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Cost of Service

Indiana Industrial Energy Consumers, Inc. (INDIEC). Cost of Service. presented by Nick Phillips Brubaker & Associates, Inc. Overview. Principles / purposes Types of cost studies Major steps in a cost study Class revenue recovery Results for use in rate design. Main Principles.

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Cost of Service

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  1. Indiana Industrial Energy Consumers, Inc. (INDIEC) Cost of Service presented by Nick PhillipsBrubaker & Associates, Inc.

  2. Overview • Principles / purposes • Types of cost studies • Major steps in a cost study • Class revenue recovery • Results for use in rate design

  3. Main Principles • Regulation is a surrogate for competition • Limit on prices • Nondiscriminatory prices • Adequate service • Rates based on cost of service

  4. Rates Based on Cost of Service • Stability • Conservation • Engineering efficiency • Equity

  5. Main Purpose of aCost of Service Study To measure the responsibility of each class for the service provided by the utility.

  6. Purposes of Cost Studies • Regulatory • Evaluation • Rate Design

  7. Regulatory Purposes • Separate costs between differentregulatory jurisdictions • Attribute costs to customer classes based on how those customers cause costs • Calculate costs of individual typesof services • Determine how costs are to be recovered from customers and categories

  8. $ $ $ Evaluation Purposes • Measure adequacy of current rates • Evaluate proposed changes • Unbundling of costs

  9. Rate Design Purposes • Amount to be recovered throughretail rates • Rate design by classand rate type • Components of rates:$ / month, $ per kWh,$ per kW-month • Unbundling of rates RETAIL RATE

  10. Fundamental Concepts • Many different types of cost • Not all customers use allparts of system • Usage patterns affectcost incurrence

  11. Types of Cost Studies • Embedded • Marginal

  12. Network Transmission Service Transformation Service Distribution Wires Service Customer The Generation and Delivery of Electricity Integrated Electric Utility Capacitor Switching Equipment Switching Equipment Substation Transformer Power Plant Main Power Transformer Circuit Breaker Distribution Pole ABC Power & Light Company

  13. Three Major Steps FunctionalizationIdentify different types of cost ClassificationDetermine basis for each type of cost AllocationDistribute costs among classes and services

  14. Functionalization Steam Nuclear Hydro Solar Wind Other Purchased Power Production Step-up Stations High Voltage Sub-Transmission Transmission Substations Distribution Poles OH & UG Lines Transformers Distribution Meters Installations Billing & Collection Service Drops Customer Information Street & Outdoor Lighting Customer Service & Facilities Management Costs, Administrative Buildings Administrative & General

  15. Classification DemandCosts that vary with demand EnergyCosts that vary with energy provided CustomerCosts related to customers served Direct Assignment

  16. Classification of Plant & Expenses Customer Demand Energy Production Transmission Distribution Customer Svc General

  17. Customer Classes • Residential • General Service (Commercial) • Large Power (Industrial) • Lighting • Other

  18. GS Res Ind Allocation Factors • Represents class share of total • Externally suppliedEnergy, customer, demand • Internally generatedDerived from prior allocations

  19. Demand and EnergyAllocation Factors • Based on class usage at generator, not at meter • Losses: Reduction in available electricity after being transmitted over transmission and distribution (T&D) facilities

  20. Energy Loss Factors Energy Available Expansion Factor 100.00 kWh Generation Transmission /Subtransmission 100 / 98.11 = 1.01926Trans/Sub Customer 98.11 kWh 100 / 95.88 = 1.04297Primary Customer 95.88 kWh Primary 93.34 kWh Secondary 100 / 93.34 = 1.07135Secondary Customer

  21. Demand Allocation • Not all customers use all parts of system:Primary Distribution Plant & Expenses: Primary & SecondarySecondary Distribution Plant & Expenses: Secondary Only • Timing of demand is important (CP vs NCP)

  22. Demand Allocation FactorProduction (MW) GS Res Ind Ltg Coincident Peak 1,304 328 402 7 Loss Factor 1.0771 1.0765 1.0461 1.0771 1 CP At Gen 1,404 353 420 7 1 CP Gen A.F. 64.26% 16.18% 19.24% 0.32%

