1. Vice President of Regulatory Affairs - CFC
William K. Edwards
Vice President of Regulatory Affairs - CFC
Florida Electric Cooperative Association
May 20, 2010
I am delighted to be here today to discuss with the impending publication of the NRECA and CFC Rate Guideline publication.
Tell Lawyer joke.

2. Background Joint NRECA & CFC study
Updates 1989 report “Rate Issues and Strategies”
20 years since last joint study – a period of stable rates
The Rate Guide is a joint CFC and NRECA production.
It is designed to update the 1980 Rate Issues and Strategies Report
The former publication came at the end of the last generation cycle (mid 70s through 1990)
This publican is being issued toward the beginning of the next generation expansion cycle
It is our hope that it will be a more useful document as a result

3. Sources Focus group and panels (CFC Forum)
Input from rate consultants and panels (NRECA Rate Summit)
Input from NRECA Innovative Energy Strategies Task Force
Presentation and Panels at Regional Meetings
Panels at CFC Independent Borrowers Meeting
NRECA and CFC newsletter articles
The Rate Guide is a compilation of information , opinions, and beliefs gathered from these various sources
It is therefore a blend of experiences from the cooperative industry, and its consultants

4. About the report Intended as a helpful resource
A starting point for discussions about rates
Not an exhaustive review of rate issues
Not a “to do” list
All suggestions don’t fit all co-ops
The Rate Guide is certainly intended to be a resource for cooperatives in order to spur discussion
It is expressly not intended to be an exhaustive review of rate issues – Indeed, it certainly is not an exhaustive review of rates
Both NRECA and CFC understand and believe that each cooperative is unique and there is not single answer for any two cooperatives

5. Why This Report? New Challenges for Co-ops
Higher demand growth than IOUs
Rising construction costs
Growing interest in energy efficiency
State and Federal Mandates
Climate Change Mitigation Proposals
These trends may make it harder for co-ops with traditional rates to recover costs & margins.
As I mentioned earlier, the industry is embarking on a capacity expansion cycle where rates typically lacks escalating costs
We are entering this cycle, in part because of the growth that the industry has experienced; however, other issues also affect this cycle

6. Co-ops Continue to Lead Industry kWh Growth
Index
1974 = 100
Co-ops
4.2%
Total Industry
2.4%
Growth is a double edged sword
Source: DOE/EIA 6

7. Average Growth Rates: Co-ops v. Total Industry
Projected Electricity Use
Index
2008 =100
Average Growth Rates: Co-ops v. Total Industry
Co-ops
1.75%
Total Industry
60%
1.0%
30%
Source: Based on EIA AEO 2010 7

8. Co-ops Entering A New Building Cycle
$ Billions
A power plant that costs $1billion in 2000 would have
Cost $2.17 billion in 2009 – IHS CERA
When you consider inflation, materials, and scarcity rents
projected
(survey results)
Loans Approved*
*not all loan approvals (shown in green) were subsequently drawn-down
Source: G&T Survey

9. Growing Co-op and Consumer Interest in Energy Efficiency
Co-ops
Avoid building high cost generation
Consumers
Reduce bills
Take advantage of incentives
The need for conservation has occurred before, during the last construction cycle, but was a small piece of the overall solution.
This time around, it may be a larger piece of the solution

10. State and Federal Mandates
30 states & D.C. have RPS programs requiring electricity providers to acquire a percentage of generation from renewable resources.
39 states & D.C. have adopted net metering requirements.
19 states & D.C. have adopted Energy Efficiency Portfolio Standards.
States are aggressively pushing for renewable resources, which may or may not benefit electric rates
States are also broadly supporting net metering
All of which suggests an earlier and vigorous support for conservation
Yet no state beyond their PSC has considered the effect of conservation on rates – that as sales are reduced, rates will need to increase to collect the same revenue.

11. Carbon Auction Impacts on Co-op Residential Bills
This map shows how a $20 cost per metric ton of carbon dioxide (CO2) could increase the monthly bill of an average electric co-op residential consumer.
DE 11%
MD 13%
Carbon reduction has become the mantra of the environmentalist
Never mind that carbon based thermal units like coal and natural gas need to be in the unit portfolio
Percent Increase:
High 15% and above
1 Metric Ton = 2,204.6 pounds
Medium 9% to 14%
Source: 2007 EIA data
Strategic Analysis Unit
May 2009
Low 0% to 8%
© NRECA, all rights reserved. May not be copied, reprinted, published, translated, hosted or otherwise distributed by any means without explicit permission.

