1 Managing Revenues in Regulated Industries Rate Design May 2008 Richard Soderman Director-Legislative Policy and Strategy

2 Components of CL&P Rates

3 In regulated utilities, pricing strategies are dependant on several factors  Underlying nature of costs of services provided Fixed costs Distribution Competitive Transition Charge Portions of Federally mandated Congestion Charges Variable costs Energy (based on kwh sales) Transmission (based on peak demand) C&LM, renewables, and Systems Benefits Charge (based on kwh sales) Assumption of risk in cost attributes Fuel price risk Market costs (e.g. congestion)  Price elasticity  Underlying economic activity of customers  Weather  Propensity to accept risk of revenue volatility  Policy choices (conservation, DG, rate continuity)

4 Standard Rate Design Process Determine total revenue requirements Allocate costs to different rate classes Determine marginal costs of services Calculate Rates (Dollars divided by units) Assign costs to rate components (customer charge, demand charge, energy charge)

5 Typical electric rate design  Customer charge A monthly charge independent of usage  Demand charge Based on highest hourly usage during the month  Energy Charge Bypassable or non-bypassable Time of use components Reflective of costs Designed to affect behavior

6 Actual Bill Components—Residential R-1 CL&P’s Last Rate Case Decision

7 Bill Comparison – Residential R-1 CL&P’s Last Rate Case Decision

8 Reconciling Rate Mechanisms  Revenue Adjustment clauses –True up costs and revenues –Fuel or purchased power –Variable costs (e.g. renewables, conservation)  Revenue Decoupling –Full decoupling of sales from earned revenues –Use per customer –Lost revenues  Earnings implications

9 Example of Rate Design and Earnings Impacts  Residential rate design –Utility has total costs of 18 cents/kwh.  Variable power supply cost is 10 cents  Fixed power supply is 3 cents  Delivery cost is fixed and 5 cents  10,000 customers  Each use 500 kwh per month  How would you design a residential rate (customer and energy rate components only--no demand charge)?  Would you use reconciling mechanisms for certain costs?  What might you do differently is you expected sales to grow at 3% per year?  What if weather could shift average sales by 5% up or down in a given year?