Billing
Ratchet Clause
Definition
A utility tariff provision that sets a minimum monthly demand charge based on a percentage (typically 70–90%) of the highest peak demand recorded in the prior 11–12 months. Even if current-month demand drops significantly, the customer still pays based on that historical peak.
Why It Matters for Your Business
Ratchet clauses trap commercial customers in high demand charges long after the peak event that caused them. A single day of high demand (e.g., from a heatwave or equipment failure) can inflate bills for up to a year. Avoiding ratchet triggers requires proactive demand management.
Frequently Asked Questions
Do all utilities have ratchet clauses?
No — they're most common in commercial and industrial tariffs in states with capacity-constrained grids. Check your rate schedule for "ratchet," "minimum demand," or "billing demand" provisions.
Can ratchet charges be negotiated?
In some cases, utilities will grant exceptions for unusual events (equipment failures, temporary facility shutdowns). Contact your utility account manager with documentation of the anomalous demand event.