UMC - Utility Management Utility Finance and Ratemaking Questions and Answers

Question 1

Which of the following components is fundamental to establishing a utility's revenue requirement in a rate case?

Accepted Answer

The cost of capital invested in assets, known as the rate of return.

Answer

The projected increase in the number of customers.

Answer

The utility's marketing and advertising budget.

Answer

The historical dividend payments to shareholders.

Question 2

A municipal water utility is preparing a rate case. It has recently completed a major capital project to upgrade its water treatment plant. According to ratemaking principles, how should the cost of this new plant be treated when determining the new rates?

Accepted Answer

The project's cost should be added to the utility's rate base, upon which it can earn a rate of return.

Answer

The entire cost of the project should be expensed in the first year of the new rates.

Answer

The cost should be recovered by adding a temporary surcharge to all customer bills until the project is paid off.

Answer

The cost is considered a non-recoverable capital expenditure and does not impact customer rates.

Question 3

A cost-of-service study is performed primarily to achieve which of the following objectives in rate design?

Accepted Answer

To allocate the utility's total revenue requirement equitably among different customer classes.

Answer

To guarantee the utility achieves its requested profit margin.

Answer

To set rates that are identical for all customer classes, promoting simplicity.

Answer

To benchmark the utility's operating expenses against those of other utilities in the region.

Question 4

What is the primary difference between the cash basis and accrual basis of accounting in the context of utility finance?

Accepted Answer

The cash basis recognizes revenue only when cash is received, while the accrual basis recognizes revenue when it is earned.

Answer

The accrual basis is used for capital projects, while the cash basis is used for operating expenses.

Answer

Only the cash basis of accounting is permissible for regulated utilities.

Answer

The cash basis provides a more accurate picture of a utility's long-term financial health.

Question 5

An electric utility implements a Time-of-Use (TOU) rate structure. What is the main goal of this type of rate design?

Accepted Answer

To encourage customers to shift electricity consumption from peak demand periods to off-peak periods.

Answer

To decrease the utility's overall revenue requirement.

Answer

To simplify the billing process for all customers.

Answer

To ensure all customers pay the same flat rate per kilowatt-hour.

Question 6

In the ratemaking formula, depreciation expense allows a utility to recover what?

Accepted Answer

The original cost of its capital assets over their useful service life.

Answer

The cost of day-to-day operational and maintenance activities.

Answer

The interest payments on its long-term debt.

Answer

The funds necessary to pay shareholder dividends.