  23. Demand Allocation FactorPrimary Distribution (MW) Res Ind Ltg GS 420 7 353 1 CP at Gen 1,404 Portion Served At Subtrans 0 0 182 0 Prim & Below 1,404 353 238 7 1 CP Pri A.F. 70.13% 17.63% 11.89% 0.35% 1 CP Gen A.F. 64.26% 16.18% 19.24% 0.32%

  24. Demand Allocation FactorSecondary (MW) using NCP Res Ind Ltg GS NCP Demand Secondary 1,304 526 121 23 NCP A.F. 66.1% 26.6% 6.1% 1.2%

  25. Two Types of Demand Coincident (CP):Measurement of demandat time of system peak Non-Coincident (NCP):Maximum peakregardless of time

  26. CP and NCP Demands Coincident Peak NCP of A NCP of B Demand CP of B B CP of A A Time

  27. Demand Allocation Methods • Coincident peak or peak responsibility • Multiple CP – e.g. 4 CP, 12 CP • Average & Excess • Capital Substitution • Peak & Average • Energy Based

  28. J F M A M J J A S O N D Monthly Peak Demands as a Percent of Total System Peak Summer Peaking Utility 100% 80% 60% 40%

  29. J F M A M J J A S O N D Monthly Peak Demands as a Percent of Total System Peak Winter Peaking Utility 100% 80% 60% 40%

  30. J F M A M J J A S O N D Monthly Peak Demands as a Percent of Total System Peak 12 Month Peaking Utility 100% 80% 60% 40%

  31. Coincident Peak DemandAllocation Factor MW 2,500 MW Percent Res 2,000 64.26% 1,404 1,500 16.18% 353 GS 1,000 Ind 420 19.24% 500 Ltg 7 0.32% 0 2,185 J F M A M J J A S O N D 100.00% Coincident Peak

  32. Pipeline Storage Storage Gas IndustryFunctional Structure Burner Tip Pipeline 1 Wellhead City Gate LDC Pipeline 2 Pipeline 3 PRODUCTIONPurchased Gas Cost TRANSMISSION – STORAGEPipeline Transportation Cost DISTRIBUTION - STORAGE

  33. Cost Study Results Ind Res GS Ltg Total Rate Base $ 629.8 $ 221.5 $ 279.5 $ 19.2 $1,150.0 195.9 Revenue 293.5 111.7 7.6 608.7 175.0 Expense 256.4 96.1 6.7 534.2 $ $ Income (Return) $ 37.1 $ 15.5 20.9 $ 0.9 74.5 ROR 5.9% 7.0% 4.9% 7.5% 6.5% RROR 91 115 108 75 100 Subsidy (6.0) $ 2.0 (0.5) $ $ 4.6 $ $ - Source: Cost Study Summary - $ Millions

  34. Cost Study Measures (1) Class Rate of Return (ROR): Income Rate Base ROR = Revenue - Expenses Return (Income) =

  35. Cost Study Measures (2) Relative Rate of Return (RROR): ROR of class ROR of system RROR =

  36. Cost Study Measures (3) Subsidy: Subsidy = Revenue - Cost of Service Expenses +Return @ Target ROR Cost of Service =

  37. Cost Study Results Rate isToo Low Rate isToo High Rate is At Cost = System Average 100%Zero < System Average <100%Negative > System Average >100%Positive Rate of return Relative ROR Subsidy

  38. Using Cost Study For ClassRevenue Increases GS Ind Res Ltg Total Rate Base $ 629.8 $ 221.5 $ 279.5 $1,150.0 $ 19.2 Fair ROR 8.90% 8.90% 8.90% 8.90% 8.90% Req’d Return 56.1 19.7 102.4 1.7 24.9 Income $ 37.1 $ 15.6 $ 20.9 $ 74.5 $ 0.9 4.1 4.0 Income Def’cy 19.0 27.9 0.8 1.644 1.644 1.644 Tax Factor 1.644 1.644 Revenue Def’cy $ 31.1 $ 6.9 $ 6.5 $ 1.3 $ 45.8 Source: Cost Study Summary - $ Millions

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