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How are utility rates determined?
Like most businesses, utility rates are set taking into consideration normal operating expenses such as labor, fuel and a return on capital investments used to buy equipment—costs for providing natural gas and electric services to homes and businesses. Unlike most businesses, Wisconsin's largest utilities are a state-regulated monopoly. In return for monopoly status, utilities have an obligation to serve all customers. The Public Service Commission of Wisconsin (PSC) regulates these utilities and their rates. When a utility requests a rate change, the PSC reviews the request. Based on a PSC audit and customer testimony in public hearings, the PSC sets utility rates. Utility rates include an amount that is based on a rate of return for shareholders up to an amount capped by the PSCW. If the year does not go as well as expected, utilities earn less than the amount authorized. If the year is better than expected, they earn more. The rate of return for shareholders is not guaranteed but does depend on how well a utility operates. Weather also affects how much energy customers use, which in turn affects the rate of return. (Municipal electric utilities and rural electric cooperatives differ, in that they are non-profit and most only distribute power rather than generate electricity. Further, electric cooperatives' rates are determined by their Boards of Directors rather than the PSC.) There is a difference between natural gas and electric bills. For electric bills, the cost of fuels (such as coal and natural gas) is figured into rates. Electric rates include the costs to produce, purchase and deliver electricity. For natural gas bills, the rates cover a utility’s costs to deliver gas to customers—but not for natural gas as a commodity. That is a separate charge that utilities pass on to customers without a markup.
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