COMMUNICATING RATE STRUCTURES or LET’S TALK ABOUT YOUR ELECTRIC BILL

1. COMMUNICATING RATE STRUCTURES or LET’S TALK ABOUT YOUR ELECTRIC BILL KAEC Kentucky Member Services Association Spring Workshop April 18, 2011 Andrew Melnykovych Communications Director Kentucky Public Service Commission

2. THE RATEMAKING PROCESS

3. The PSC ratemaking process • Governed by statute – KRS 278 • Rates must be “fair, just and reasonable” • Investors are entitled to an opportunity to earn a return on equity • Two-part process • Revenue requirement • Rate design

4. The PSC ratemaking process • Timetable • 30-day notice of intent required • Public notice required • Clock starts when application complete • Initial 30-day suspension period - automatic • PSC typically extends suspension period • Further suspension may be for either five or six months, depending on type of rate case • Case must be completed within 10 months • Rehearing requests – within 23 days of final order

5. The PSC ratemaking process • Intervenors • Kentucky Attorney General - statutory representative of ratepayers in general • Full intervenors – must show they represent unique interests and will contribute evidence that otherwise might not be brought before the PSC – testimony, discovery, cross-examination • Limited intervenors – cross-examination only

6. The PSC ratemaking process • Process • Intervention – may come before filing of application • Discovery – one or more rounds of data requests to/from parties; from PSC staff • Public meetings – at PSC discretion • Public comment • Evidentiary hearing – not required • Post-hearing filings • Final order

7. The PSC ratemaking process • Settlements • Must be unanimous – all full intervenors agree • Settlements typically are “black boxes” –do not specify details of trade-offs in areas such as expenses and rates of return • However, resulting rates must still meet “fair, just and reasonable” test

8. The PSC ratemaking process • Revenue requirement • Bottom-line number for total revenue • Calculated over a “test year” – 12-month period • Historic test year – previous 12-month period that ends within three months of filing date – actual numbers • Forecasted test year – prospective period within 12 months of proposed effective date • Suspension period is five months for historic, six months for forecasted

9. The PSC ratemaking process • Revenue requirement • Allowable expenses – operations, equipment purchases, personnel costs, capital costs, etc • Expenses not allowed – promotional advertising, executive bonuses, charitable donations, club memberships, etc • Unusual or one-time costs or revenue are excluded • Final revenue requirement = allowable expenses and the opportunity to earn a reasonable rate of return on equity (investor-owned) or to meet TIER requirement (coops)

10. The PSC ratemaking process • Rate design • Allocates revenue over various rate classes – residential, commercial, industrial, etc. • As part of rate application, utilities must submit a “cost of service” study that determines how much it costs to serve each rate class • PSC uses cost of service study as a guideline, but rates are not rigidly set to reflect costs • Some rebalancing of costs and rates typically occurs in every rate case

11. TALKING ABOUT RATES

12. TWO FUNDAMENTAL TRUTHS

13. NOBODY LIKES PAYING THEIR ELECTRIC BILL • 1A. CUSTOMERS LIKE RATE INCREASES EVEN LESS

14. 2. RATES AND RATEMAKING ARE COMPLICATED 2A. THAT MAKES THEM HARD TO EXPLAIN 2B. CUSTOMERS DON’T LIKE COMPLEXITY

15. SO WHY BOTHER?

16. Don’t allow an information vacuum because… If you don’t provide information, somebody else will – and it’s likely to be wrong

17. A lie gets halfway around the world before the truth has a chance to get its pants on in the morning. Winston Churchill

18. HOW DOES THE PSC COMMUNICATE ABOUT RATES?

19. PSC has generally: • Focused on rate cases • Relied on the news media to convey information while a rate case is pending • Emphasized process over issues • Used news releases sparingly

20. Advantages of PSC approach: • Above the fray • Legal justification • Educates news media • Builds basis for final decision

21. Shortcomings of PSC approach: • Doesn’t deal with public directly • Doesn’t address rates at a fundamental level • Isn’t geared toward public education • Saw this with recent AEP/KP rate case and aftermath

22. The Kentucky Power situation taught us that: • Many customers don’t fully grasp connection between electric consumption and bill amount • Most customers don’t understand PSC role • Most customers don’t understand rate process, especially settlements • Customers don’t understand subsidies that exist within rate structures • Customers appreciate outreach and education efforts

23. WHAT ARE WE GOING TO DO DIFFERENTLY?

24. Adopt a more pro-active approach loosely modeled on efforts that began in 2003 to educate the news media and public about rising natural gas costs. It has largely defused any controversy over gas costs.

25. New approach includes: • Adding an information component to public meetings • Conducting informational meetings as needed • Online presentations about: • - Reading/understanding your electric bill • - The ratemaking process • Other elements to be determined – we welcome your suggestions

26. EXAMPLES

27. UNDERSTANDING YOUR ELECTRIC BILL

28. ENERGY CHARGE

29. FUEL ADJUSTMENT CHARGE http://psc.ky.gov/agencies/psc/consumer/FAC%20QandA.pdf

30. DEMAND-SIDE MANAGEMENT CHARGE

31. ENVIRONMENTAL SURCHARGE

32. TOTAL BILL

33. MONTH-TO-MONTH USAGE

34. Natural Gas Prices An Overview and a Look Ahead to the 2010-2011 Heating Season News Media & Public Briefing October 29, 2010 Andrew Melnykovych Communications Director Kentucky Public Service Commission

35. Structure of the natural gas industry • How natural gas rates are set • The natural gas market • Recent trends in gas prices • What’s ahead for 2010/2011 • What consumers can do

36. 1990 1995 2000 2005 2010 Year

37. Jan. 08 June 08 Jan. 09 Aug. 09 Oct. 10 Spot price decline – 6/08 ($13) to 8/09 ($2.42) – 81%

38. Current gas costs Gas Cost Adjustment - per 1000 cubic feet LDC 11/08 11/09 11/10 09-10 % 08-10% Average $11.70 $5.61 $5.70+ 2%- 51% Atmos $11 $6.09 $4.67 - 23% - 58% Columbia $14.23 $3.68 $6.95 + 89%- 51% Delta $13.13 $6.66 $6.17 - 7% - 53% Duke $9.05 $6.70 $5.31 - 20% - 41% LG&E $11.09 $4.91 $5.39 + 10%- 51% 11/02 average = $4.90/mcf ($5.81 adj. for inflation) (as of 11-1-10)

39. Current gas costs Total gas bill – “typical customer” – 10 mcf/mo LDC Nov. 2009 Nov. 2010 % change #Atmos $82.18 $70.20 - 15% Columbia** $67.90 $100.55 + 48% #Delta $123.73 $125.10 + 1% #Duke* $105.68 $106.30 0% #LG&E $80.90 $88.80 + 10% Average $92.08 $98.19 + 7% 2008 avg. - $150.78 (as of 11-1-10) # Base rate adjustment since 11/01/09 * Gas cost adjusted monthly ** Gas cost last adjusted for September; others for November

40. Psc.ky.gov/av_broadcast/2008-NaturalGasBriefing/NaturalGasBriefing_29Oct08.asxPsc.ky.gov/av_broadcast/2008-NaturalGasBriefing/NaturalGasBriefing_29Oct08.asx

41. Contact information: Andrew Melnykovych Communications Director Kentucky Public Service Commission 211 Sower Boulevard, Frankfort KY 40602 502-564-3940 x208 Andrew.Melnykovych@psc.ky.gov