1. Cost of Service Indiana Industrial Energy Consumers, Inc. (INDIEC) Indiana Industrial Energy Consumers, Inc. (INDIEC) presented by Nick Phillips Brubaker & Associates, Inc. presented by Nick Phillips Brubaker & Associates, Inc.

2. Principles / purposes Types of cost studies Major steps in a cost study Class revenue recovery Results for use in rate design Principles / purposes Types of cost studies Major steps in a cost study Class revenue recovery Results for use in rate design Overview

3. Main Principles Regulation is a surrogate for competition –Limit on prices –Nondiscriminatory prices –Adequate service Rates based on cost of service Regulation is a surrogate for competition –Limit on prices –Nondiscriminatory prices –Adequate service Rates based on cost of service

4. Rates Based on Cost of Service Stability Conservation Engineering efficiency Equity Stability Conservation Engineering efficiency Equity

5. Main Purpose of a Cost of Service Study To measure the responsibility of each class for the service provided by the utility.

6. Purposes of Cost Studies Regulatory Evaluation Rate Design Regulatory Evaluation Rate Design

7. Regulatory Purposes Separate costs between different regulatory jurisdictions Attribute costs to customer classes based on how those customers cause costs Calculate costs of individual types of services Determine how costs are to be recovered from customers and categories Separate costs between different regulatory jurisdictions Attribute costs to customer classes based on how those customers cause costs Calculate costs of individual types of services Determine how costs are to be recovered from customers and categories

8. Measure adequacy of current ratesMeasure adequacy of current rates Evaluation Purposes Evaluate proposed changes Unbundling of costs $ $ $

9. Amount to be recovered through retail rates Rate design by class and rate type Components of rates: $ / month, $ per kWh, $ per kW-month Unbundling of rates Amount to be recovered through retail rates Rate design by class and rate type Components of rates: $ / month, $ per kWh, $ per kW-month Unbundling of rates Rate Design Purposes RETAIL RATE

10. Fundamental Concepts Many different types of cost Not all customers use all parts of system Usage patterns affect cost incurrence Many different types of cost Not all customers use all parts of system Usage patterns affect cost incurrence

11. Types of Cost Studies Embedded Marginal Embedded Marginal

12. The Generation and Delivery of Electricity Integrated Electric Utility The Generation and Delivery of Electricity Integrated Electric Utility Substation Transformer Power Plant Main Power Transformer Circuit Breaker Distribution Pole Switching Equipment Switching Equipment Capacitor Distribution Wires Service Network Transmission Service Transformation Service Customer ABC Power & Light Company

13. Three Major Steps Functionalization Identify different types of cost Classification Determine basis for each type of cost Allocation Distribute costs among classes and services Functionalization Identify different types of cost Classification Determine basis for each type of cost Allocation Distribute costs among classes and services

14. Management Costs, Administrative Buildings Administrative & General Meters Installations Billing & Collection Service Drops Customer Information Street & Outdoor Lighting Meters Installations Billing & Collection Service Drops Customer Information Street & Outdoor Lighting Customer Service & Facilities Substations Distribution Poles OH & UG Lines Transformers Substations Distribution Poles OH & UG Lines Transformers Distribution Step-up Stations High Voltage Sub-Transmission Step-up Stations High Voltage Sub-Transmission Transmission Functionalization Steam Nuclear Hydro Solar Wind Other Purchased Power Production

15. Classification Demand Costs that vary with demand Energy Costs that vary with energy provided Customer Costs related to customers served Direct Assignment

16. Classification of Plant & Expenses Customer Demand Energy Customer Demand Energy Production Transmission Distribution General Customer Svc

17. Customer Classes Residential General Service (Commercial) Large Power (Industrial) Lighting Other Residential General Service (Commercial) Large Power (Industrial) Lighting Other

18. Res GS Ind Allocation Factors Represents class share of total Externally supplied Energy, customer, demand Internally generated Derived from prior allocations

19. Demand and Energy Allocation Factors Based on class usage at generator, not at meterBased on class usage at generator, not at meter Losses: Reduction in available electricity after being transmitted over transmission and distribution (T&D) facilitiesLosses: Reduction in available electricity after being transmitted over transmission and distribution (T&D) facilities Based on class usage at generator, not at meterBased on class usage at generator, not at meter Losses: Reduction in available electricity after being transmitted over transmission and distribution (T&D) facilitiesLosses: Reduction in available electricity after being transmitted over transmission and distribution (T&D) facilities

20. Energy Loss Factors Energy Available 100.00 kWh Generation Transmission / Subtransmission 98.11 kWh 95.88 kWh Primary 93.34 kWh Secondary Expansion Factor 100 / 98.11 = 1.01926 Trans/Sub Customer 100 / 95.88 = 1.04297 Primary Customer 100 / 93.34 = 1.07135 Secondary Customer

