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Published byDarrell Booth Modified over 9 years ago
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Contributions In Aid of Construction Mark Beauchamp Business & Finance Workshop Utility Financial Solutions 616-393-9722
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Objectives Types of Line Extension Policies Consideration when developing a line extension policy Risk of investments How much is a new customer worth? How to determine the value and example calculations Other Considerations when developing a line extension policy
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Examples of Electric Line Extension Policies Based on Annual Revenues Some charge the difference between underground and overhead Some contribute a per foot maximum amount Some provide it free of charge Some charge customers a System Development Charge
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Types of Line Extension Polices Many policies are not based on economics and do not consider the financial impact to existing rate payers. Examples: Investing $15,000 to connect a residential customer Using a times revenue policy for a 15 mW Ethanol plant Not contributing to expansion of hospital that will increase electrical use
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Considerations in developing a line extension policy Often power supply represents 65% - 85% of the total revenue requirement for utilities. Power supply can represent 85% - 90% of a high load factor customers revenue requirement and only 60% for a residential or small commercial A times annual revenue policy will overvalue a high load factor customer Example Ethanol Plant (87% Load Factor) Five times annual revenue valued customer at over $5.0 Million actual value to electric utility is less than $500,000
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Utility Investment per kWh by Load Factor
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Risk of Investments in Customer Example: TransCanada Pipeline building line through rural areas of Nebraska substantial investment were needed to service pumping stations Investments of over $5.0 million were required by some utilities, kWh usage from the pipeline would more than double sales to utility Risks: over-estimating sales in determination of line extension contribution Bankruptcy Stranded investments could substantially increase rates to utility Contribution margins from distribution amounted to only $200,000 per year Wholesale providers ratchet clause in rates
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Value of a Customer? Many Utilities are moving toward policies that places a value on a customer Reviews the contribution margin a customer will provide to the system Amount of risk of investing money to serve the customer Objective Help ensure the investment to connect customer is a good investment for the utility and will benefit existing customers of the system Growth should be good for the system
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Steps to Value a Customer Determine variable cost to serve each customer class Determine contribution margin (net revenue) from each class Convert contribution margin of each customer class to a per kWh, kW, kVa or HP basis Present value the contribution margin over an appropriate time (considering risk) assuming a discount rate = rate of return
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Determination of Contribution Margin by Class
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Determination of Contribution Margin on a billable basis
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Types of Billable Basis kWh Average kWh projected for customer kW projected for customer kVa of installed capacity Variable Costs = Power Supply costs from Cost of Service Study
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Present Value Contribution Margin
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Key Assumptions Discount Rate Typically equal to Rate of Return Target for Utility Length of time to recover investment Based on perceived risk of investment Residential 5-9 years Commercial 4-5 years Industrial 3 years
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Perceived Risks Company going out of business Facility burning down Co-Generation Wind Mills/Solar/Fuel Cells Alternative fuels
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Other Considerations Second customer connecting to line paid by another customer Customer above certain size should require a special analysis Existing customer expands facilities Residential average not representative of the new customers usage Risk to utility
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