12. Carbon Auction Impacts on Co-op Residential Bills
This map shows how a $50 cost per metric ton of carbon dioxide (CO2) could increase the monthly bill of an average electric co-op residential consumer.
DE 27%
MD 31%
Cooperative especially have relied on coal as the backbone of their generation portfolio
Percent Increase:
High 15% and above
1 Metric Ton = 2,204.6 pounds
Medium 9% to 14%
Source: 2007 EIA data
Strategic Analysis Unit
May 2009
Low 0% to 8%
© NRECA, all rights reserved. May not be copied, reprinted, published, translated, hosted or otherwise distributed by any means without explicit permission.

13. Rates Have Increased 39% Since 2000
cents per kWh
Although the recession has slowed this in 2009 somewhat, it has not stopped it.
The fundamental fact is that we need new capacity and that capacity is expensive
Source: EIA and CFC
December 2009

14. Implications of Industry Trends
Higher costs
Potential for lower per-capita usage
Compatible with current rate structure?
These issues will continue to stress rates in coming years
For these and other reasons we believed it was time to update the rate book originally published in the early 1990s
We started with a series of suggestions…

15. Rate Suggestion 1 Integrate Rates with the Business Plan
Cooperatives should consider including rate objectives as key components of an integrated business plan that addresses the new challenges facing the electric industry.
Rate Suggestion #1 – Rates should be integrated with the business plan.
Rates will affect the business plan and the business plan will affect rates
Failure to integrate rates with your business plan will have long-term and negative implications

16. Why Integrate Rates?
Rates need to be compatible with technology, power supply, communications non-rate programs, member services and financial goals
Synergies are created when all co-op functions work together
Industry challenges require more extensive advance planning
Example: If a co-op is planning to implement time of use rates its technology plan needs to budget for TOU meters

17. Rate Suggestion 2 Adopt a Rate Policy Statement
Cooperative boards, working with management, should consider adopting a rate policy statement that provides specific objectives for rates that support the cooperative’s strategic goals.
Rate Suggestion #2 – Adopt a Rate Policy Statement

18. Rates and rate policy provide important support of a cooperative’s strategic goals.

19. Elements of a Rate Policy Statement
Establish targets to meet the cooperative’s strategic financial goals
Set objectives for rate design
Examine the fairness of rates
between classes of customers
within customer classes
Identify issues other than cost of service that should be considered.
Provide other necessary direction to staff

20. Examples of Rate Policy Objectives
The Co-op will implement rates based on an embedded cost of service study.
Costs should be allocated to the rate classes causing costs to be incurred.
All members must provide a margin to the system.
Rates should support energy efficiency.
Collect fixed costs via fixed charges, variable costs via variable charges.

21. Rate Suggestion 3 Support Financial and Other Strategic Objectives through Effective and Complementary Rate Design
Retail rates should be designed to:
Consistently produce sufficient revenue to recover the cost of providing service to consumers, including its margin targets.
Give price signals to consumers that are aligned with the strategic objectives of the business plan.
Minimize abrupt changes in rates through use of automatic adjustments clauses.
Assure compliance with legal and tax requirements
Rate Suggestion #3 – Avoid rate structures that are inconsistent with you business plan
It is very common to see declining block rates with a

22. Rate Design Communicates Price Signals
Sample size = 372 Distribution Co-ops

23. 61% of co-ops now have a wholesale power adjustment clause
What about the other 39%
How many of these are fixed form month to month
How many are not used
Sample size = 372 Distribution Co-ops

24. Antidiscrimination Considerations
“Discrimination in rates is not permitted as between customers similarly situated; however, because a difference in charges may be justified under some circumstances, not every difference is an unlawful discrimination.”
-- 29 C.J.S. Electricity § 67 (2009)
This is a COS issue or marginal cost issue
But you can be sued, brought before a state or worse yet a federal commission
There are also Tax implications

25. Federal Tax Law Considerations
To maintain exempt status, a cooperative must operate on a cooperative basis, which requires, among other things, equitably allocating costs and revenues.
Excessive cross-subsidization between member rate classes may violate cooperative tax law principles.
The more a cooperative deviates from strict cost-based accounting by rate class, the greater risk it runs of not operating at cost.

