Online Learning: Learning Paths

How Utilities Make Money

Length: 2 hours
Subscription: 2 months - 12 months
Cost: $295 - $350
Prerequisites: None

A surprising number of utility employees do not understand how their utility makes money! This How Utilities Make Money learning course explains the basics in simple and easy-to-understand terms. This online learning path introduces basic financial concepts for a non-regulated company (a lemonade stand) and then compares these concepts to those that apply to a regulated utility. In addition to answering the question "How do utilities make money?", the learning path also explains the basic concepts of utility regulation, why a utility operates under rules different from non-regulated companies, and how rates are set such that the utility has the opportunity to collect enough to cover expenses as well as a reasonable return on its equity. Upon completing the online learning path, learners will be able to explain to those who ask questions such as "How do electric utilities make money?" and "How do gas utilities make money?" Included are practical examples and exercises to help learners understand basic financial concepts and the unique way in which utilities earn a profit.

This course comprises the following modules:

  • Introduction
  • How a Competitive Company Makes Money
  • How and Why Utilities Are Regulated
  • Business Basics for Regulated Utilities
  • How Utility Rates and Earnings Are Determined
  • How Utilities Can Exceed or Fall Short of Authorized Earnings

Following is a more detailed outline of content contained in the How Utilities Make Money online course.

Business Basics for Competitive Companies

  • Capital expenditures vs. expenses
  • Sources of capital
  • The concept of debt/equity (capital structure)
  • Pricing for non-regulated companies
  • What are earnings?
  • How does a non-regulated company measure success (concept of return on equity)
  • How a non-regulated company can increase earnings

How and Why Utilities Are Regulated

  • What is regulation?
  • How regulation affects utility earnings
  • Who are state and federal regulators
  • The regulatory compact
  • Functions and goals of regulation

Business Basics for Regulated Utilities

  • Why capital investments are important to utilities
  • Utility expenses and why they are important to distinguish
  • Sources of capital
  • Pricing (rates) for regulated utilities
  • How revenues and earnings are calculated
  • Utility return on equity
  • Why a regulated utility is different from a non-regulated, competitive company

How Utility Rates and Earnings Are Determined

  • Cost-of-service ratemaking concepts
  • Rate base
  • How depreciation affects the value of utility rate base
  • Not all investment goes into rate base
  • Rate of return and how it is set in a cost-of-capital proceeding
  • What is fair and reasonable return on equity (ROE)?
  • How rates are set
  • Details of the regulatory process
  • The revenue requirement and how it is allocated among customer classes and charge types
  • Incentive regulation (performance-based and market-based)

How Utilities Can Exceed or Fall Short of Authorized Earnings

  • Earnings and expenses
  • How energy deliveries affect revenues
  • The role of capital investment in rate base and authorized ROE in utility earnings
  • How utilities can earn extra profit by offering additional services
  • Incentives
  • Cost of debt
  • Decoupling
  • How earnings can be increased under cost-of-service ratemaking
  • Earnings risks for utilities
  • Example of how utility earnings are calculated

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