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

Return on rate base provides investors (both debt and equity holders) with compensation for the capital they have invested in utility plant.

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

A fuel adjustment clause (FAC) lets utilities automatically recover changes in fuel costs from customers without filing a full rate case each time.

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

Regulators include plant in rate base only when it is both in service (used) and necessary to serve customers (useful), protecting ratepayers from paying for idle assets.

Question 4

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

Accepted Answer

Fixed customer charge

Answer

A fixed customer charge is a set monthly fee that recovers costs associated with serving a customer (metering, billing) independent of how much they use.

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

A cost-of-service study allocates the utility's total costs (production, distribution, customer) to each rate class so rates can be set that reflect the cost to serve each group.

(UMC) Utility Management Certification Practice Test

(UMC) Utility Management Certification Practice Test

UMC Finance and Ratemaking 2