UMC Finance and Ratemaking 3

Question 1

An inverted block rate structure is primarily designed to:

Accepted Answer

Encourage conservation by charging higher rates for greater usage

Answer

Inverted block rates charge progressively higher per-unit prices as usage increases, incentivizing conservation and penalizing excessive consumption.

Question 2

In utility capital structure, the 'optimal capital structure' balances debt and equity primarily to:

Accepted Answer

Minimize the overall weighted average cost of capital (WACC)

Answer

The optimal capital structure minimizes WACC by balancing the tax advantage of cheaper debt with the financial risk that too much debt creates, lowering the cost ratepayers ultimately bear.

Question 3

Under traditional rate-of-return regulation, if a utility earns above its authorized rate of return, regulators will typically:

Accepted Answer

Order refunds to customers or reduce rates in the next rate case

Answer

When a utility over-earns, regulators may require customer refunds or use the finding to justify lower rates in the subsequent rate case to prevent excessive profits.

Question 4

The 'revenue decoupling' mechanism breaks the link between a utility's revenues and:

Accepted Answer

Sales volume, removing the disincentive to promote energy efficiency

Answer

Revenue decoupling adjusts rates so utilities recover a fixed revenue per customer regardless of how much is sold, eliminating the financial incentive to maximize sales over efficiency.

Question 5

Which of the following is classified as an 'above-the-line' cost in utility ratemaking?

Accepted Answer

Costs included in operating expenses within the revenue requirement

Answer

Above-the-line costs are operating and maintenance expenses recognized in the revenue requirement (income statement), while below-the-line items like dividends and charitable gifts are not recoverable from ratepayers.

(UMC) Utility Management Certification Practice Test

(UMC) Utility Management Certification Practice Test

UMC Finance and Ratemaking 3