Finance and Ratemaking Flashcards
7 cards from real UMC practice questions. Tap to flip, then mark Knew It or Still Learning — missed cards come back until you master them.
Read the first 7 Finance and Ratemaking flashcards as text
In utility ratemaking, which component of the revenue requirement compensates investors for the use of their capital?
Answer: Return on rate base
Return on rate base provides investors (both debt and equity holders) with compensation for the capital they have invested in utility plant.
A utility's test year shows $500,000 in fuel costs. Regulators apply a fuel adjustment clause (FAC). The primary purpose of the FAC is to:
Answer: Allow automatic pass-through of fuel cost changes between rate cases
A fuel adjustment clause (FAC) lets utilities automatically recover changes in fuel costs from customers without filing a full rate case each time.
The 'used and useful' standard in utility regulation means that plant is included in rate base only if it:
Answer: Is currently providing service to ratepayers and is needed for that service
Regulators include plant in rate base only when it is both in service (used) and necessary to serve customers (useful), protecting ratepayers from paying for idle assets.
Which rate design approach charges customers a flat monthly fee regardless of consumption volume?
Answer: Fixed customer charge
A fixed customer charge is a set monthly fee that recovers costs associated with serving a customer (metering, billing) independent of how much they use.
When a utility commissions a cost-of-service study, the primary goal is to:
Answer: Allocate total costs among customer classes to set equitable rates
A cost-of-service study allocates the utility's total costs (production, distribution, customer) to each rate class so rates can be set that reflect the cost to serve each group.
In utility finance, 'working capital allowance' in the rate base represents:
Answer: The amount of money utilities need to operate between billing and collection
Working capital allowance recognizes that utilities must pay operating expenses before collecting revenues from customers, and investors deserve a return on this cash need.
A utility files for a rate increase using a 'future test year.' This means the revenue requirement is based on:
Answer: Projected costs for a future 12-month period after the rate case concludes
A future test year uses forecasted costs and revenues for a future period, so rates reflect what costs will be when the new rates take effect rather than past costs that may already be outdated.