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 (e.g., 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.
- "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:
| Type of Rate Component | Description |
|---|---|
| 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 usage. 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 consumed quantities are charged at $0.43 per quantity, anything in excess of 50 consumed quantity is charged at $0.71 per quantity). 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. |
| 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 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 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. |
| Variance Parameter Pricing | This type of rate component is used to map and/or price interval quantities into Variance Parameter quantities given a Variance Parameter map. See Variance Parameter 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.
| Source of Rate Component Value | Description |
|---|---|
| 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. |
| 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 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. A charge (or discount) is only levied for a subset of customers for defined periods of time. For example, if you have a discount that is only given to customers who have had service for more than 2 years, you would use a bill factor to specify the discount percent. The price differs per customer. For example, you may have a rate for customers where the price of a product 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 units, the price is $1.50; whereas if the customer uses more than 10 units, 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. |
- 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.