Tariff Toolkit: Primer on Primary Drivers of Electricity Tariffs for Utility Regulators

April 2021 – With the support of the United States Agency for International Development (USAID) Energy Division, Center for Environment, Energy, and Infrastructure, Bureau for Development, Democracy, and Innovation (DDI), the National Association of Regulatory Utility Commissioners (NARUC) is working on the development of a Cost-Reflective Tariff Toolkit consisting of primers developed specifically to support electricity regulators in emerging markets.

The latest addition to the Toolkit, the "Primer on Primary Drivers of Electricity Tariffs for Utility Regulators," is meant to help utility regulators around the world understand the primary drivers of electricity tariffs based on the revenue requirement concept, with a specific focus on the expenses that are incorporated into revenue requirements. These components are primary drivers of effective cost-based ratemaking and developing cost-reflective tariffs.

It is divided into the following key sections:

Section 2 provides an electricity tariffs overview.
Section 3 explains the need for cost-reflective tariffs.
Section 4 describes the need for high quality accounting data.
Section 5 describes typical expenses incorporated into revenue requirements.
Section 6 explains typical rate base assets and liabilities incorporated into revenue requirements.
Section 7 categorizes total bill impacts to end-users by distribution, transmission, and generation.
Section 8 summarizes primary drivers of electricity tariffs.
Section 9 concludes with final remarks.

In addition, it contains an annex featuring a case study on the tariff-setting process of Uganda, which describes how the Uganda Electricity Regulatory Authority (ERA) approves cost-reflective electricity tariffs by incorporating expenses and rate base items into revenue requirements for its regulated entities.

Access the primer here.

Additional primers from the Tariff Toolkit include:

Promoting Transparency and Public Participation in Energy Regulation: A Communications Primer for Utility Regulators

This primer focuses on developing a set of recommendations that regulators in countries with emerging economies may want to consider when designing a communications strategy, particularly with regard to engaging the public and key stakeholders during a pending tariff change.

Regulatory Accounting: A Primer for Utility Regulators

This primer is a guide to the structure and function of a system of accounts that regulated utilities can use to ensure they are accurately recording and categorizing financial transactions and presenting coherent data to the regulator.

Cost of Capital and Capital Markets: A Primer for Utility Regulators

This primer is a guide to helping utility regulators around the world understand the capital markets and estimate the cost of capital, which is one of the elements of effective cost-based ratemaking and developing cost-reflective tariffs.

Primer on Rate Design for Cost-Reflective Tariffs

This primer is a resource for electricity regulators and utilities outlining the fundamental principles of cost-reflective rate design and describing key rate design processes. Additionally, it offers regulators and utilities a practical guide for adopting, reviewing, and assessing rate structures based on core principles, international case studies, and widely accepted practices.

Upcoming Primers

To further the Toolkit, NARUC is currently preparing additional primers on the following topics:

Depreciation
The Impact of Electricity Tariff Reforms on Infrastructure Investment and Economic Development
Impact and Treatment of Grants, Donor Assistance and Concessional Financing