If your bill shows "metered demand" and "billed demand" — and the higher one is costing you
If you run a plant, a hospital, a school system, a city, or a large commercial operation — and you open the electric bill, see a metered demand line and a billed demand line, and wonder why they're different and why the higher one costs so much — this guide is for you.
If you've ever had one odd month — one commissioning event, one short peak — and then felt like you were paying for that single moment on every bill that followed, that's the world of demand ratchets. You are not in the energy business. You're in manufacturing, education, healthcare, or municipal operations. The job here is to make this one mechanism clear enough that you can control it.
How can you manage your facility's demand in a way that avoids punitive ratchet charges and lowers your overall utility expense — without contorting your entire operation around the rate book?
This is Part 1 of 2. Here we get very clear on the what and the how: what a ratchet is, how it's calculated, why utilities use it, and what it does to your bill. Part 2 turns to strategy — demand budgeting, monitoring, and lining up finance and operations around it.
A demand ratchet is a billing method your utility applies to larger commercial and industrial customers. Without a ratchet, the utility finds your highest 15- or 30-minute demand interval for the month, bills that, and resets next month. Fresh start, every cycle.
A ratchet changes that. It remembers your highest peak over a look-back window and bills you for a percentage of it as a floor — every month, whether you hit that level again or not. Each month, two numbers get compared:
Your actual highest demand interval this billing period, exactly as the meter recorded it.
Here's the trap in one line. Hit a peak of 1,000 kW once, with a 70% ratchet, and your billed floor becomes 700 kW — until you either set a higher peak or that old one ages out of the window. You could run at 500 kW every month afterward. The meter will honestly show 500. The bill will still charge you for 700.
"The demand ratchet determines minimum billing demand for a commercial industrial customer by establishing the relationship between billable demand and the highest demand placed on the grid over the prior 11-month period."
What that gap looks like over a year
A single 1,000 kW peak in January. After that, the plant never pulls more than about 600 kW. But the 70% floor (700 kW) sits above every quiet month — and that shaded gap is demand you're billed for but never used.
The type of ratchet in your tariff shapes the pattern of pain. All three share the same core mechanic — billed demand is the greater of your metered peak or the floor — but the look-back window differs.
A % of your highest peak over the previous set of months — e.g. the last 11, making a rolling 12-month floor.
Often summer. Your summer peak sets the floor for the non-summer months — brutal for seasonal and cold-storage operations.
The highest peak in a defined 12-month period sets the minimum for the entire following year.
Why the utility does this
From their side, it's infrastructure and liability. To serve you, the utility invests in transformers, substations, feeders, and generation that can handle your maximum possible load. They don't know what's inside your plant — they only know what the meter has seen.
When you create a high demand event, the meter records it. To the utility, that number is a statement: this customer can place this much load on the grid. The ratchet says: because you've proven you can hit that level, we'll recover the cost of keeping that capacity ready — even in months you don't reach it.
On paper, that's a reasonable objective — a way to split the difference between your typical month and your worst month and fund reserve capacity. But you don't live on paper; you live in a P&L. The same mechanism that is rational for the utility becomes a trap for the customer who sets a high peak once, by accident or necessity, and then pays for that single interval for a full ratchet term.
Four ways a ratchet hits an operator:
One profitable production push, one commissioning test, one maintenance event sets a high peak — and you pay demand charges based on it for the next year, even when your real operation is far lower.
Most facilities know "if we set a high peak, we pay some minimum." Few know the exact percentage, the exact look-back, or how it interacts with their real load. Two lines on the bill — metered and billed — differ, and nothing connects the rate language to the plant floor.
Run hard one quarter and light the rest, and a ratchet turns that intense period into a year-round demand floor — thousands per month in charges during months your load is a fraction of it.
Bringing on new equipment, testing backups, running full-load tests — all necessary. Under a ratchet, those necessary activities can become the peak that drives your floor for months.
Amid roughly 6.2 million miles of transmission and distribution infrastructure, and some 168 million electric meters, there's a little gap — maybe 5 to 10 feet between the utility meter and the customer's main distribution panel. It's an unclaimed, jurisdictional gray space. And it holds the system's largest unsolved issue.
In that gap, three things are missing — and each cuts both ways, against the utility and the customer: data, operational knowledge of the rate, and regulatory participation. Ratchets sit right in it. Customers aren't unintelligent — the rate designers who love this stuff are simply very different people from the plant manager making product, and the incentives don't line up.
