Cost of ServiceCost of Service

Indiana Industrial Energy Consumers, Inc.(INDIEC)

Indiana Industrial Energy Consumers, Inc.(INDIEC)

presented by

Nick PhillipsBrubaker & Associates, Inc.

presented by

Nick PhillipsBrubaker & Associates, Inc.

• Principles / purposes

• Types of cost studies

• Major steps in a cost study

• Class revenue recovery

• Results for use in rate design

• Principles / purposes

• Types of cost studies

• Major steps in a cost study

• Class revenue recovery

• Results for use in rate design

OverviewOverview

Main PrinciplesMain Principles

• Regulation is a surrogate for competition

– Limit on prices

– Nondiscriminatory prices

– Adequate service

• Rates based on cost of service

• Regulation is a surrogate for competition

– Limit on prices

– Nondiscriminatory prices

– Adequate service

• Rates based on cost of service

Rates Based on Cost of Service

• Stability

• Conservation

• Engineering efficiency

• Equity

• Stability

• Conservation

• Engineering efficiency

• Equity

Main Purpose of aCost of Service StudyMain Purpose of aCost of Service Study

To measure the responsibility of each class for the service

provided by the utility.

To measure the responsibility of each class for the service

provided by the utility.

Purposes of Cost Studies

• Regulatory

• Evaluation

• Rate Design

Regulatory PurposesRegulatory Purposes• Separate costs between different

regulatory 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

• Measure adequacy of Measure adequacy of current ratescurrent rates

Evaluation PurposesEvaluation Purposes

• Evaluate proposed changes

• Unbundling of costs$

$

$

• Amount to be recovered throughretail rates

• Rate design by classand rate type

• Components of rates:$ / month, $ per kWh,$ per kW-month

• Unbundling of rates

Rate Design PurposesRate Design Purposes

RETAIL RATERETAIL RATE

Fundamental ConceptsFundamental Concepts

• Many different types of cost

• Not all customers use allparts of system

• Usage patterns affectcost incurrence

Types of Cost Studies

• Embedded

• Marginal

• Embedded

• Marginal

The Generation and Delivery of ElectricityIntegrated Electric Utility

SubstationTransformer

PowerPlant

MainPower

Transformer

Circuit Breaker

DistributionPole

SwitchingEquipmen

t

SwitchingEquipment

Capacitor

Distribution Wires

Service

Network Transmission

Service

TransformationService

Customer

ABC Power & Light Company

Three Major StepsThree Major StepsFunctionalization

Identify different types of cost

ClassificationDetermine basis for each type of cost

AllocationDistribute costs among classes and services

Management Costs, Administrative Buildings

Management Costs, Administrative BuildingsAdministrative & GeneralAdministrative & General

Meters InstallationsBilling & Collection Service Drops

Customer InformationStreet & Outdoor Lighting

Meters InstallationsBilling & Collection Service Drops

Customer InformationStreet & Outdoor Lighting

Customer Service & FacilitiesCustomer Service & Facilities

Substations Distribution PolesOH & UG Lines Transformers

Substations Distribution PolesOH & UG Lines Transformers

DistributionDistribution

Step-up Stations High VoltageSub-Transmission

Step-up Stations High VoltageSub-Transmission

TransmissionTransmission

FunctionalizationFunctionalizationSteam Nuclear Hydro

Solar Wind Other Purchased Power

Steam Nuclear Hydro Solar Wind Other

Purchased PowerProductionProduction

ClassificationClassificationDemandDemand Costs that vary with demandCosts that vary with demand

EnergyEnergy Costs that vary with energy providedCosts that vary with energy provided

CustomerCustomer Costs related to customers servedCosts related to customers served

Direct AssignmentDirect Assignment

Classification of Plant & ExpensesClassification of Plant & Expenses

Customer Demand EnergyCustomer Demand Energy

ProductionProduction

TransmissionTransmission

DistributionDistribution

GeneralGeneral

Customer SvcCustomer Svc

Customer ClassesCustomer Classes• Residential

• General Service (Commercial)

• Large Power (Industrial)

• Lighting

• Other

Res

GS

Ind

Allocation FactorsAllocation Factors

• Represents class share of total

• Externally supplied Energy, customer, demand

• Internally generated Derived from prior allocations

Demand and EnergyAllocation FactorsDemand and EnergyAllocation Factors

• Based on class usage Based on class usage at generatorat generator, , not at meternot at meter

