Rate Component Design Methodology

Designing rate components is an iterative process. Over time, you will develop intuitive skills that will allow you to avoid some iterations. However, when you're starting out, we recommend you follow these steps to design your rate components:

  • Obtain copies of existing bills that use the rate in question. If the rate is new, then write up EXACTLY how the information should appear on the customers' printed bills. If the rate has optional charges (such as, employee discounts or charges that only apply after the customer has consumed a large volume), make sure your examples encompass every possible scenario.
  • Next, look at the bill lines and ask yourself what are the variables that cause each line's charges to be calculated the way they are. Consider the following examples:
  • "Monthly service charge: $50.00". This is a simple service charge that appears regardless of how much the customer consumed. This line doesn't really have any variables that affect its amount. Rather, the amount is a constant value of $50.00.
  • "1,250 kWh at $0.07892". This charge is based on how much the customer consumed. The variables involved are the number of kilowatt-hours (kWh) and the price per kWh.
  • "1,000 20K Lumen Mercury Vapor Lamps at $20.00 per lamp". The variables involved are the number of devices (also called "items") used by the customer and the price per item.
  • "Minimum monthly charge of $100.00". This is a charge that only appears if the total of the prior lines is less than $100.00. The variables involved in this line are a little complicated because they must be calculated at billing time by adding up several other lines and comparing them to the minimum charge amount. This means the variables are the total of prior lines and the minimum charge amount.
  • "1.25% County Surcharge". This charge is similar to the minimum charge in that it is calculated by adding up one or more prior lines and applying a percentage to the sum. This means the variables are the total of prior lines plus the tax percentage.
  • After you've determined all of the potential bill lines you can start designing your rate components. Typically you create one rate component for every line that can appear on the customer's bill. When you create a rate component, you will categorize it as one of the following types:

    Flat Charge

    This type of rate component is used to create bill lines that levy service charges and fees that aren't based on how much the customer uses. The monthly service charge shown above would be levied using this type of rate component.

    Service Quantity

    This type of rate component is used to create bill lines that levy charges based on some type of consumption. The kWh charge shown above would be levied using this type of rate component.

    Frequently the amount consumed is measured by a meter's registers and sometimes it's calculated using Service Quantify (SQ) Rules linked to the rate and sometimes it's derived based on the type of item (e.g., for lamps). Regardless of how the amount consumed is calculated, the charge for the consumption amount is levied using this type of rate component.

    You'll find it helpful to differentiate your service quantity rate components into two categories - stepped and non-stepped. Stepped charges are those where there's a different price for different ranges of consumption (e.g., the first 50 therms are $0.43 a therm, anything in excess of 50 therms is charged at $0.71 per therm). We recommend doing this because a) you frequently show a subtotal of the steps on the customer's bill, b) steps, by definition, mean you have several rate components that are dependent on each other, and c) they frequently involve complex calculations in order to define the step boundaries.

    Item Type

    This type of rate component is used to create bill lines that levy charges based on the number and type of items used by a customer. The system keeps track of items on the service point(s) linked to the customer's service agreement. The lamp charge shown above would be levied using this type of rate component.

    Apply To

    This type of rate component is used to create bill lines that levy charges based on the amount calculated on other bill lines. The county surcharge shown above would be levied using this type of rate component.

    Summary

    This type of rate component is used to create a "subtotal" on the bill. It exists purely for aesthetic purposes.

    Minimum Charge

    This type of rate component is used to create bill lines that levy charges only when the sum of previously calculated lines is less than the minimum charge amount. The minimum monthly charge shown above would be levied using this type of rate component.

    Note that if the values being compared are negative values, the comparison is NOT done on the absolute values, but rather on the actual values. For example, imagine you have a minimum discount of $ -2.00 and previous rate components have calculated a discount of $ -1.00. You want a rate component to create a bill line for $ -1.00 to apply a further discount. A minimum charge rate component will not work in this case because -1 is considered more than -2. For this business scenario you should use a maximum charge rate component.

    Maximum Charge

    This type of rate component is used to create bill lines that levy charges only when the sum of previously calculated lines is more than the maximum charge amount.

    Note that if the values being compared are negative values, the comparison is NOT done on the absolute values, but rather on the actual values. For example, imagine you have a maximum discount of $ -2.00 and previous rate components have calculated a discount of $ -3.00. You want a rate component to create a bill line for $1.00 to reduce the discount. A maximum charge rate component will not work in this case because -3 is considered less than -2. For this business scenario you should use a minimum charge rate component.