There's a narrative that ratchets are "good" because they incentivize careful demand management. That assumes something untrue in most plants: that operators have deep tariff fluency, live demand data, and a way to turn both into scheduling. In reality, the ratchet just shows up as higher cost. What Daniel calls energy folklore — "I think we pay a percentage of our highest peak no matter what" — is the ceiling of most operators' understanding.
| The myth | The reality |
|---|---|
| "It only applies if I exceed my historical peak." | If that were true, it wouldn't be a ratchet — just normal monthly billing. The whole point is you're billed a % of a past peak even when you stay below it. |
| "Cutting my kWh will fix my demand charge." | Usage (kWh) and demand (kW) are different. You can lower total consumption and still have one short interval where everything runs at once and sets a high peak. |
| "Once I set a peak, I'm stuck with it forever." | Not permanent — it's bounded by the look-back. On a 12-month ratchet, the peak ages out of the rolling window (or is replaced by a higher one). There's a reset if you understand the timing. |
| "Demand charges are a small part of the bill." | For many C&I customers they're 30–70%+ of the total. Pair a high floor with a mediocre load factor and your all-in cost per kWh runs far above the printed energy rate. |
| "My consultant will handle this." | A consultant can advise, but they don't decide when you start the extruder or test the backups. Without a persistent link between finance, ops, and real-time data, a memo changes little on the floor. |
Bottom line: ratchets live at the intersection of finance, operations, and data. Connect all three and you can manage them. Connect none and you get all of the penalty and none of the supposed benefit.
You can't manage what you don't monitor. Six numbers turn a ratchet from black magic into a controllable cost:
The tallest interval this period — not an average.
The "X%" in your tariff language. Often ~70% in the Midwest.
How long a peak follows you — 11 months, a season, a year.
The number actually charged — the greater of metered or floor.
Cost per kW applied to billing demand. Multiply for the charge.
Usage vs. demand. Watch billed load factor, not just metered.
Here's why load factor is the hinge: if your billed demand is held high by an old peak, your load factor on billed demand is worse than on metered — and your all-in cost per kWh is worse than it needs to be. Don't just improve your metered load factor. If a ratchet is in play, reduce the gap between billed and metered kW.
"You can't really call management management unless there is monitoring and control. This is across the board — not just energy. You can't financially manage unless you monitor and control. You can't operationally manage unless you monitor and control."
The king question — the only one that matters
The utility is effectively the vendor here, and there's no ready-made list of red-flag phrases. The red flag is simpler: anyone — a vendor, or the utility proposing a rate change or program — who won't break open the tariff and model it against your real data. Daniel's bar never changes:
"Using my exact data and a functional equivalent of my utility's billing calculator, calibrated to my specific rate — recreate the exact bill, to the penny, that I received last month. Then model how your project changes my data as an input, and show the to-the-penny outcome my rate's rules would produce next month. Then show it across a full year, including any seasonal variance written into the tariff."
Anyone using regional averages, "typical" performance, or generic case studies will not do the job they claim. Demand a specific case study of this exact maneuver, on a facility like yours — same industry, same shift schedule, same rate. Specific, specific, specific. If they can't get specific, they can't perform.
Who wins with a ratchet on their rate — and who bleeds
- You know your exact ratchet %, look-back, and how they hit your load.
- You have revenue-grade, real-time monitoring — table stakes, not a luxury.
- Finance and operations are linked around a common demand-budgeting goal.
- You watch billed load factor, not just metered.
- You run on energy folklore — a vague sense a ratchet exists, no specifics.
- You have no monitoring and no way to see peaks as they form.
- You're seasonal with no seasonal rate to match your operation.
- You accept a vendor or rate change without a to-the-penny model on your tariff.
A ratchet means billed demand and metered demand can drift apart — and that gap is money.
Watch both, close the gap, and one bad peak stops owning your year.
Ratchets aren't going away because we wish they would. They're in your tariff today, and the utility won't explain them to you in operational terms. Your edge is monitoring, the specifics of your rate, and a finance-and-operations partnership that treats energy like any other supply chain.
Demand budgeting — cataloging how each major process contributes to your peak, feeding that into scheduling and controls, and uniting finance and operations to hold the floor down. Part of the complete C&I energy series at Energy Answers.
| Demand ratchet | A billing rule setting your minimum billed demand at a % of a past peak over a look-back window. You're billed the greater of that floor or this month's metered demand. |
| Metered vs. billed demand | Metered = what the meter recorded. Billed = what you're charged for. A ratchet makes billed run higher than metered. |
| Look-back period | How far back the utility hunts for your highest peak — 11–12 months, or a season. Defines how long a peak follows you. |
| Ratchet percentage | The share of the historical peak that becomes your floor — often ~70% in the Midwest; 75–80% elsewhere. |
| Load factor | Usage relative to demand. Watch billed load factor — a high floor drags it down and lifts your all-in cost per kWh. |
| All-in cost per kWh | Total bill (demand + energy + riders) ÷ total kWh. The number that actually reflects a ratchet's damage. |
| Demand budgeting | Cataloging each major load's contribution to your peak, then scheduling around it. The Part 2 playbook. |
| Energy system gap | The 5–10 ft between meter and panel where data, rate knowledge, and regulatory participation all go missing. |
Energy Answers · by Daniel Burke · Energy Decision 03 · Demand Ratchets, Part 1