Article
Beyond the cost-of-service study: A road map for modernizing your utility’s rate design
May 28, 2026 · Authored by Russ Hissom and Margaret Niehoff
The electric utility industry is undergoing a profound transformation as it adapts to new technologies and changing consumer behaviors. Modern rate design must balance multiple objectives, including grid reliability, cost recovery and cost-based pricing. While the evolution of electric rate design is complex, it is manageable with the right data and skill sets, whether developed internally or through partnerships with the right external expertise. Based on our experience and broader industry analysis, the following key trends are shaping electric rate structures:
Trend one: The demand shift from volumetric to capacity-based pricing
Advanced metering infrastructure (AMI) enables time-of-use (TOU) and dynamic pricing for all customer classes, offering variable rates throughout the day. TOU rates encourage customers to shift usage to off-peak hours, reducing strain on the grid while providing opportunities to lower bills for the customer and utility.
Demand-based rate structures are also gaining prominence as utilities seek to better align pricing with infrastructure costs. Charging customers based on peak demand rather than total consumption more accurately reflects each customer’s contribution to system capacity requirements.
A recent cost-of-service study performed by Baker Tilly analyzed two years of rate class comprehensive 15-minute AMI interval data for a southern utility to support improved load management and customer choice. Using large-scale data analytics and enterprise AI tools, new rates were designed that smoothed peak demand and flattened the load curve, optimizing generation and purchased power costs.
Trend two: Prosumer integration for distributed energy resources (DERs)
The growth of distributed energy resources (DERs) has led utilities to develop new rate structures for solar, battery storage and other customer-owned generation. While state laws may modify traditional ratemaking principles, adhering to cost-based DER rate design helps ensure participating customers pay their share of grid infrastructure costs while receiving appropriate compensation for energy exported to the grid, without creating cross-subsidies.
A recent Baker Tilly rate design for a Northeast utility established DER compensation based on avoided day-ahead market costs, which treats DER and non-DER customers equitably.