EEI Electric Rates Advanced Course

1. EEI Electric Rates Advanced Course Efficient Pricing Equals Energy Efficiency Jon Kubler

2. Traditional vs. Non-Traditional

3. Traditional Rate Design • Rate Base x Rate of Return • = Allowed Revenue • + Expenses • = Revenue Requirement • Actual Revenue • = Revenue Deficiency

4. Traditional Rate Design • Objectives • Collect Embedded Revenue Requirement • Recover Costs - Based on Cost Causation • Earn a Fair Rate of Return

5. Why Change? Even if you are on the right track, you will get run over if you sit there long enough. Will Rogers

6. Electricity prices have significantly increased over the last 5 years ……. 35% increase in 8 years Cents/kWh 6% increase in 15 years Source: Energy Information Administration (EIA)

7. Stockholders Customers Regulators Employees Achieving Balance • Increasing profits • Stabilized earnings • Satisfied customers • Increased dividends • Reliable electric service • Excellent customer service • Fair and stable prices • Simple rates Pricing and Rates • Very satisfied customers • Fair and stable prices • Reliable electric service • Encouragement of load management • Simple rates • Sales tools • Reduced administration • Effective partnerships

8. Ongoing Strategic Objectives • Increase and stabilize earnings • Simplify pricing structures • Develop and offer new pricing options • Comply with regulation • Encourage load management

9. Pricing Principles • Prices will recover marginal costs (at least) • Costs will be aligned with cost causers, and prices will reflect costs • Risk will be factored into prices • Pricing will help create opportunities that provide customer and company value • Prices will promote the efficient consumption of energy • Prices will meet regulatory specifications

10. Share The Risk The Concept Variability Cost to Customer Risk to Customer

11. An Application

12. Share The Risk Domestic Customers FlatBill R TOU-REO Cost to Customer RCPP Risk to Customer

13. Non-Traditional Product Design Objectives • Meet Differing Customer Needs, e.g., • Bill Stability/Protection from Weather and Other Risk Factors • Access to Low-Cost Energy (RTP) • Access to “Green” Energy • Increase And Stabilize Company’s Earnings • Capture Value Created in New Pricing Products • Grow Revenue; Increase Off-Peak Sales, etc. • De-link Revenues from Weather • Manage Financial Risk of Offering New Products • Simplify Rate Structures • Comply With Changing Regulations

14. Innovation Process Define Objective Collect Data Identify Problem/Need Analyze Data Modify or Eliminate Generate Ideas Evaluate New Product Evaluate Ideas Implement New Product Design Possible Solutions Select Best Solution Evaluate Solutions

15. The Result

16. Non-Traditional Pricing Products • Real-Time Pricing (RTP) • Price Protection Products (CfDs, Caps, Collars) • RTP with Adjustable CBL • Fixed Pricing Alternative (for RTP customers) • Daily Energy Credit • Demand Plus Energy Credit • FlatBill • FlatBill – Select • Critical Peak Pricing • Time of Use

17. Real Time Pricing

18. Embedded Cost Concept Behind the RTP Rate Marginal Cost • Goals: • Must recover embedded costs (as allowed by the PSC) • Allow customers to benefit from receiving prices based on marginal costs • Question: • How do you simultaneously accomplish the above goals?

19. Types of Real Time Pricing Tariffs • One-part RTP • Hourly pricing for 100% of the actual energy used • Includes a mark-up to recover fixed costs such as customer, distribution, and transmission costs • A calculated access charge that is different for each customer, or • A multiplier for each hour that may vary depending on the hourly marginal price, or • A premium added to each hour • Two-part RTP • Total bill comprised of two parts • Base bill on a fixed portion of the customer’s load or customer baseline load (CBL) to recover fixed costs, and • Hourly prices applied to the difference in energy between the actual load and the CBL to recover marginal costs

20. Demand (MW) 20 Actual Load 15 RTP Prices CBL 10 Standard Bill 5 0 Jan Feb Mar Apr May Jun Jul Aug Sept Oct Nov Dec Off-Peak On-Peak Off-Peak Two-Part RTP Tariff

21. RTP Bill CBL kW Why is Two-RTP Valuable? Enjoy Low Cost Energy Avoid High Prices 6 12¢ 9¢ 6¢ kW Demand Earn Credits Thousands RTP Price (cents per kWh) 3¢ Standard or CBL Bill 0 Hours of the day RTP Price Actual kW

22. Outage costs Transmission Components of Hourly Price 32 Risk Factor 28 Losses Lambdas 24 20 16 12 8 4 0 0 4 8 12 16 20 24 Hours of the Day

23. Components of the RTP Prices All 8760 hours contain these components: • System Lambda • Fuel plus variable O&M of incremental generator or purchase • Stable in most hours • Higher on high-load days • Losses • Between generator and customer meter • Varies by hour • Greater in high-load and/or hot weather • Nothing new, already incorporated into standard rates • Risk Adder • Helps recover fixed costs • Compensates for risks

