How Are Energy Rates Calculated?


Quick Answer

Energy rates are calculated by adding the base cost of the energy itself and the cost of transporting the energy to the end user. In addition, companies calculate in the costs for weather-related repairs and the expense of maintaining the energy-delivery infrastructure. The time of day also impacts a customer's energy rate.

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Full Answer

Electricity rates change rapidly throughout the day — the price is often different from one minute to the next. Demand is an important factor in the energy rate calculation. During periods of high demand, prices often rise.

Natural gas energy rates do not usually change on a daily basis. Instead, gas companies examine the current and projected prices, add in delivery costs, and set the rate for the year. Once or twice a year, a company adjusts rates to make up for the difference between projected and actual costs.

The calculation of energy rates varies from state to state. In Michigan, the Michigan Public Service Commission calculates and sets rates. Individual energy providers can petition the MPSC for a rate adjustment. In Idaho, the Idaho Public Utilities Commission adjusts energy rates on an annual basis. The IPUC also approves cost adjustments for providers based on proof of cost increases, legal filings and other factors.

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