Since deregulation of the supply market in the UK over two decades ago, the regulator has tended to leave it to the supply companies to decide the design of the tariffs charged to end-users. This has changed recently with regulatory interventions to limit the number of residential tariffs offered but in most other countries worldwide the regulators do concern themselves with tariff designs to regulated end-users as well as with allowed revenues. National Association of Regulatory Utility Commissioners (NARUC) in the US is updating its Electric Utility Cost Allocation Manual on how to allocate costs in electricity tariffs. The current version was issued in 1992 and recognised two broad approaches to cost allocation – marginal cost and embedded cost. While accepting the legitimacy of the marginal cost method, it recommended that US utilities adopt embedded cost. Marginal cost is, arguably, more common outside of North America. This ECA Insight examines the two approaches and considers how fundamentally different they are. READ ECA’s INSIGHT HERE.

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