Utilities

How do utility companies make money?

First, note that I’m focusing here mostly on investor-owned utilities (IOUs), which serve about 70 percent of America’s customers. These are the old-school, for-profit, regulated-monopoly utilities, with a captive customer base and profits guaranteed by law. IOUs are the main (though not exclusive) force pushing back against distributed solar.

Here’s how IOUs make money: 1) they estimate how much power their customers will need; 2) they estimate the investments they’ll need to make in power plants, fuel, transmission lines, etc. in order to meet that demand; 3) they estimate what rate they need to charge customers to cover those investments and offer a reasonable “rate of return” to their investors; 4) they go to the state public utility commission (PUC) to make a “rate case” justifying the rate; 5) if the PUC signs off, the IOU charges that rate until time to make their next rate case. See http://grist.org/climate-energy/utilities-vs-rooftop-solar-what-the-fight-is-about/

Anyway, that’s the rate residential customers pay: the PUC-approved “retail rate.” Typically, the retail rate bundles all the utility’s costs into a single package, not just the “variable costs” of fuel and electricity but also the “fixed costs” of investment in transmission lines, transformers, power plants, and the like.

Unless otherwise stated, the content of this page is licensed under Creative Commons Attribution-ShareAlike 3.0 License