The PSC's rate-setting process is like the banker's loan process, although the PSC certainly doesn't lend money. Before the PSC sets a utility's rates, it analyzes the company's financial statements for accuracy, examines its operating practices to ensure efficiency, and reviews known future events that may affect the business.
There is a major difference between the PSC and the banker, however. The banker would be pleased if a loan applicant could make very high profits. By law, the PSC must allow only those profits that are just and reasonable. In other words, the PSC must allow utilities an opportunity to earn just enough profit so that utility owners will have the incentive to provide adequate service to customers. No more, no less. It is this public interest protection that makes the PSC unique.
After the PSC examines all the factors affecting a utility's profitability, it approves a total revenue level. One more matter is then considered: how much should each customer group be charged? The charges from all groups must equal the total revenue level and customer groups cannot be discriminated against. For example, if each customer were exactly equal, simple division of the total revenue level by the number of customers would equal a nondiscriminatory rate. In practice, however, customers are not equal. Some use more of the utility's service than others; some use it at peak times; some live in towns where service is readily available, while others live in isolated areas where the cost of service may be quite high; and some have alternatives to utility service. These are only a few of the differences among customers that the PSC must consider to avoid rates which unduly discriminate in favor of any customer or customer group. From these factors, balanced against the total revenue level, the PSC calculates rates, usually by unit of consumption.