Revenue requirements are determined by the cooperative board. It is this board that decides if rates should be increased or not depending on the evaluation of some specific factors. Some of the factors that could result to rate change process are detected changes in cost of power of the wholesale, identified deterioration of financial indicators in the system, competitive pressure that calls for response and response to requests made by members to some some specific special contract.
The general process followed to determine revenue requirements involves five major steps.
The first step is to analyze the the information that needs and determine a revenue requirement for the overall system. The second step involve developing and coming up with requirements of the class revenue otherwise referred to as cost of service. The third step is to develop the rate design which is the revenue requirements of each individual customer. The base rate design is then coordinated to ensure that it is in agreement and in accordance with the policy of the line extension.
The final step involves monitoring the ongoing performance of the line and analyzing it. b) Define and describe the components of the revenue requirement. What are the issues associated with the various component Revenues are characterized by different components which include operation and maintenance costs incurred by the business. This component determines the rate at which the revenues will be sset as as the rate reached has to ensure that some fair returns are made after these costs are deducted from the revenue rates.
This costs usually vary with time hence the cooperation has to ensure that the margin set up for them is large enough to ensure that no loses are made. Another component is taxes. The taxes charged by the government on services provided have to be considered when the revenue rates are being determined. This is because they are an expense and need to be deducted from the determined rate when calculating returns from the investment.
The depreciation value of the utility as a recovery of capital investment is a component that needs to be considered as it affects the profits made. This is because depreciation implies that the money that comes in keeps reducing as compared to when the enterprises were new. This component can not be ignored as it would result to the enterprise making loses when it does its deductions to determine their net profit. Finally average net investment rate base has to be considered to determine the rate at which the utilities will set their revenues.
This is done to ensure that the rates of the revenue requirements are enough to cover all the costs and still enable the utility providers to make some fair returns on their capital. c. The costs and revenues that should not included in the revenue requirement process? Why should they be excluded? Give examples of excluded costs and revenues. Some of the costs that should not be included in the revenue requirement process are capital costs. This refers to costs used in construction of the investments and usually are funded by some financial institution or the governmental.
They may also be loans or grants that usually are paid over a long period of time without interest being charged on them. They are not included in the process for the simple fact that they are financed and are not part of the the utility providers capital. Costs incurred by the utility in carrying out functions such as anniversary parties and sending off employees for holidays also are not included in the process. This is because they are not operational costs but costs incurred while using the already gained profits.
Included costs and revenues included the governmental taxes and revenues that are usually charged per unit of the utility that is supplied and sold. Cost of operations that is incurred such as in buying of equipment, machines, raw materials and transporting of these equipment to the plant, employee wages and salaries and rent paid on premises that house operations of the utility all need to included in the process. The maintenance cost of the machines and equipment also needs to be included in the revenue requirement process.
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