American Public Power Association Business and Financial Conference Time of Use PricingThe Fundamentals and Applications September 26, 2005 Portland, Oregon Presented by: Gary Saleba, President A registered professional engineering corporation with offices in Kirkland, WA; Bellingham, WA; Portland, OR; and Indio, CA Corporate Telephone (425) Facsimile (425)

Agenda Introductions and Session Objectives Time of Use Basics Steps for Determining TOU Rates Examples of TOU Rates Observations on Impacts of TOU Rates Structure of Tariffs in the Future Summary/Conclusion 1

Introductions and Session Objectives n Objectives of Session n Background on Speaker n Disclaimers 2

Time of Use Basics n Why Time Differentiate/the Rationale Higher principal of rate setting is fair, equitable and non- discriminatory Cost based rates are fair, equitable and non-discriminatory Cost based rates must follow cost causation Cost causation requires customer causing costs should also pay Costs vary by time of use Time variant costs should be allocated to users based on who uses what during time variant costing periods (i.e., time of use rates) 3

What are TOU Rates? Time differentiated rates Vary with time of day (TOD) or time of use (TOU) Multiple periods –On-peak period –Off-peak period –Mid or shoulder period 4 Time of Use Basics (contd)

May be seasonally adjusted –Winter –Summer –Monthly May be unbundled –Power supply component –Transmission component –Distribution component Pricing based on the cost of electricity during a particular time block Rates are higher during the peak period and lower than the standard rate during off-peak period because costs vary in same manner 5 Time of Use Basics (contd) Do the functions cost vary by TOU?

Rewards customers for reducing consumption during high price periods/using more during off peak Example for commercial customer: –Customer charge = $50/month –Demand charge = $3/kW/month –Energy charge = On-peak - 5¢/kWh / Off-peak – 2¢/kWh n TOU Rates are Not Real-Time Pricing Real-time pricing differs from TOU pricing in that real time pricing is based on actual (as opposed to forecasted prices) Real-time pricing is more applicable to utilities that purchase a significant portion of power supply at the market Utilities that generate their own power may use TOU pricing to reduce costs Time of Use Basics (contd) 6

n Relative Merits of Time of Use Rates Advantages –Closely tracks costs –Price signal Disadvantages –Metering requirements –Acceptance level by customers –Cost differential between time periods may be small –Administration/billing costs –Impacts on utility net income 7

Time of Use Basics (contd) 8 n Which Type of Costs Vary with Time?

Steps for Determining TOU Rates n Summary Determination of time periods Incorporate time periods into COSA analysis/allocation of costs to time periods Allocate to customer classes Calculate Unit costs by TOU period Calculate TOU rates Data needs 9

n Determination of Time Periods Number of periods should be feasible to administer Hours and months having similar costs should be combined into like groups/look to system lambda or LOLP –Statistical techniques –Wholesale power rates –Eye-ball technique –Other utilities –Market The periods chosen should be broad enough to allow for minor shift in loads without major impacts on revenues n Incorporate Time Periods into COSA Functionalizeno change to standard methodology Classificationneed time period cost classifiers, demand and energy Allocationdemand and energy allocation factors by time period 10 Steps for Determining TOU Rates (contd)

n Classification of Plant and Expenses Timing of peak loads may impact –Power supply investment and expenses –Transmission investment –Distribution investments Power supply investmentlook to causal variable (i.e., LOLP) Power supply O&Mlook to fuel costs Determine if significant difference exists between time periods for transmission and distribution costs 11 Steps for Determining TOU Rates (contd)

n Allocation of Rate Base and Revenue Requirement Take classified costs and allocate to each class of service utilize TOU allocation factors Results in time differentiated costs or revenue requirement by customer class n Calculate Unit Costs Determine time-differentiated unit costs for demand and energy categories Calculate TOU rates based upon unit costs Reasons for deviation from unit costs 12 Steps for Determining TOU Rates (contd)

n Data Requirements for TOU Analysis Load data needed for each class/rate schedule –Energy (kWh) usage by period (on-peak, off-peak, shoulder) –Demand (kW) usage by period (on-peak, off-peak, shoulder) Is the data available? –Metering –Load research –Estimation –Borrow Accounting data –Power supply O&M costs by time period –Power supply capital costs by time period (?) –Transmission costs by time period (?) –Distribution costs by time period (?) 13 Steps for Determining TOU Rates (contd)

n Other Considerations Lack of data Price elasticity impacts Rate continuity Rate stability/revenue shifts Customer understanding 14 Steps for Determining TOU Rates (contd)

