Energy ≠ Electricity
4 Economic Principles
Key Terms
Needs: necessities for survival. Food, water, shelter, etc. Wants: anything good and/or service beyond what is necessary for survival Goods: physical objects that can be purchased Services: actions/activities performed for a fee
We need energy for all these things!
How to Read Your Utility Bill
Energy is essential for modern life. Everything including farming, cooking, lighting, comfort, communication, mobility, production of goods, all rely on energy, often in the form electricity at some point.
Learn how to calculate how much you spend on energy
Because the availability of energy drives almost every aspect of the economy, it is best to think of energy and economics as one concept rather than two. If energy is economics, then economics is energy. Since this is the case, not only is energy essential, it is also a geopolitical concern.
Since energy is so important, the energy economy is less competitive. In a perfectly competitive market, there are very few barriers to entry and the number of suppliers can be almost infinite. Common agriculture products, like corn, are close to this end of the spectrum. On the opposite end are monopolies. Monopolies consist of just one supplier who meets all of the demand, allowing them to set the price as they see fit. Most utilities are monopolies in the areas that they serve.
Utility lines in New York City, NY, 1890
In general, yes. However, in industries that require large networks of equipment, competition results in redundancy, higher costs, and in the case of electricity, safety risks.
“Wires snapped on a regular basis as a result of over tension, wind, or ice weighing them down. The electrical wires carried a significant charge, but the other wires carried electricity as well. As wires snapped and lashed across streets, smashing against buildings, thrashing about, spraying sparks in all directions, blocks were rendered impassable until power to the downed lines could be cut."
Without a Competitive Market, Regulators Enforce Economic Efficiency Regulators strive to approve rates that are reflective of the costs of the services rendered by utilities by enforcing 4 principles:
The role of any utility is to design an system that can supply the demand for electricity.
Sitka's Energy Supply and Demand
Sitka's electricity demand is supplied by two hydroelectric dams. As the community grew over time, the dams were built or expanded to meet the new demand. Even though the population of Sitka is decreasing, electrification continues to increase the demand as new technologies enable us to power more with hydroelectricity.
Learn more about Sitka's Energy History.
Sitka's Electricity for the Past 50 Years
Interconnected grids like large regional grids are able to purchase and sell power from neighboring communities to meet electricity needs and offset costs when there is surplus. However, Sitka's grid is an islanded microgrid, which means it is not interconnected and must meet all of the demand independently. Learn more about Sitka's electric grid.
What should a well functioning utility system look like?
Sustainable
Reliable
Affordable
The grid must consider environmental, political, and social constraints.
The grid must ensure services are delivered wherever needed whenever.
The grid must be able to deliver electricity at a reasonable cost.
The cost of service of a utility is impacted by both the scale of the utility, as well as local and global economic factors. Electricity prices generally reflect the cost to build, finance, maintain, and operate power plants and the electricity grid. Some for-profit utilities also include a financial return for owners and shareholders in their electricity prices.
There are 8 major cost factors that can impact the total cost of service
The Benefits and Drawbacks of Sitka's Grid
A little more about fuel: If hydropower is unavailable, the diesel generators must be used. Each year, CBS budgets for fuel for generator maintenance, planned outages, and short unplanned outages. If this amount is not enough and more diesel must be used, this cost is passed on to consumers. Fuel is the only cost factor that is allowed to be passed on to consumers entirely. That is why in communities that do not have renewable energy experience frequent, sometimes month to month changes to rates as oil prices fluctuate.
To determine what a rate needs to be, you need to know the cost of service. To understand the cost of service, image a pie.
1. Determine the total cost, or revenue requirement
Revenue Requirement: Any utility's total cost of service depends on the revenue requirement (RR) the revenue requirement is the amount necessary to pay all expenses and achieve an adequate return. Fortunately, as a municipally owned utility, some aspects that contribute to the revenue requirement are not applicable, like return on investment or taxes.
Sitka's Revenue Requirement
How big is Sitka's pie?
Sitka's revenue requirement is approximately $20 million per year. It is split between capital expenses (52%) and Operating expenses (48%). This is comparable to other utilities*.
*Statistica via EIA data, 2024.
How is the revenue requirement divided between groups? How is the pie sliced?
Examples of Allocation Factors Include:
To determine how much of the revenue requirement each customer type is responsible for, allocation factors are used. Allocation factors are developed by analyzing the cause-and-effect relationships between different cost categories and characteristics. If the revenue requirement was divided equally, rates for everyone would be almost 26¢/kWh!
3. Design rates to meet the needs of the customer group
Rates are designed on two broad concepts It is an art as much as it is a science
In addition to allocation factors, rates are determined using Bonbright principles which further guide and refine how the revenue requirement responsibilities are divided amongst customers.
If you look at your electricity bill, you will notice different types of charges that make up the total amount owed. These types of charges vary by customer class (residential, commercial). Surcharges for diesel, riders, and demand charges are some of the many that could appear on a typical electricity bill, but fixed charges and volumetric charges are always present. (NLR)
Volumetric Use Charge
Volumetric charges are electricity costs that vary due to electricity use. The more electricity (i.e. kilowatt hours) used, the higher this portion of the bill. Volumetric charges can be a bundle of different elements (e.g. fuel, energy efficiency), or cover only the short-term variable costs a utility incurs. (NLR)
Volumetric Demand Charge
Similar to volumetric use charges, volumetric demand charges are electricity costs that vary due to electricity use depending on how much is used at once. The more electricity (i.e. kilowatt hours) used at once, the higher this portion of the bill. This is more common on commercial bills and is rare on residential bills.
Customer Charge
These charges are fixed and depend on customer class and does not change depending on use. It is useful for helping cover fixed costs like metering, billing, and other administrative aspects of a utility.
Rate making is not perfect
In a perfect world, the process of setting rates should result in a perfect match of meeting the revenue requirements. However, each cost factor that influence the cost of service change rapidly; it is not uncommon for rates to change monthly in some places where the price of fuel is highly volatile. In reality, revenue requirements are seldom met perfectly. This means rates should be reevaluated frequently and thoroughly to make sure the needs of customers now are met, as well as future customers.
Increase and diversify consumption for fixed costs Bring more to eaters to help eat the pie in smaller bites
By increasing diversifying the number of consumers helps break up the fixed cost over more customers making each customer responsible for less. This is a difficult strategy that takes time to implement at a large scale.
Increasing reliability and resiliency to avoid surprise costs Invest in good ingredients, and an oven timer; it will cost more if it burns and must start over
Any surprise cost due to equipment failure either anticipated or not, can be expensive. Strategically improving the grid to make it less vulnerable to interruptions and planning replacements before failure can minimize unforeseen costs from suddenly arising.
Don’t increase fixed costs before you know you can sell more Don’t make a bigger pie than you need in hopes you have others to help eat it
ling services appropriately is the best way to avoid this scenario.
Conserve Energy and Use it more Efficiently Take a smaller slice
The most immediate way to lower the cost of electricity is to use less and/or use it more efficiently.
Learn more about how to do this here!
Energy Economics:
Questions? Contact
Cappers, P. & Satchwell, A. 2022. EVGrid Assist Webinar: Electric Vehicle Rates and Incentives. Lawrence Berkeley National Laboratory. Rozgonyi, A., Bodek, D., Meernik, T., Rasay, S. 2024. 10 Rated Utilities With The Highest Debt Balances U.S. Public Power Retail Municipal Utilities, S&P Global Ratings. U.S. Energy Information Administration, Annual Electric Power Industry Report. 2019.This page was last updated January, 2026