Joan HoltzCASE 5-3 JOAN HOLTZ (A)*(

Joan Holtz

CASE 5-3 JOAN HOLTZ (A)*

(1) Electric utility bills.
An electric utility company can estimate with reasonable certainty the expected revenue in a given period by taking into consideration some of the following: customer habits, average historical trends, demand and supply forecasts, and environmental changes. The electric utility industry effectively uses an insurance industry concept—the law of large numbers, to determine with certainty, expected revenue. The law of large numbers states, as the number of participants (customers) in a risk class (low, medium, high kilowatt users) increases, the expected outcome (usage for specific class) remains the same but the standard deviation (variability of usage) continues to drop until the probability that the average outcome (average usage) will be different from the expected outcome (expected usage) becomes negligible. This concept is conceptually similar to the Central Limit Theorem, and thus illustrates on average, the more observations per class, the more the usage tends to be bell-shaped and this usage is used for basing revenues per class. This is one way how the utility company can determine period-end revenue. Another way is if customer usage is consistent from period to period it can base reported revenue on actual meter readings. The unreported usage in December would be reported in January, and overall revenues for this year would not be materially misstated. The utility company can also adjust for seasonal changes in demand (i.e less usage in summer due to daylight savings and more in the winter) and factor this into their calculation. Usually, utility companies send agents to verify meter readings and, if there is a difference, it is reflected in your next statement