Examples of TOU Rates Puget Sound Energys Time-of-Use Program Created in 2000 during the west coast energy crisis to provide financial incentives for customers to shift electric consumption to off- peak times Launched in may ,000 program participants shifted approximately 5 percent of their demand away from peak hours Revised program rates in 2002 to reflect calmer wholesale electricity market; added a $1.00 monthly administration charge to cover incremental meter reading and data handling costs 94% of participants lost an average of 81 cents per month during the third quarter of 2002 compared to standard customers After receiving the disappointing usage summaries in October 2002, approximately 26,000 customers withdrew from the program TOU program was cancelled 10 months ahead of schedule so the company and interested parties could evaluate and possibly re-tool the program 15

Pacific Powers Time-of-Use Programs Required as a result of Oregons electricity restructuring bill that went into effect March 1, 2002 Time-of-use pricing plan requires the installation of a time-of-use meter and a 12-month enrollment commitment PacifiCorp participants pay a $1.50 monthly surcharge and PGE customers pay $1.00 per month to cover a portion of the additional cost for the time-of-use meter, including meter installation charges The first year a customer selects the time-of-use pricing plan, if the total annual energy costs incurred under the time-of-use exceeds 10% over what costs would have been for the same period under standard rate, the net difference, guarantee payment, will be credited on the customers bill following the last month of the initial one-year commitment 16 Examples of TOU Rates (contd)

PGEs Oregon Time-of-Use Programs PGE rate structure –3 tiers: on-peak, mid-peak and off-peak –Mid-peak equals the standard service rate –Ratio of on- to off-peak rates roughly 3-to-1 or near 5¢/kWh –Customers pay a surcharge on top of inclining block rates for usage during on-peak hours and get a credit during off-peak hours –On-peak surcharge is twice as high from April through October Results of PGE study show that time-of-use households used 292 kWh less energy and saved $28 (or 5 percent) per year on average Enrollment statistics as of March 2005 –1,367 or 0.3% of Pacific Powers 517,000 residential customers –1,998 or 0.3% of PGEs 742,555 residential customers 17 Examples of TOU Rates (contd)

n Southern California Edison Time-of-Use Programs TOU programs are available for residential, commercial and industrial customer classes Standard TOU and new critical peak pricing For the residential class, TOU pricing only occurs in the generation component of the rate For the remaining rate schedules, both the distribution and generation components have time related components n SCE – Residential 2 tiers: on-peak and off-peak for each session Ratio of on- to off-peak rates roughly 3-to-1 or near 20¢/kWh on peak SCE charges an additional TOU meter charge of 0.09 cents ($2.70/month) per meter per day in addition to the standard customer charge, an increase of approximately 35% 18 Examples of TOU Rates (contd)

n Commercial and Industrial Programs Three tiers (on-peak, mid-peak and off-peak) Both generation and distribution rates include time related components n Enrollment Statistics as of March ,127 or 0.1% of SCEs 3,987,127 residential customers 21,836 or 3.4% of SCEs 634,941 commercial & industrial customers 19 Examples of TOU Rates (contd)

20 Source: Orange & Rockland, Residential TOU Rate (NY) n Example of TOU Delivery Charge Examples of TOU Rates (contd)

21 Source: Orange & Rockland, Residential TOU Rate (NY) Examples of TOU Rates (contd) n Example of TOU Delivery Charge

Observations on Impacts of TOU Rates n Success of TOU Programs Depends On: Price of power Design of the program n PSE Program Was Not Successful Price differential not significant enough Expensive to participate n Studies in CA Have Shown that: Residential customers will reduce peak load by approximately 5% given on-peak TOU rates approximately double the standard rate Residential customers will reduce peak load by approximately 15% given on-peak CPP rates approximately 5 times the standard rate n PSEs Program also Reduced Peak Demands by Approximately 5% 22

n Commercial TOU Customers Reduce Demands by 2% - 10% Due to TOU Rates n Industrial TOU Customers Reduce Demands by 4% - 25% Due to TOU Rates n Online Energy Management Systems are Likely to Increase the Demand Response 23 Observations on Impacts of TOU Rates (contd)

Structure of Tariffs in the Future n Continuing Price Volatility Under Deregulation as Supply/Demand Balance Vacillates n Price and Availability of Advanced Meters Better (AMR) n Increased Education of Customers/Up the Learning Curve n Results in More Complex Time Differentiated Tariffs n For the Future: Dynamic Pricing Critical peak pricing tariffs Real-time pricing Day ahead tariffs n Assumes Resources are Periodically Scarce and Deregulation Continues to Evolve 24

Summary/Conclusion n Grandpa Salebaisms If it aint broke, dont fix it 25

Summary/Conclusion (contd) n Grandpa Salebaisms If it aint broke, dont fix it Never have time to do it right but always have time to do it over 26

Summary/Conclusion (contd) n Grandpa Salebaisms If it aint broke, dont fix it Never have time to do it right but always have time to do it over Better to be roughly right than precisely wrong 27