost of transmission lines, or the cost of transmission service purchased from other companies.
  • Distribution charge:
    The price paid by consumers to cover the cost of the low-voltage distribution system.
  • Ancillary service charges:
    Prices paid by consumers to cover the costs of backup power and other equipment used to keep the electric grid stable and reliable. We'll get into ancillary services later in the course.

Specific state policy measures may also show up as special charges on electric utility tariffs. For example, many states that went forward with the restructuring of their electric utility sector imposed special charges called "Competitive Transition Charges" to help utilities pay down old debts. Other states fund renewable energy or energy efficiency programs through a "System Benefits" charge that shows up on consumer electric bills and in tariffs.