Bay State Gas Company Distribution Rate Design “What is in the Customer’s Best Interest”

1. Bay State Gas CompanyDistribution Rate Design “What is in the Customer’s Best Interest” Joseph A. Ferro June 15, 2010 Presented at 2010 NASUCA Mid-Year Meeting San Francisco, CA

2. Distribution Rate Design - Summary • Summary of Recent Rate Order in MA D.P.U. 09-30 • Bay State Gas Co.’s Customer Rate Classes • Revenue Decoupling • Rate Design – Impact on Goals / Principles and Alternatives • Q&A

3. Summary of Recent Rate Filing – D.P.U. 09-30 • Filed on April 16, 2009 • Bay Sate first LDC to file under DPU directive to implement Decoupling • 6-month suspension period • Revenue Decoupling -- as directed in generic order (DPU 07-50) • All utilities must implement by 2012 in context of a rate case • Infrastructure Replacement Tracker • Inclining Block Rate Structure – as directed by DPU (DPU 08-35; N.E. Gas / Fall River)

4. Summary of Rate Order • New Rates Effective Nov. 1, 2009 • Revenue Increase of $19.1 million or 3.6% of Total Revenue • 56% of Request • ROE – 9.95% • PBR Plan Terminated • Revenue Decoupling, with Bay State modifications • Infrastructure Replacement Tracker Approved • Replacement of non-cathodically protected bare steel • File every May 1 for effect November 1 • Inclining Block Rate Structure

5. Bay State Rate Classes - Residential • Residential Heating • Average Distribution Bill - $39.11 / mo • Average Base Rate - $0.47 per therm • Residential Heating LI Discount • Based on discount realized prior to March 1, 1998 • 20.9% Discount off regular R-Heating Total Bill • Residential Non-heating • Average Distribution Bill - $17.26 / mo • Average Base Rate per therm - $1.13 per therm • Residential Non-heating LI Discount • Based on discount realized prior to March 1, 1998 • 19.0% Discount off regular R-Non-heating Total Bill

6. Bay State Rate Classes – Commercial & Industrial • C&I Low Annual / High Peak Period Use (70% or greater than annual use) • Annual Use less than 5,000 therms • Avg. Mo. Dist. Bill - $58 / Avg. Base Rate - $0.48 per therm • C&I Low Annual / Low Peak Period Use (less than 70% of annual use) • Annual Use less than 5,000 therms • Avg. Mo. Dist. Bill - $61 / Avg. Base Rate - $0.47 per therm • C&I Medium Annual / High Peak Period Use (70% or greater than annual use) • Annual Use between 5,000 therms and 39,999 therms • Avg. Mo. Dist. Bill - $274 / Avg. Base Rate - $0.26 per therm • C&I Medium Annual / Low Peak Period Use (less than 70% of annual use) • Annual Use between 5,000 therms and 39,999 therms • Avg. Mo. Dist. Bill - $226 / Avg. Base Rate - $0.22 per therm

7. Bay State Rate Classes – Commercial & Industrial, cont. • C&I High Annual / High Peak Period Use (70% or greater than annual use) • Annual Use between 40,000 therms and 249,999 therms • Avg. Mo. Dist. Bill - $1,243 / Avg. Base Rate - $0.19 per therm • C&I High Annual / Low Peak Period Use (less than 70% of annual use) • Annual Use between 40,000 therms and 249,999 therms • Avg. Mo. Dist. Bill - $1,361 / Avg. Base Rate - $0.16 per therm • C&I Extra High Annual / High Peak Period Use (70% or greater than annual use) • Annual Use of 25,000 therms or more • Avg. Mo. Dist. Bill - $6,639 / Avg. Base Rate - $0.145 per therm • C&I Extra High Annual / Low Peak Period Use (less than 70% of annual use) • Annual Use of 25,000 therms or more • Avg. Mo. Dist. Bill - $7,072 / Avg. Base Rate - $0.135 per therm

8. Decoupling - Public Policy Benefits • Aligns LDC and customer interests by removing financial disincentive for utility to aggressively promote energy efficiency and conservation • Contributes to lower total energy bills for customers • Promotes stronger partnership between the LDC and policy makers on conservation issues • Benefits the environment and future generations through reduced emissions • Promotes investment community confidence in utility by ensuring that declines in customer usage do not dampen financial performance • Throughput reductions not a contributing factor for LDC to file a base rate case • Supported by broad array of stakeholders including environmental advocates, gas industry groups, consumer representatives and policymakers

9. REVENUE DECOUPLINGSevering the Link Between Revenue and Customer Use Drivers or Intended Results – Utility Perspective • Removes LDC disincentive to promote energy efficiency • Stabilizes base revenue – unaffected by volume • Preserves incentive to add new customers and retain existing customers • Revenue tied to number of customers at benchmark revenue per customer • New customers excluded from Decoupling mechanism

