By Verbal Blakey, P.E.
When a community’s elected board sits down to set—or adjust—electric rates, it can feel like entering a foreign landscape of cost studies, regulatory mandates, and revenue models. Yet these fundamentals aren’t arcane secrets reserved for utility consultants. At its core, rate-setting is about matching the dollars your utility needs to collect with the outcomes your customers value most: reliable service, predictable bills, and a path toward long-term sustainability.
Below are eight essentials every board member should know before weighing a rate proposal. Whenever possible, I’ve added personal insights and examples—drawing on experiences with smaller municipal utilities—to help make each concept relatable and practical.
1. From Revenue Requirement to Rate Schedule
Every rate decision begins with a simple question: How much money does the utility need to collect to cover its costs and obligations? We call that the revenue requirement. It combines operating expenses (staff wages, materials, regulatory fees), maintenance and capital costs (replacing aging transformers, upgrading lines), and financial obligations (debt service, reserve funds). Once you know that target number, the next step is designing a rate schedule—deciding who pays, how much, and when.
A helpful analogy is a family budget: list monthly expenses like mortgage, car payments, groceries, utilities, and toss in savings goals (retirement, rainy-day fund) plus non-routine costs (home repairs, gifts). Just as a family tallies everything to know how much income is needed, a utility totals all its anticipated costs—including reserves for emergencies—to define its revenue requirement. From there, rate designers figure out how to distribute that “household” cost among customers, making sure each pays their share.
By seeing rates not as arbitrary percentages but as the logical outcome of finances, board members can ask sharper questions like, “Are we capturing all hidden maintenance costs?” or “Which expenses drive our biggest spikes?”
2. Cost Allocation and Customer Classes
Not all customers use—or benefit from—the system in the same way. A small commercial bakery pulling heavy loads during business hours impacts the grid differently than a house whose usage peaks at night. Utilities group customers into classes (residential, commercial, industrial) and allocate costs so each class covers its share without cross-subsidizing another. Rate equity isn’t about splitting bills evenly—it’s about aligning charges with the costs each group imposes.
In practice, there can be temptation to let businesses carry more of the load so residential rates stay low. But I’ve seen boards face trouble when a large commercial customer—say, a local grocery store—closes or relocates. Suddenly, residential customers must make up that missing revenue, often resulting in a hefty rate hike. Likewise, when new subdivisions come online, the incremental residential load takes years to pay for the infrastructure investment, prolonging a financial lag. By reframing “equity” as ensuring each class truly pays its fair share, boards can avoid scenarios where one customer group quietly subsidizes another—and where losing a heavy‐series customer causes much larger pain for everyone else.
3. Fixed Charges vs. Volumetric Rates
Within each customer class, bills typically combine a fixed monthly charge (to recover connection and basic administration costs) and a volumetric charge based on kilowatt-hours consumed. Fixed charges stabilize revenue—so if overall usage dips (for example, during a mild winter), the utility still meets its obligations. Volumetric rates, on the other hand, incentivize conservation: if customers use less, they pay less. Striking the right balance is key to both utility stability and customer behavior.
Board members often ask why their customer charge differs from a neighboring cooperative’s. It’s important to set the fixed charge based on your utility’s actual cost per customer—if you have more customers per mile of line than a co-op, your per-customer costs will be lower. Many utilities find they can keep the fixed charge below the co-op’s rate, which feels more competitive to customers while still funding operations.
Another twist is the rise of behind-the-meter generation like rooftop solar. A customer with solar generation buys fewer kWh from the utility, but the cost to serve them (line maintenance, meter reading, reliability) is the same as for a non-solar customer. If the fixed charge is set too low, non-generating customers will end up subsidizing those with solar panels. Conversely, when boards resist raising the fixed charge—often out of concern for fixed-income households—they can inadvertently saddle low-income residents who live in less efficient homes (and thus use more kWh) with higher volumetric costs.
4. Regulatory and Policy Constraints
Municipal utilities often aren’t regulated by state public-utility commissions, so they don’t face formal cost-of-service filing deadlines or mandated low-income assistance programs. That said, you still need to be aware of any embedded policy goals—like encouraging renewable adoption—and ensure your rate design allows you to fund those initiatives. Even without a regulator, it’s wise to maintain a calendar: if you anticipate a major rate study every five years, build the internal schedule to gather data, engage the public, and fine-tune allocation methods well in advance.
