What Is Demand Billing?

Mary McMahon

Demand billing is an approach to charging for services based both on quantity used and peak demands during the billing period. This allows service providers to balance individual usage and the infrastructure needs required to meet demands from customers. Electric utilities commonly use this approach, although other providers may as well. A slightly different version can also be seen in health care, often as part of an appeals process to receive payment for a claim that was originally rejected by a benefits provider.

Demand billing, when used by the electric company, measures how much energy customers use and when.
Demand billing, when used by the electric company, measures how much energy customers use and when.

In the case of electricity, demand billing measures how much electricity a customer uses, and when the customer uses it. Utilities need to have sufficient capacity to meet customer needs during peak periods, such as the middle of the day in the heat of summer, when air conditioners may run full blast across the service area. Because they cannot store electricity for times of greater need, this means that they must be able to quickly increase production to accommodate it. As the demand on the system decreases, they can step back electricity generation to accommodate the reduced customer need.

Demand billing is often used by electric utilities.
Demand billing is often used by electric utilities.

Utilities that use this scheme can charge more for high electricity usage, particularly during peak hours. Demand billing has a twofold effect. It funds operations at the utility, ensuring that it has enough money to support its infrastructure and ensure that enough power will be available when people want it. Furthermore, it creates an incentive for customers to shift the timing of their energy use to avoid high bills. If they only use electricity during off-peak hours, their energy costs will drop under the demand billing scheme.

This approach can work with other services where companies need to consider both overall usage and periods of especially high demand. With water, for instance, the pipes and pressure need to be sufficient to meet the needs of customers. If everyone wants to take a shower at seven in the evening, this might overload the system and could cause shortages unless the utility was prepared in advance.

Health care demand billing works slightly differently. It occurs when benefits providers refuse to pay out on a claim because it wasn’t authorized or they feel it was not medically indicated. Customers can appeal by asking the service provider to present a demand bill to the benefits provider. The bill can offer documentation that the care was medically necessary and should be covered under the terms of the policy.

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