THE ECONOMICS OF OVERHEAD COSTS AND THE ALLOCATION METHODS: AN ANALYTICAL APPROACH FOR THE COST OF SERVICE STUDY IN ELECTRIC UTILITY FIRMS

The purpose of this study is to investigate the corporate organizational structure of a typical electric utility firm, its interdepartmental functional relationships, and, specifically, the functional areas. The study focuses on how the corporate structure of an investor-owned utility is incorporated into the supply function for electricity within the context of its regulatory constraint. The study is based on the analysis of organizational structure and empirical studies of some selected generating electric utility companies.;Case studies of several electric utilities are included, utilizing time series data (1961-1984) compiled from the Federal Energy Regulatory Commission-Form 1, and the U.S. Department of Energy, Statistical Reports for class A & B.;Chapter I provides a general introduction and the scope of the study. Chapter II comprises three sections. Section 1 presents a conceptual model of a corporate organizational structure. Section 2 describes a theoretical cost model of an electric utility supply system. Section 3 reviews the corporate organizational structure of modern electric utility firms as reported by various management audit surveys. Chapter III presents a critical review of the economic overhead cost concepts for electric firms and alternative models used to allocate overhead fixed costs to customer classes or jurisdictions. Chapter VI proposes a cost refunctionalization models for economic overhead costs. Chapter V reports the results and conclusion of an empirical analysis applied to the various functional cost allocation models.;The study reveals that there is no single dominant exogenous variable that can be selected as the "best" solid allocation basis for any of the various components of fixed overhead costs. The disaggregation of cost to the lowest accounting level is found to be more desirable in refunctionalizing and/or allocating fixed overhead costs.;Growing interest by the public and regulatory bodies in the areas of utility management efficiency, and in the correctness of an allocation methodology of fixed overhead cost components is the main reason for such a study. The scope of the study is limited exclusively to the allocation of the components of fixed overhead cost.