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
An inverted block rate structure is primarily designed to:
Answer: Encourage conservation by charging higher rates for greater usage
Inverted block rates charge progressively higher per-unit prices as usage increases, incentivizing conservation and penalizing excessive consumption.
In utility capital structure, the 'optimal capital structure' balances debt and equity primarily to:
Answer: Minimize the overall weighted average cost of capital (WACC)
The optimal capital structure minimizes WACC by balancing the tax advantage of cheaper debt with the financial risk that too much debt creates, lowering the cost ratepayers ultimately bear.
Under traditional rate-of-return regulation, if a utility earns above its authorized rate of return, regulators will typically:
Answer: Order refunds to customers or reduce rates in the next rate case
When a utility over-earns, regulators may require customer refunds or use the finding to justify lower rates in the subsequent rate case to prevent excessive profits.
The 'revenue decoupling' mechanism breaks the link between a utility's revenues and:
Answer: Sales volume, removing the disincentive to promote energy efficiency
Revenue decoupling adjusts rates so utilities recover a fixed revenue per customer regardless of how much is sold, eliminating the financial incentive to maximize sales over efficiency.
Which of the following is classified as an 'above-the-line' cost in utility ratemaking?
Answer: Costs included in operating expenses within the revenue requirement
Above-the-line costs are operating and maintenance expenses recognized in the revenue requirement (income statement), while below-the-line items like dividends and charitable gifts are not recoverable from ratepayers.
A regulatory commission uses the 'comparable earnings' method to set a utility's allowed return on equity (ROE) by referencing:
Answer: Returns earned by companies with similar investment risk in competitive markets
The comparable earnings method benchmarks the allowed ROE against returns that investors can earn in other investments of similar risk, ensuring the utility can attract capital.
A 'rate case moratorium' agreed to in a utility settlement means the utility agrees to:
Answer: Not file for a rate increase for a specified number of years
A rate case moratorium is a settlement provision where the utility agrees not to file for higher rates for a defined period, giving customers rate stability in exchange for regulatory certainty.