1

Transmission Company

Profit Making

Charles G. Ely II, PE

Anderson Consulting, Training & Testing

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Overview

! Basic Business Profits

! A Changing Marketplace

! The “Old Way”

! The “New Way”

! Quantifying The Value of Efficiency

! What’s Next?

3

Basic Business Profits

Revenue

- Cost of Goods/Services

- Taxes (40%) $$ Profits $$

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Revenues

! Transportation Services

– Firm & Interruptible

– Demand & Reservation Fees

! Storage Services

– Storage Capacity & Daily Flows

– Park & Loan

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Cost of Goods & Services

! Operating and Maintenance (O&M)

– Labor, parts, utilities, etc.

! Fuel Costs

– Fuel Tracker

! Capital Costs (Amortization)

– Property and Equipment (> 1 year life)

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Taxes

! Corporate Tax Rate = 40% of Profits

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A Changing Marketplace

How do companies make money?

Yesterday

-v-

Today

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Making Money The Old Way

Profits = Capital Assets * Rate of Return

where

" Rate of Return was established with FERC

" Operating Costs were fully recovered in Rate Base

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FERC Rate Case - Tariff

O&M Cost: Total O&M / Total Pumped GasExample: $10MM/100BCF = $0.10/mcf

Fuel Cost – At Cost to CustomerExample: $3.00/mcf

Profit Cost: Capital Assets x Rate of ReturnExample: $150MM x 10% / 100BCF = $0.15/mcf

Customer Cost = O&M Cost + Fuel Cost + ProfitExample: $0.10 + $3.00 + $0.15 = $3.25/mcf

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Growing Profits: The Old Way

Profit Growth = Asset Additions

" Equipment inefficiency helped justify FERC filings for

capital asset additions by undervaluing existing assets.

" No penalty or cost for high O&M or fuel costs.

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Making Money Today

Profits = Revenue - Expenses

where

" FERC sets the upper tariff rates for certain services.

" Operating Expenses are fully recovered only if

services are sold at the upper tariff.

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Growing Profits -Today

Grow Revenues! Expand into new markets

! Add capacity for Park & Loan services without adding

risk

! Upgrade existing assets to deliver added capacity without

capital expenditures

! “At-Risk” for fuel -v- Fuel Tracker

Reduce Expenses! Eliminate non-value added expenses

! Enhance equipment efficiency and reduce O&M costs

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Quantifying the Value of Efficiency

Pipeline and Compressor efficiency gains

will grow the bottom line!

The value is realized through

enhanced revenues or reduced expenses.

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How Does This Work?

Efficiency gains reduce the horsepower required

to pump a fixed quantity of gas or allow more

gas to be pumped with the same horsepower.

! If additional capacity is marketable, the existing

equipment can deliver more throughput with the

existing HP – growing revenues.

! If the throughput requirements stay constant, the

horsepower requirements are reduced - lowering O&M

costs.

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Grow Revenues

! Existing equipment can deliver more

throughput with the same horsepower

! Added capacity can be marketed:

1. Certificated and sold as base capacity

2. Made available for Park & Loan services

without adding operational risk

! Significant tangible revenues with no

incremental operating costs.

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Reduce Expenses

! With fixed throughput requirements, less

compression horsepower is required.

! Lower Operating and Maintenance costs.

– Maintenance

– Fuel

– Operating Labor

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What’s Next…

Typical efficiency studies have paybacks of less

than 1 year (including the equipment upgrades)

The next significant

gain in profits will be

achieved by focusing

on efficiency.