Facility charge: a fair and equitable way to recover fixed costs

March 2009

Without a doubt, the most despised part of our electric bill is the facility charge. This is the part of your bill you pay each month, even if you don’t use any electricity. I was once told it is kind of like having a cover charge to come to Nodak and do business.

Facility or fixed charges with electric utilities are necessary for rate equity among ratepayers. For each of the 16,000 metering points in our service area, we make a significant investment, and we must maintain that investment to ensure reliability and safety. We also must have a system of meter reading, billing, and customer service functions in place to take care of customers. This system includes trained people, office facilities, and state-of-the-art technology to provide the level of service expected by the general public. The cost of all of these facilities and services must be maintained, even if you elect not to buy any electricity during a specific period. The cost of these services are appropriately billed on a per customer per month basis rather than in proportion to the amount of electricity purchased.

A common question is, “why do some consumer classes pay a different facility charge than others?” The answer is that required facilities tend to differ among different consumer classes. In high density urban areas, accounts require less distribution line per account, and they are typically served with multiple accounts per transformer. For this reason, urban accounts require a lower monthly facility charge than rural accounts. Commercial accounts require large transformers, more expensive metering, and often require three-phase service and specialized equipment. For these reasons, commercial accounts require a higher monthly facility charge than residential accounts.

Following our recent rate increase, one member asked why his facility charge increased when nothing changed at his account. The answer is that the facility charge is an average of the cost to provide facilities for all consumers, and it covers the cost of owning, maintaining, and supporting these facilities. The total of these fixed costs does in fact increase every year, and this component of our rate needs to be periodically adjusted.

Roughly 10% of our annual revenue is billed through the facility charge. If we eliminated the facility charge, we would need to increase our rate per kilowatt-hour a proportional amount. While we would receive adequate revenue to pay all of our expenses, there would be some consequences. Those who use at or near average consumption would see little change in their total bill. Minimal users would be getting a free ride, as they would be paying little or nothing for the facilities serving their account, along with the billing and support required to serve their account. The free ride would be picked up by the larger users who would pay more than their share for these costs.

As you can see, it is our responsibility to not only have a facility charge in our rate structure, but to do the best we can to ensure it is designed to be fair and equitable among the different rate classes.