UMC Finance and Ratemaking 2

Question 1

In utility ratemaking, which component of the revenue requirement compensates investors for the use of their capital?

Accepted Answer

Return on rate base

Answer

Depreciation expense

Answer

Operating and maintenance costs

Answer

Income taxes

Question 2

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:

Accepted Answer

Allow automatic pass-through of fuel cost changes between rate cases

Answer

Reduce the utility's rate base

Answer

Eliminate the need for depreciation accounting

Answer

Cap fuel spending at test year levels

Question 3

The 'used and useful' standard in utility regulation means that plant is included in rate base only if it:

Accepted Answer

Is currently providing service to ratepayers and is needed for that service

Answer

Was built within the last 10 years

Answer

Has been fully depreciated

Answer

Received state legislative approval

Question 4

Which rate design approach charges customers a flat monthly fee regardless of consumption volume?

Accepted Answer

Fixed customer charge

Answer

Inverted block rate

Answer

Declining block rate

Answer

Time-of-use rate

Question 5

When a utility commissions a cost-of-service study, the primary goal is to:

Accepted Answer

Allocate total costs among customer classes to set equitable rates

Answer

Determine the total debt capacity of the utility

Answer

Calculate depreciation schedules for new plant

Answer

Measure employee productivity benchmarks

Question 6

In utility finance, 'working capital allowance' in the rate base represents:

Accepted Answer

The amount of money utilities need to operate between billing and collection

Answer

Cash reserves set aside for major capital projects

Answer

Long-term debt outstanding at year-end

Answer

Accumulated depreciation on plant assets

Question 7

A utility files for a rate increase using a 'future test year.' This means the revenue requirement is based on:

Accepted Answer

Projected costs for a future 12-month period after the rate case concludes

Answer

Actual costs from the most recently completed 12-month period

Answer

An average of the past five years of costs

Answer

Historical costs adjusted only for inflation