How Transmission Companies Make Money

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<p>Transmission Company Profit MakingCharles G. Ely II, PEAnderson Consulting, Training &amp; Testing</p> <p>1</p> <p>Overview! Basic Business Profits ! A Changing Marketplace ! The Old Way ! The New Way ! Quantifying The Value of Efficiency ! Whats Next?2</p> <p>Basic Business ProfitsRevenue - Cost of Goods/Services - Taxes (40%) $$ Profits $$</p> <p>3</p> <p>Revenues! Transportation Services Firm &amp; Interruptible Demand &amp; Reservation Fees</p> <p>! Storage Services Storage Capacity &amp; Daily Flows Park &amp; Loan</p> <p>4</p> <p>Cost of Goods &amp; Services! Operating and Maintenance (O&amp;M) Labor, parts, utilities, etc.</p> <p>! Fuel Costs Fuel Tracker</p> <p>! Capital Costs (Amortization) Property and Equipment (&gt; 1 year life)</p> <p>5</p> <p>Taxes! Corporate Tax Rate = 40% of Profits</p> <p>6</p> <p>A Changing MarketplaceHow do companies make money?Yesterday -vToday</p> <p>7</p> <p>Making Money The Old Way</p> <p>Profits = Capital Assets * Rate of Returnwhere</p> <p>" Rate of Return was established with FERC " Operating Costs were fully recovered in Rate Base8</p> <p>FERC Rate Case - TariffO&amp;M Cost: Total O&amp;M / Total Pumped GasExample: $10MM/100BCF = $0.10/mcf</p> <p>Fuel Cost At Cost to CustomerExample: $3.00/mcf</p> <p>Profit Cost: Capital Assets x Rate of ReturnExample: $150MM x 10% / 100BCF = $0.15/mcf</p> <p>Customer Cost = O&amp;M Cost + Fuel Cost + ProfitExample: $0.10 + $3.00 + $0.15 = $3.25/mcf9</p> <p>Growing Profits: The Old WayProfit Growth = Asset Additions" Equipment inefficiency helped justify FERC filings for capital asset additions by undervaluing existing assets. " No penalty or cost for high O&amp;M or fuel costs.</p> <p>10</p> <p>Making Money Today</p> <p>Profits = Revenue - Expenseswhere</p> <p>" FERC sets the upper tariff rates for certain services. " Operating Expenses are fully recovered only if services are sold at the upper tariff.11</p> <p>Growing Profits -TodayGrow Revenues! Expand into new markets ! Add capacity for Park &amp; Loan services without adding risk ! Upgrade existing assets to deliver added capacity without capital expenditures ! At-Risk for fuel -v- Fuel Tracker</p> <p>Reduce Expenses! Eliminate non-value added expenses ! Enhance equipment efficiency and reduce O&amp;M costs12</p> <p>Quantifying the Value of EfficiencyPipeline and Compressor efficiency gains will grow the bottom line!</p> <p>The value is realized through enhanced revenues or reduced expenses.13</p> <p>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&amp;M costs.14</p> <p>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 &amp; Loan services without adding operational risk</p> <p>! Significant tangible revenues with no incremental operating costs.15</p> <p>Reduce Expenses! With fixed throughput requirements, less compression horsepower is required. ! Lower Operating and Maintenance costs. Maintenance Fuel Operating Labor</p> <p>16</p> <p>Whats NextThe next significant gain in profits will be achieved by focusing on efficiency.Typical efficiency studies have paybacks of less than 1 year (including the equipment upgrades)</p> <p>17</p>

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