24. Components of the RTP Prices Remaining components in some hours: • Incremental transmission cost • Occurs on summer weekday afternoons • Expect 100 to 300 hours per year • About 2-10 cents per kWh • Reflects transmission capital costs • Assigns costs to appropriate hours • Assigns costs to those causing it • Reliability (or outage) costs • Also called "loss of load probability" • Assigns incremental capacity costs to "capacity constrained" hours • Expect about 50 hours per year

25. Losses 2% Risk Adder 8% Lambda 87% Transmission 2% Reliability 1% Components of Annual RTP Prices Average

26. RTP Alternatives or Hedges

27. Weather Fuel Price RTP Prices Wholesale Market Factors that influence RTP prices Economy Unit Availability Transmission Lines/Interconnections

28. RTP (DA/HA) Fixed Pricing Alternative-FPA Price Protection Products Adjustable CBL RTP Alternatives (Hedges) RTP Customers

29. RTP Alternatives (Hedges)Adjustable CBL

30. RTP with Adjustable CBL • Allows RTP customer to manage RTP price risk and volatility. • Customer may adjust the CBL at expected RTP prices for next calendar year. • Customer can raise CBL (lower exposure to price volatility) • Cannot exceed customer’s expected total consumption • Customer can lower CBL (Raise exposure to price volatility) • Cannot be less than zero (0) kW • RTP credits given for load reductions below customer’s adjusted CBL or pay prevailing RTP price for usage above Adjusted CBL • Available after a customer has been on RTP for 12 months

31. RTP Adjustable CBL Example Raising the CBL Load 4 Actual RTP Priced 3 New CBL Original RTP @ 4.7¢ New CBL Billed at Average of 5.6¢ Old CBL 1 Original CBL @ 6.9¢ RTP Adjustable CBL allows you to lock in a price for the whole year

32. RTP Alternatives (Hedges) Price Protection Products (PPP)

33. Price Protection Products • Price Protection Products are price guarantees that give you more stability and certainty with RTP. ?

34. Price Protection Products • Contract for Differences (CfD) • Standard • Range • Limited • Caps – upfront premium to guarantee a maximum average delivered RTP price • Collars – sets a Cap and Floor of the RTP price Customers should still respond to the actual hourly RTP price

35. Contract for Differences (CfD) • Fixed price based on forecast • No up-front premium • Specified time period • Specified amount of load (up to average historical RTP purchases) GPC pays Customer High Avg. Cents/kWh CfD Low Avg. Customer pays GPC

36. How do you lower your prices and lower your risk - at the same time!?

37. You Innovate! Prices are examples intended to be used only for illustration.

38. Fixed Price Alternative (FPA) Stable and Simple Historical RTP RTP? ¢/kWh FPA RTP?

39. Fixed Pricing Alternative (FPA) • Stable energy prices • Fixed rates without hourly price risk • Simple energy pricing and billing • Energy-only, TOU pricing • Demand ratchets and demand charges are eliminated • CBL is eliminated • Need for Adjustable CBL and Price Protection Products is eliminated • Low energy prices • No RTP Admin. charges

40. Fixed Pricing Alternative How does the rate work? • On-Peak • Jun-Sep, Monday-Friday, Non-Holidays, 2pm-7pm (5% of the year) • Fixed On-Peak price • Off-Peak • All other hours of the year (95% of the year) • Customer-specific, contracted rate

41. Example of Off-Peak Rate Calculation Using FPA price file

42. Example of Off-Peak Rate Calculation

43. RTP Portfolio Large Business PLL FPA RTP w/Adjustable CBL Variability Cost to Customer RTP w/ PPP RTP-DA RTP-HA Risk to Customer

44. Demand Response Program

45. Daily Energy Credit (DEC) How Does It Work?

46. For Customers: Savings on electric bill A voluntary program A known time period for reductions For Georgia Power: Lower costs/RTP/FCR Enhanced reliability Customer Satisfaction Daily Energy Credit (DEC) What are the benefits?

47. Demand Plus Energy Credit (DPEC) • Allows customers to receive credits for demand reduction. • Minimum of 30 minute notice • Paid a fixed credit or “reservation fee” for being willing to be on the program • Credit paid each month during the summer months of June – September based on the contracted demand reduction from the Normal Electric Demand (NED) to the FDL during the DPEC Peak Period. • Paid an energy credit every time and interruption is called. • The monthly energy credit will paid on the monthly actual energy (kWhs) reduced below the Normal Electric Demand (NED), but not below the Firm Demand Level (FDL). • Customer will be charged a compliance incentive of $3.50 per kW for each kW above the FDL during each hour of an actual reduction period. • One hour of forgiveness

48. Critical Peak Pricing

49. Critical Peak Pricing TOU Design • Based on a TOU style tariff • Base Charge • Energy Charges • On-Peak • Shoulder • Off-Peak • Critical Peak • Critical Peak limited to specific number of hours a year • Day - ahead notice • Energy Management System • Thermostat • Orb • Could move a customer to the tariff revenue neutral

50. $10,000 $ 20,000 $ 30,000 $ 40,000 $ 10,000 10% $100,000 30¢ Critical Period Hours/Day/Year $40,000 12¢ Calculated using existing revenue $ 20,000 $30,000 Off-peak On-peak Off-peak TOU Critical Peak Pricing