21. Demand Allocation Not all customers use all parts of system: Primary Distribution Plant & Expenses: Primary & Secondary Secondary Distribution Plant & Expenses: Secondary Only Timing of demand is important (CP vs NCP)

22. Demand Allocation Factor Production (MW) Res GS LtgInd Coincident Peak 1,3043284027 Loss Factor 1.07711.07651.04611.0771 1 CP At Gen 1,4043534207 1 CP Gen A.F. 64.26%16.18%19.24%0.32%

23. Demand Allocation Factor Primary Distribution (MW) Res GS LtgInd 1 CP at Gen 1,404 Prim & Below 1,404 Portion Served At Subtrans 0 1 CP Pri A.F. 70.13% 1 CP Gen A.F. 64.26% 35 3 353 0 17.63% 16.18% 420 238 182 11.89% 19.24% 7 7 0 0.35% 0.32%

24. Demand Allocation Factor Secondary (MW) using NCP Res GS LtgInd NCP Demand Secondary 1,304 NCP A.F. 66.1% 526 26.6% 121 6.1% 23 1.2%

25. Two Types of Demand Non-Coincident (NCP): Maximum peak regardless of time Coincident (CP): Measurement of demand at time of system peak

26. CP and NCP Demands Coincident Peak NCP of B NCP of A A A B B Time Demand CP of A CP of B

27. Demand Allocation Methods Coincident peak or peak responsibility Multiple CP – e.g. 4 CP, 12 CP Average & Excess Coincident peak or peak responsibility Multiple CP – e.g. 4 CP, 12 CP Average & Excess Capital Substitution Peak & Average Energy Based

28. Monthly Peak Demands as a Percent of Total System Peak JFMAMJJASOND 40% 60% 80% 100% Summer Peaking Utility

29. Monthly Peak Demands as a Percent of Total System Peak Winter Peaking Utility JFMAMJJASOND 40% 60% 80% 100%

30. Monthly Peak Demands as a Percent of Total System Peak 12 Month Peaking Utility JFMAMJJASOND 40% 60% 80% 100%

31. Coincident Peak Demand Allocation Factor J F M A M J J A S O N D 500 1,000 1,500 2,000 2,500 MW Coincident Peak 0 Res GS Ind MWPercent 64.26% 353 16.18% 42019.24% 2,185 100.00% 1,404 Ltg 70.32%

32. Gas Industry Functional Structure City Gate Burner Tip Pipeline 1 Pipeline 2 Pipeline 3 Wellhead PRODUCTION Purchased Gas Cost TRANSMISSION – STORAGE Pipeline Transportation Cost Pipeline Storage DISTRIBUTION - STORAGE LDC Storage

33. ResLtg Ind Rate Base $ 221.5 $ 279.5 $ 19.2 Revenue111.7 195.9 7.6 Expense96.1 175.0 6.7 Income (Return) 37.115.520.90.9$$ $ $ $ 629.8 293.5 256.4 ROR 7.0% 7.0% 7.5% 7.5% 4.9% 4.9% 5.9% 5.9% RROR 108 115 75 91 Subsidy 2.0 4.6 (0.5) $ $ $ (6.0) $ Total $1,150.0 608.7 534.2 74.5 $ 6.5% 6.5% 100 -$ Source: Cost Study Summary - $ Millions Cost Study Results GS

34. Cost Study Measures Return (Income) = Revenue - Expenses ROR = Income Rate Base (1) Class Rate of Return (ROR):

35. RROR = ROR of class ROR of system (2) Relative Rate of Return (RROR): Cost Study Measures

36. Subsidy = Revenue - Cost of Service (3) Subsidy: Cost of Service = Expenses + Return @ Target ROR Cost Study Measures

37. Cost Study Results Rate of return Relative ROR Subsidy Rate of return Relative ROR Subsidy < System Average <100% Negative < System Average <100% Negative Rate is Too Low Rate is Too High Rate is At Cost Rate is At Cost = System Average 100% Zero = System Average 100% Zero > System Average >100% Positive > System Average >100% Positive

38. Source: Cost Study Summary - $ Millions Res GS Ltg Ind Total $ 221.5 $ 279.5 $ 629.8 8.90% 8.90% 19.7 24.9 56.1 37.115.620.9$$$ 4.1 4. 0 19.0 1.644 1.644 1.644 6.96.5$$31.1$ Rate Base Fair ROR Req’d Return Income Income Def’cy Tax Factor Revenue Def’cy $ 19.2 8.90% 8.90% 1.7 0.9$ 0.8 1.644 1.3$ $1,150.0 102.4 74.5$ 27.9 1.644 45.8$ Using Cost Study For Class Revenue Increases