How electric rates are calculated

Burlington Free Press, April 13, 2003

By Sue Robinson
Free Press Staff Writer

Electric rates are based on what it costs a utility to deliver power to its customers as well as a reasonable rate of return for its shareholders.

The expenses include:

-- What the utility pays companies that generate or own the power,

-- What it costs the company to bring the power to homes and businesses through transmission lines and wires,

-- Other expenses including the utilities' administration costs, debt from building power plants or improving offices, and taxes.

Power contracts typically make up 60 percent of a utility's costs. Most power contracts held by Vermont utilities are long-term whose costs do not vary from year to year.

Vermont utilities enter into long-term supply contracts because they own few power plants, which are expensive to build and maintain. New power plants are difficult to build in Vermont because there are few suitable locations, and such plants often face environmental restrictions and public opposition.

Costs tend to rise or fall based, in part, on the national market for all energy, not just electricity. So, when oil prices skyrocket -- as they did leading up to the Iraq war -- the utilities pay higher wholesale oil prices on the spot market when demand exceeds the contracted power supply. So the utilities have to compensate by cutting costs. Salary, insurance and other inflation costs also apply.

When these costs keep rising over time, utilities must go to state regulators to seek permission to raise prices. In Vermont , that regulator is the Vermont Public Service Board.

When the utilities come to them, state regulators also consider what the utilities can make for a profit. Each utility is allowed to earn about 11 percent return (or profit) on the money shareholders invest in the utility property needed to serve customers. In Green Mountain Power Corp.'s case, this amounts to about 5 percent of its revenues.

The Vermont Public Service Department, which advocates for consumers, investigates every request. Sometimes the department and the utility will settle on a rate increase. Other times, the department will fight the increase.

The Public Service Board will make the ultimate decision. A process of seeking approval for a price increase, called a rate case, takes 18 months on average.

Contact Sue Robinson at 660-1852 or srobinso@bfp.burlingtonfreepress.com