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Rate Analysis & Cost of Service Study Powder River Energy Corporation Created by Guernsey


Steps in the Cost of Service Study Process Define the System Revenue Requirement Define the Rate Class Revenue Requirement Define the Customer Revenue Requirement Coordinate Rate Design with the Line Extension Policy Monitor Performance

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Cost of Service Study:

DEFINE SYSTEM REVENUE REQUIREMENT

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Define the System Revenue Requirement  The test year is the actual financial result of the most recent year  Make adjustments to test year financial information for changes that are known, measurable and continuing in nature  Determine margin required to meet long-range financial goals  Adjustments are made to the historical test year - Sales and Revenue adjustments - Purchased power adjustments 4


Development of Adjusted Test Year  Additional adjustments to the historical test year - Payroll expense reflects current and projected employee count - Benefits expense reflects changed premiums - Existing plant in service with any known but not accounted for changes - Depreciation expense - Projected Property Taxes - Interest expense adjustments

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Primary Concerns in Developing Test Year Data  Proper matching of expenses and billing units  Costs, billing units and resulting unit rates are forward looking  Data can be supported if it is: - Known - Measurable - Continuing in nature

 Unit rates reflect “normal” conditions

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Financial Criteria Required to Define Return from Rates  Board Objectives - Recover adjusted test year expenses - Equity objective - Capital credit refund - General funds level - Coverage ratios

 Other Factors - Level of plant additions - Cost of debt

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Cash Revenue Requirement – Cash Basis  Where does cash come from? - Cash margin from operations - Cash capital credit retirements from others - Cash from line extension contributions - Borrowing  Where must cash go? - Pay operating expenses including interest - Pay principal on long-term debt - Pay for plant additions  Other possible uses for cash - Build equity by financing plant additions - Retire capital credits - Build cash reserves by increasing Cash-General Funds level - Pay principal on short-term borrowing

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Components of Revenue Requirement  Return  Interest Expense & Other Deductions  Operating Margin  Non-Operating Income  Net Margin

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Cost of Service Study:

DEFINE CLASS REVENUE REQUIREMENT

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Cost of Service Allocation  Allocates plant investment and operating expenses to the various rate classes  Identifies the return (margin) for each rate class provided under existing rates  Identifies the required revenue change (increase or decrease) for each rate class

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Customers Grouped Together  A Rate or Customer Class is usually defined by: - Existing rate schedule - Proposed rate schedule

 Customers are grouped together if they: - Use energy in similar ways - Cause similar types of costs

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Steps in Development of Cost of Service Study

1. 2. 3. 4.

• Functionalize Costs • Classify Costs • Develop Allocation Factors • Allocate Investment & Responsibility

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Classify Costs  Classification of Costs - Fixed (demand) - Variable (energy) - Customer - Direct

 Concepts - System is designed to serve customer load - Load is defined in terms of: - Peak demand - Energy requirements - Number of customers served

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Allocation Factors  Energy - Sales - Adjust for losses

 Customer count  Capacity / Demand - Coincident Peak (CP) and Non-Coincident Peak (NCP) - Purchased Power - System

 Consistent methodology and assumptions  Allocation factors updated with current costs and reflect changing relationships between the classes 15


Customer Subsidies  Inter-Class Subsidies - Charging one group of customers more than their share as compared to other member groups

 Intra-Class Subsidies - Charging one or more members within a group more than their share as compared to other members of the group

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Cost of Service Study:

DEFINE CUSTOMER REVENUE REQUIREMENT

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Rate Evaluation Criteria  Fair / non-discriminatory  Customer impact  Competitive  Proper pricing signal  Understandable  Encourage proper usage

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House B Family of 2 Occupied part time

House A Family of 4 Occupied full time Distrib. Cost of Service $23 per month $0.01238 per kWh Excludes power cost

Distrib. Electric Rate $17.50 per month $0.0155 per kWh Excludes power cost

Questions: 1. Excluding power cost, which house costs more to serve? 2. Which house provides more revenue? 3. Who is being subsidized? 4. What could we do to the rate to correct this situation?

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Final Steps  Coordinate rate design with Line Extension Policy - Contributions required of members in different rate classes will impact the revenue requirement of the class

 Monitor performance - Maintain the cost of service equilibrium established in approved rates

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