• Losses:Losses: Reduction in available Reduction in available electricity after being transmitted electricity after being transmitted over transmission and distribution over transmission and distribution (T&D) facilities(T&D) facilities

Energy Loss FactorsEnergy Loss FactorsEnergy AvailableEnergy Available

100.00 kWh100.00 kWh GenerationGeneration

Transmission /Transmission /SubtransmissionSubtransmission98.11 kWh98.11 kWh

95.88 kWh95.88 kWh PrimaryPrimary

93.34 kWh93.34 kWh SecondarySecondary

Expansion FactorExpansion Factor

100 / 98.11 = 1.01926100 / 98.11 = 1.01926Trans/Sub CustomerTrans/Sub Customer

100 / 95.88 = 1.04297100 / 95.88 = 1.04297Primary CustomerPrimary Customer

100 / 93.34 = 1.07135100 / 93.34 = 1.07135Secondary CustomerSecondary Customer

Demand AllocationDemand Allocation• Not all customers use all parts of system:

Primary Distribution Plant & Expenses: Primary & Secondary

Secondary Distribution Plant & Expenses: Secondary Only

• Timing of demand is important (CP vs NCP)

Demand Allocation FactorProduction (MW)Demand Allocation FactorProduction (MW)

ResRes GSGS LtgLtgIndInd

Coincident PeakCoincident Peak 1,3041,304 328328 402402 77

Loss FactorLoss Factor 1.07711.0771 1.07651.0765 1.04611.0461 1.07711.0771

1 CP At Gen1 CP At Gen 1,4041,404 353353 420420 77

1 CP Gen A.F.1 CP Gen A.F. 64.26%64.26% 16.18%16.18% 19.24%19.24% 0.32%0.32%

Demand Allocation FactorPrimary Distribution (MW)Demand Allocation FactorPrimary Distribution (MW)

ResRes GSGS LtgLtgIndInd

1 CP at Gen1 CP at Gen 1,4041,404

Prim & BelowPrim & Below 1,4041,404

Portion ServedPortion ServedAt SubtransAt Subtrans 00

1 CP Pri A.F.1 CP Pri A.F. 70.13%70.13%

1 CP Gen A.F.1 CP Gen A.F. 64.26%64.26%

353353

353353

00

17.63%17.63%

16.18%16.18%

420420

238238

182182

11.89%11.89%

19.24%19.24%

77

77

00

0.35%0.35%

0.32%0.32%

Demand Allocation FactorSecondary (MW) using NCPDemand Allocation FactorSecondary (MW) using NCP

ResRes GSGS LtgLtgIndInd

NCP DemandNCP DemandSecondarySecondary 1,3041,304

NCP A.F.NCP A.F. 66.1%66.1%

526526

26.6%26.6%

121121

6.1%6.1%

2323

1.2%1.2%

Two Types of DemandTwo Types of Demand

Non-Coincident (NCP):Non-Coincident (NCP):Maximum peakMaximum peakregardless of timeregardless of time

Coincident (CP):Coincident (CP):Measurement of demandMeasurement of demandat time of system peakat time of system peak