10. DECOUPLING – A Reconciling Recovery Mechanism • Revenue Requirement or Target equals: Test Year (2008) or Benchmark base revenue per customer (“BRPC”) times the current number of customers taking service as of 2008 --- Plus revenue realized from new customers  Per Order - Exclude new customers added since December 31, 2008 • Revenue Decoupling Adjustment = [Benchmark BRPC – Actual BRPC] x Current No. of Customers

11. Revenue Decoupling Illustrative Example

12. DECOUPLING – Application of Rate Adjustment • All rate classes charged the same volumetric decoupling charge --- Revenue Decoupling Adjustment Factor (“RDAF”) • RDAF = Sum of decoupling revenue adjustment by rate groups / Firm sales + FT • Uniform charge designed to limit rate impacts to any one class • Potential shifting of revenue requirement • Temperature sensitive vs. non-temp. sensitive • Energy Efficiency participants vs. non-participants • High volume customers vs. all other customers

13. DECOUPLING – A Reconciling Recovery Mechanism • Example: • TY Rev = $1,000 • No. Customers = 100 • ARPC = $10 • Warmer than normal year/period, EE measures installed and Company loses 5 customers • Actual Revenue = $760 • Actual ARPC = $760 / 95 = $8 • Decoupling Adj. = 95 x ($10 - $8) = $190 • Company Revenue = $760 + $190 = $950 • Revenue down by $50 => 5 lost customers at $10 ARPC • Not $240 ($1,000 - $760)

14. DECOUPLING – Tracking Revenue by Rate Group and Season • Three Decoupling Rate Groups with 6-month seasonal Benchmark ARPC • Bay State proposed variation from MA DPU Generic Order • ARPC based on revenue per Order : • Residential Heating • Winter ARPC = $340 • Summer ARPC = $130 • Residential Non-heating • Winter ARPC = $114 • Summer ARPC = $ 96 • All 8 C&I classes • Winter ARPC = $1,410 • Summer ARPC = $ 487

15. DECOUPLING – Tracking Revenue by Rate Group and by Season • Why by Season? • Fair to separate winter/temperature sensitive ARPC and summer/non-temperature sensitive ARPC • Consistent with Bay State base rate (and CGA) structure • More timely reconciliations as compared to annual • Why by 3 Rate Groups combining all 8 C&I classes? • Avoids unintended revenue impact caused by C&I Rate reclassification • Example Extra High, G/T-53, reclassified to High Annual Use, G/T-52: • G/T-53 at $64,000 ARPC (winter) and $23,000 (summer) • G/T-52 at $12,000 ARPC (winter) and $ 4,500 (summer) • Rev Loss: $52,000 $18,500 = $70,500

16. RATE DESIGN • Inclining Block Rate Structure as directed by MA DPU and in conjunction with Decoupling • All Company proposed Customer Charge increases rejected • Maximize volumetric charges in the spirit of encouraging conservation • Inclining rates intended to encourage customers to conserve • Tail Block price $0.02 to $0.05 per therm higher than head block price • Do inclining rates promote conservation? • Res. Heating total rate of $1.30 per therm; commodity $0.85 / therm • Could inclining rates disadvantage high use customers? • No applicable energy efficiency measures • Business / operation requires maintaining or increasing high use level

17. RATE DESIGN – Longstanding Goals / Principles • Efficiency – promote economic use of distribution system • Unit marginal cost • Simplicity – consumers easily understand rates / charges • Could expand to also make it easy to administer • Continuity – gradual changes in rates to allow for consumers to adjust their usage patterns • Fairness – rates reflect the underlying or embedded cost of providing service to each rate class • Also intra-class considerations • Earnings Stability – company earnings should not vary significantly over a few years

18. Rate Design – Goals vs. Decoupling & Inclining Rates

19. Rate Design - Alternatives • Straight Fixed Variable Rate Design • Efficient, Simple, Fair and Earnings Stability • Reasonable Continuity, thus viable for the existing homogenous classes • Residential Heating - $39.11 / mo • Residential Non-heating - $17.26 / mo • C&I Low Annual, High Winter - $58 / mo • C&I Low Annual, Low Winter - $61 / mo • For other High Annual C&I classes, either create additional classes or base on customer design day demand • For Extra High Annual, currently partially based on monthly MDQ • “Modified” Fixed Variable Rate Design • Based on ACOS, 80% - 90% of revenue from fixed Distribution Charge • Remaining revenue from volumetric rate  close to unit MC • More Efficient, Simple, More Fair and reasonable Earning Stability

20. Bay State Gas – Distribution Rate Design Q & A ?