26. Rate Suggestion 4 Consider Decoupling Revenues from Sales
Cooperatives should consider moving, to the extent practicable, toward recovering costs in the way they are incurred. Fixed costs and margins should be recovered through fixed charges, and variable costs should be recovered through variable charges. To the extent that this cannot be fully achieved, due to competitive pressures, cooperatives should consider adopting an adjustment mechanism clause that permits recovery of appropriate margins, regardless of kWh sales.
This is an issue that make a lot of sense

27. Aligning Costs & Charges
Components
Charges
• Consumer Acct/Sales
Fixed Monthly Charge per Customer
Customer
• Portions of A&G,
Dist O&M, Depreciation
• Wholesale Power Bill
Demand Components
Demand
Metered Demand
• Transmission O&M
• Portions of A&G,
Dist O&M, Depreciation
Energy
• Wholesale Power Bill
Energy Charges
Variable per kWh Charge

28. U.S. Median Distribution Co-op
% of Revenue
Wholesale Power Bill
Energy
65%
Demand
What should the residential customer charge be and why?
$60-$90 Dollars
Because COS and the strong correlation between sales and Revenues
Other Costs
35%
Customer

29. Cooperative and Investor-Owned Utility (IOU) Customer Charges
Graph based on sample of 371
distribution co-ops and 163 IOUs

30. ABC Electric Cooperative
Revenue Trackers
ABC Electric Cooperative
Ceiling 2.5
Floor 1.75

31. Rate Suggestion 5 Align Wholesale and Retail Rates with Wholesale Cost Drivers
G&Ts should consider designing rates that reflect wholesale cost drivers.
G&T and distribution systems should consider coordinating rate policies in order to align both wholesale and retail rates to send the appropriate price signals to consumers.
Rates need to express costs and cost causation

32. Wholesale – Retail Coordination Win / Win
Power Supply costs 65% of electric bill.
Wholesale power costs depend on load characteristics of distribution co-ops.
Wholesale rates should reflect wholesale cost drivers
Distribution systems’ rates should send the correct price signals to consumers.

33. Benefits of Coordinating Rates
Delay the need for new generating capacity
Delay the need for new T & D capacity
Reduce exposure to high fuel prices and high wholesale market price for electricity
Reduce coincident peak demand
Develop energy efficiency and demand response capacity resources
Better utilize technological capabilities
Help consumers to manage their bills

34. Rate Suggestion 6 Develop a Rate Implementation Plan
Rate implementation plans assist a cooperative to achieve member, community, and regulatory acceptance of rate changes and continued satisfaction with the cooperative.
A key aspect of such a plan is internal coordination of rate objectives and activities across a co-op’s functional lines.

35. Implementation Plan Promotes Member Satisfaction
Assure adequate technological capabilities to support tariffs.
Introduce rate adjustments at a time that will have the least impact on consumers.
Explain co-op’s rate strategy to key audiences.
Empower consumers to manage energy use and bills.

36. A Plan Should Address Schedule for ratemaking process
Assigned roles and responsibilities for successfully implementing the rate change
Approach to educating key audiences
Technology, software staff, staff training and other resources needed to implement the change smoothly
Often more frequent and smaller increases are better than less frequent and larger
Education as to why rates are changing is critical
It is better to talk about it ad nauseum as opposed to ignoring it

37. A Plan Should Address Cont.
Timing of rate adjustments
Ways to help members manage their energy usage
Timely review of rate schedules to ensure intended result
Adequate budget support

38. Coordination Enhances
Financial performance
Member relations
Communications
Business development
System engineering and operations
Long-term technology acquisition
Other cooperative functions

39. Rate Suggestion 7 Review Rates At Least Annually
An annual review of rate strategies and policy is recommended – more frequently if a significant change occurs.

40. Reasons for Annual Review
Avoid delaying rate increases
Determine if rates are contributing to co-op goals
Evaluate consumer response to rates
Modify rate design if needed

41. Questions?