CP and NCP DemandsCoincident

Peak

NCP of BNCP of BNCP of ANCP of A

AA

BB

TimeTime

Dem

and

Dem

and

CP of ACP of A

CP of BCP of B

Demand Allocation MethodsDemand Allocation Methods• Coincident peak or peak

responsibility

• Multiple CP – e.g. 4 CP, 12 CP

• Average & Excess

• Capital Substitution

• Peak & Average

• Energy Based

Monthly Peak Demands as a Percent of Total System Peak

J F M A M J J A S O N D

40%

60%

80%

100%

Summer Peaking UtilitySummer Peaking Utility

Monthly Peak Demands as a Percent of Total System Peak

Winter Peaking UtilityWinter Peaking Utility

J F M A M J J A S O N D

40%

60%

80%

100%

Monthly Peak Demands as a Percent of Total System Peak

12 Month Peaking Utility12 Month Peaking Utility

J F M A M J J A S O N D

40%

60%

80%

100%

Coincident Peak DemandAllocation Factor Coincident Peak DemandAllocation Factor

J F M A M J J A S O N DJ F M A M J J A S O N D

500500

1,0001,000

1,5001,500

2,0002,000

2,5002,500MWMW

Coincident PeakCoincident Peak

00

ResRes

GSGS

IndInd

MWMW PercentPercent

64.26%64.26%

353353 16.18%16.18%

420420 19.24%19.24%

2,1852,185 100.00%100.00%

1,4041,404

LtgLtg 77 0.32%0.32%

Gas IndustryFunctional StructureGas IndustryFunctional Structure

City Gate

Burner Burner TipTipPipeline 1

Pipeline 2

Pipeline 3

WellheadWellhead

PRODUCTIONPurchased Gas Cost

TRANSMISSION – STORAGEPipeline Transportation Cost

PipelineStorage

DISTRIBUTION - STORAGE

LDC

Storage

ResRes LtgLtgIndInd

Rate BaseRate Base $ 221.5$ 221.5 $ 279.5$ 279.5 $ 19.2$ 19.2

RevenueRevenue 111.7111.7 195.9195.9 7.67.6

ExpenseExpense 96.196.1 175.0175.0 6.76.7

Income (Return)Income (Return) 37.137.1 15.515.5 20.920.9 0.90.9$$ $$ $$ $$

$ 629.8$ 629.8

293.5293.5

256.4256.4

RORROR 7.0%7.0% 7.5%7.5% 4.9%4.9% 5.9%5.9%

RRORRROR 108108 115115 75759191

SubsidySubsidy 2.02.0 4.64.6 (0.5)(0.5)$$ $$ $$(6.0)(6.0)$$

TotalTotal

$1,150.0$1,150.0

608.7608.7

534.2534.2

74.574.5$$

6.5%6.5%

100100

--$$

Source: Cost Study Summary - $ MillionsSource: Cost Study Summary - $ Millions

Cost Study ResultsCost Study Results

GSGS

Cost Study MeasuresCost Study Measures

Return (Income) =Return (Income) = Revenue - ExpensesRevenue - Expenses

ROR =ROR = IncomeIncomeRate BaseRate Base

(1)(1) Class Rate of Return (ROR): Class Rate of Return (ROR):

RROR =RROR = ROR of classROR of classROR of systemROR of system

(2)(2) Relative Rate of Return (RROR): Relative Rate of Return (RROR):

Cost Study MeasuresCost Study Measures

Subsidy = Revenue - Cost of ServiceSubsidy = Revenue - Cost of Service

(3)(3) Subsidy: Subsidy:

Cost of Service =Cost of Service = Expenses +Expenses +Return @ Return @ TargetTarget ROR ROR

Cost Study MeasuresCost Study Measures

Cost Study ResultsCost Study Results

Rate of return

Relative ROR

Subsidy

Rate of return

Relative ROR

Subsidy

< System Average

<100%

Negative

< System Average

<100%

Negative

Rate isToo LowRate is

Too LowRate is

Too HighRate is

Too HighRate isAt CostRate isAt Cost

= System Average

100%

Zero

= System Average

100%

Zero

> System Average

>100%

Positive

> System Average

>100%

Positive

Source: Cost Study Summary - $ MillionsSource: Cost Study Summary - $ Millions

ResRes GSGS LtgLtgIndInd TotalTotal

$ 221.5$ 221.5 $ 279.5$ 279.5$ 629.8$ 629.8

8.90%8.90% 8.90%8.90% 8.90%8.90%

19.719.7 24.924.956.156.1

37.137.1 15.615.6 20.920.9$$ $$ $$

4.14.1 4.04.019.019.0

1.6441.644 1.6441.6441.6441.644

6.96.9 6.56.5$$ $$31.131.1$$

Rate BaseRate Base

Fair RORFair ROR

Req’d ReturnReq’d Return

IncomeIncome

Income Def’cyIncome Def’cy

Tax FactorTax Factor

Revenue Def’cyRevenue Def’cy

$ 19.2$ 19.2

8.90%8.90%

1.71.7

0.90.9$$

0.80.8

1.6441.644

1.31.3$$

$1,150.0$1,150.0

8.90%8.90%

102.4102.4

74.574.5$$

27.927.9

1.6441.644

45.845.8$$

Using Cost Study For ClassRevenue IncreasesUsing Cost Study For ClassRevenue Increases