Navigating Utility Rate Plans

Written by: Lisa Clifton, Senior Client Data Manager

We all know the first rule of saving money on utility bills – use less!  Fewer know the second step is understanding your rate plan and what options you may have in choosing the rate plan that works best for you. Several factors go into determining what business rate plan options are available:

  • The location’s physical address and type of business
  • The location’s rate class including:
    • Maximum consumption or demand
    • Time-of-use
  • The location's operational schedule

Address and Type of Business

Most addresses in the U.S. are assigned specific utility providers for electric, natural gas and water service – you don’t have a choice in which company you use. Consumers in states with deregulated energy markets may have the option to “shop” for an energy provider; however, the ability to choose an electric or gas provider is generally limited to certain locations within the state. This map shows which states currently have some form of energy deregulation: https://www.electricchoice.com/map-deregulated-energy-markets/.

The rate plans available to you are determined by your utility provider and your state utility commission. Within a state there can be wide variation in the types and number of available rate plans, depending on whether your local utility is for-profit, non-profit, a cooperative or owned by a municipality.

The utility may also offer special rate plans tailored to specific industries or business types in their service area, such as large mining, manufacturing or agricultural operations, transportation services, small businesses, houses of worship or K-12 schools.

RATE CLASS

Utility customers are sorted into rate classes, such as residential, small-, medium- or large-commercial, industrial, etc. based on their usage patterns. These rate classes are defined by the utility provider and have different rate plans associated with them. While a water user is generally locked into a specific rate class, commercial electric and gas users may be able to switch rate classes if their usage patterns change significantly.  

Unlike electricity, water and natural gas can be stored for future use, and therefore these rate classes are generally based on total annual usage or consumption. Electricity, however, must be generated as it is needed; therefore, it is necessary to understand two additional concepts when navigating electric rate plans – Maximum Demand and Time-of-Use.

MAXIMUM DEMAND

Electric demand is a measure of power, or the “speed” at which electricity is used, and is usually measured in kilowatts (kW or “KW”), while energy consumption or usage is measured in kilowatt-hours (kWh). Demand multiplied by time equals electricity consumed:

demand (electricity/hour or kW) * time (hour) = electricity consumed (kW*hour or kWh)

Monthly maximum demand refers to the highest demand required during the month; for commercial electric accounts this is typically based on demand averaged over a 15-minute interval. In other words, your monthly maximum electric demand is based on a single 15-minute period during the month.

Based on your maximum demand, your electric provider will assign you to a rate class: extra-small, small, medium, large, or extra-large. Note that the definitions of small, medium, etc. vary by utility provider, as does the specific criteria for determining rate class. For example, one electric utility may use the average maximum demand from May to October, while another utility may use the single highest demand month in a rolling 12-month period.  Thus, it’s important to understand how your electric utility provider determines maximum demand.

TIME-OF-USE

As mentioned earlier, utilities generate electricity as it is needed, and extra generating capacity must be brought online to meet high customer demand. Times of day marked by high, wide-spread usage are called on-peak hours, while the remaining hours are called off-peak.

Electric rate plans generally fall into two categories: general service plans and time-of-use plans. General service plans charge based on total monthly consumption and maximum demand, irrespective of the time that the electricity was used. Time-of-use plans encourage customers to shift electric consumption to off-peak hours by charging more during on-peak hours. Businesses may be able to save money on time-of-use rate plans by implementing energy management and behavior strategies.

In summary, your location, type of business, maximum consumption or demand and operational flexibility determine what rate plan options are available to you. Rate plans can be complicated and confusing.  If you would like more information or would like to explore your business’ specific plan, please contact us at www.energyplanning.org/contact-us.