5. Long-Range Planning and Revenue Stability
A one-time rate increase can patch a revenue hole, but robust boards look beyond the next budget. Developing a five-to ten-year financial forecast lets you model capital projects, debt retirement schedules, and trends in operating costs. This approach helps you avoid “rate-shock” years—when a large capital project demands an abrupt rate jump—by phasing in smaller increases over time.
For example, when a community expects a new industrial customer, you might delay certain infrastructure upgrades until you know how much load they’ll bring. Conversely, in a case where a utility hadn’t raised rates for over a decade, they suddenly had to hike rates by 25 percent just to pay bills because reserves had been zeroed out. Customers who’d benefited from low rates for years then found themselves covering costs that should have been shared over the past decade. By using multi-year forecasts, boards can space out modest annual increases, customers accept a 2 percent bump more readily than a sudden 25 percent spike.
6. Transparency and Customer Engagement
Rate adjustments touch every ratepayer’s pocketbook, so clear communication is as vital as technical design. Drafting customer-friendly fact sheets—written in a simple Q&A format—can spell out why an increase is needed, how funds will be used, and what could happen if rates stay flat. Too often, technical memos go unread. A concise Q&A sheet invites honest dialogue and helps customers—and board members—focus on the big picture.
Consider hosting a town hall where staff walk through the key points, then answer common questions in real time: “Why can’t we postpone a transmission line upgrade?” or “How will this rate affect my electric bill next winter?” By treating rate‐setting as a two-way conversation, you transform board members from passive approvers into community stewards.
7. Risk Management and Contingency Planning
Unexpected events—extreme weather, fuel-price spikes, or sudden demand shifts—can derail even the best plans. Building a modest reserve into your revenue requirement or scheduling periodic “true-up” adjustments (where actual costs are compared against collected revenues) provides a safety valve.
I’ve seen boards assume that after a severe storm, FEMA will cover rebuilding costs. In reality, FEMA requires the area to be declared a disaster first, then covers only 75 percent of approved expenses—and it often takes two years and a nearly full-time employee to secure those funds. In the meantime, crews are out restoring power at $250,000–$500,000 per week in labor and materials. If you don’t have reserves or a line of credit, you may be forced to delay restoration—leaving customers in the dark longer, with no revenue coming in until power is back on. When a board understands these risks, they’re more inclined to fund reserves consistently rather than rely on uncertain external aid.
8. Linking Rates to Strategic Goals
Finally, rates can advance broader community objectives. If you want to encourage electric-vehicle charging, consider a separate rate/rider that offers reduced off-peak charging fees. Planning to pilot smart-grid technologies? Allocate a slice of revenue to an innovation fund. At present, many smaller utilities are new to such riders and their impact on shifting the conversation. But by keeping strategic goals in mind, boards can position themselves to pivot when opportunities arise, rather than treating rate-setting as purely a financial exercise.
Conclusion
In sum, rate-setting is a balancing act between the utility’s need for stable, sufficient revenue and customers’ expectations for fairness, predictability, and value. By focusing on these eight fundamentals—revenue requirements, cost allocation, rate design, regulatory context, planning horizons, transparency, risk management, and strategic alignment—elected boards can turn a complex technical process into a clear, purpose-driven exercise.
A final piece of advice for board members stepping into their first rate-setting vote: You were elected or appointed as a fiduciary for your community. Holding rates flat for years might feel popular, but it can just create a bigger problem down the road—like leaving a large debt for your successors to wrestle with. Thoughtful, incremental updates that build reserves and maintain reliability are the mark of good stewardship. If you keep customers informed, plan ahead, and align your decisions with long-term vision, you’ll not only keep the lights on—you’ll earn the community’s trust for years to come.
Download a PDF of this article here.
Considering a rate‐setting decision or utility upgrade? Let’s explore how these fundamentals apply to your community. Feel free to contact us—we’re happy to discuss our approach, no strings attached.
Disclaimer: This article is for discussion purposes only and does not constitute professional advice. For engineering services or specific guidance, please consult a qualified, licensed engineer.