    Note - these types of rate components are rare. You tend to only see them in deregulated markets where customers have agreed to pay the market rate but want a cap on the maximum they'll pay each bill period.

    Exact Charge

    This type of rate component is used to force a bill to add up to a given amount (regardless of how much the bill would be based on earlier rate components).

    Note - these types of rate components are rare. You tend to only see them in deregulated markets during the transition period between regulated rates and complete deregulation. In this situation, you show on the bill what the charges would be, given a deregulated environment, but then adjust the bill back to an amount equal to the regulated rate. This charge is called a Competition Transition Charge (CTC) in California.

    Calculation Algorithm

    This type of rate component enables you to produce bill calculation lines based on logic in an algorithm that you supply. Use this rate component when none of the other rate component functions will provide you with the logic you require.

    Interval Pricing

    This type of rate component is used to apply interval prices to interval quantities. See Interval Pricing Rate Application for more information.

    TOU Pricing

    This type of rate component is used to map and/or price interval quantities into time of use quantities given a TOU map. See Time of Use Mapping and Pricing for more information.

    • For each rate component, determine if the customer must meet some form of eligibility criteria before the rate component is applied. For example, you may have a rate component that calculates an employee discount. This rate component may have eligibility criteria that requires the person to have a given characteristic value before the rate component is applied. Refer to The Big Picture of Rate Component Eligibility for more information.
    • For each type of rate component (except summary), determine how you'll define its unit rate / percent / flat amount. You have four choices:
    • Specify the value directly in the rate component.
    • Tell the rate component to use the value defined in a bill factor.
    • Tell the rate component to use the value calculated by a " for calculation purposes only" rate component.
    • Tell the rate component to call an algorithm. The algorithm will return the value.

      The following tables provide guidance in respect of which of the methods to use:

    Specify value in the rate component

    You'd specify the value in the rate component when the value in the rate is specific to that rate and is applied to all customers regardless. For example, if you see a provision in the rate that says to charge $0.05674 per kWh, you'd specify 0.05674 directly in the rate.

    Use a bill factor to define the value

    The following paragraphs describe when you'd use a bill factor to define a unit rate / percent / flat amount.

    The same charge exists in many rates. For example, if there are 3 rates that all contain the same service charge, it would make sense to use a bill factor to levy this charge rather than specify the same value on 3 rate components.

    The amount being charged is dependent on some physical characteristic of the customer's equipment. For example, if the price differs depending on whether the customer owns the transformer, you would use a bill factor to specify the price.

    The amount being charged is dictated by some external organization and therefore can change independently from the rate. For example, tax percentages and use fees are set by taxing authorities and can be changed at any time (and you don't want to change the rate when these charges change).

    The amount being charged varies depending on WHERE the customer lives. If you have a rate where the price per gallon differs depending on where the customer lives, you should use a bill factor to levy this type of charge.

    The price differs per customer. For example, you may have a rate for large gas customers where the price per therm is different for every customer. In this situation, you would use a bill factor to specify the price.

    Use a "for calculation purposes only" rate component

    This is complicated to explain and is not used very often, but it is very powerful and handles some very complicated algorithms. It works like this - you calculate the price / percent / flat charge on another rate component (marked as "for calculation purposes only" so it won't affect the bill amount), and then reference it on the "real" rate component. See the Calculated Minimum Charges example for an illustration of when this method is useful.

    Call an algorithm

    This is complicated to explain and is not used very often, but it is very powerful and handles some very complicated examples. It works like this - you call an algorithm and it calculates the price / percent / charge.

    One example that would require the use of an algorithm would be when the price differs based on the total amount consumed. For example, if the customer uses less than 10 CCF, the price is $1.50; whereas if the customer uses more than 10 CCF, the price is $2.00.

    We supply an example of one such algorithm in the base package. If your rates require additional algorithms, you will have to develop additional algorithms. Refer to How to set up service quantity rate components under Rate Component - Main Information for more information about this type of algorithm.

    Please note that this scenario could also be implemented without invoking an algorithm by setting up two rate components that have eligibility rules to indicate their required respective consumption levels. Refer to The Big Picture of Rate Component Eligibility for more information.

  • After you've categorized the bill lines into the various types and know how the price is defined, you determine how each line's charges are reflected in your general ledger. You will need to work with your accounting department as they will tell you the exact revenue, expense, and liability accounts that will be affected by the charges.
  • Finally, read the provisions of your rate (the legal wording) and make sure you haven't left out something. This may involve having to discuss confusing provisions with your legal department.

At this point, you're ready to start entering your rate components.

Note:

Examples. Refer to Rate Examples for many sample rate components.