Two classes of expenses determine the total cost of generating, transmitting, and distributing electric energy. They are:

1. Capital investment items: depreciation, interest on notes, property taxes, and other annual expenses arising from the electric utility’s capital investment in generating, transmitting, and distributing equipment, and in land and buildings,

2. Operation and maintenance items: fuel, payroll, renewal parts, workmen's compensation, rent for office space, and numerous other items contributing to the cost of operating, maintaining, and administering a power system.

In billing the individual consumer of electricity, the utility considers to what extent the total cost of supplying that consumer is determined by capital investment and to what extent it is determined by operation and maintenance expenses.

Furnishing power to some consumers calls for a large capital investment by the utility. With other consumers, the cost may be due largely to operation and maintenance. The following two examples illustrate these two
extremes of load.

1. In a certain plant, electricity is used largely to operate pumps, which run at rated load night and day. The power consumed by the pump motors is low and the plant shares a utility-owned transformer with several other consumers.

The amount of energy used each month is large because the pumps are running constantly. Therefore, the cost of supplying this consumer is largely determined by operating expenses, notably the cost of fuel. The capital investment items are relatively unimportant.

2. Another factory uses the same number of kilowatthours of energy per month but consumes all of it in a single eight-hour shift each day of the month. The average power is therefore three times greater than for the pump plant and the rating (and size) of equipment installed by the utility to furnish the factory with energy must also be about three times higher.

Costs rising from capital investment are a much greater factor in billing this consumer than in
billing the operator of the pump plant.

Demand is an indication of the capacity of equipment required to furnish electricity to the individual consumer. Kilowatthours or energy per month is no indication of the rating of equipment the utility must install to furnish a particular maximum power requirement during the month without overheating or otherwise straining its facilities.

What is needed in this case, is a measure of the maximum demand for power during the month. The demand meter answers this need. More importantly, the true demands that the equipment experiences are the maximum kilovoltamperes (kVA).

This takes into account the real power watts, and the reactive power VARs, as one quantity. With electronic meters, the meter calculates kVA demand from the coincident peak demand of the real and the reactive power. This represents the true maximum stress on the power equipment.

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