How Transmission Companies Make Money

1

Transmission Company

Profit Making

Charles G. Ely II, PE

Anderson Consulting, Training & Testing

2

Overview

! Basic Business Profits

! A Changing Marketplace

! The “Old Way”

! The “New Way”

! Quantifying The Value of Efficiency

! What’s Next?

3

Basic Business Profits

Revenue

- Cost of Goods/Services

- Taxes (40%) $$ Profits $$

4

Revenues

! Transportation Services

– Firm & Interruptible

– Demand & Reservation Fees

! Storage Services

– Storage Capacity & Daily Flows

– Park & Loan

5

Cost of Goods & Services

! Operating and Maintenance (O&M)

– Labor, parts, utilities, etc.

! Fuel Costs

– Fuel Tracker

! Capital Costs (Amortization)

– Property and Equipment (> 1 year life)

6

Taxes

! Corporate Tax Rate = 40% of Profits

7

A Changing Marketplace

How do companies make money?

Yesterday

-v-

Today

8

Making Money The Old Way

Profits = Capital Assets * Rate of Return

where

" Rate of Return was established with FERC

" Operating Costs were fully recovered in Rate Base

9

FERC Rate Case - Tariff

O&M Cost: Total O&M / Total Pumped GasExample: $10MM/100BCF = $0.10/mcf

Fuel Cost – At Cost to CustomerExample: $3.00/mcf

Profit Cost: Capital Assets x Rate of ReturnExample: $150MM x 10% / 100BCF = $0.15/mcf

Customer Cost = O&M Cost + Fuel Cost + ProfitExample: $0.10 + $3.00 + $0.15 = $3.25/mcf

10

Growing Profits: The Old Way

Profit Growth = Asset Additions

" Equipment inefficiency helped justify FERC filings for

capital asset additions by undervaluing existing assets.

" No penalty or cost for high O&M or fuel costs.

11

Making Money Today

Profits = Revenue - Expenses

where

" FERC sets the upper tariff rates for certain services.

" Operating Expenses are fully recovered only if

services are sold at the upper tariff.

12

Growing Profits -Today

Grow Revenues! Expand into new markets

! Add capacity for Park & Loan services without adding

risk

! Upgrade existing assets to deliver added capacity without

capital expenditures

! “At-Risk” for fuel -v- Fuel Tracker

Reduce Expenses! Eliminate non-value added expenses

! Enhance equipment efficiency and reduce O&M costs

13

Quantifying the Value of Efficiency

Pipeline and Compressor efficiency gains

will grow the bottom line!

The value is realized through

enhanced revenues or reduced expenses.

14

How Does This Work?

Efficiency gains reduce the horsepower required

to pump a fixed quantity of gas or allow more

gas to be pumped with the same horsepower.

! If additional capacity is marketable, the existing

equipment can deliver more throughput with the

existing HP – growing revenues.

! If the throughput requirements stay constant, the

horsepower requirements are reduced - lowering O&M

costs.

15

Grow Revenues

! Existing equipment can deliver more

throughput with the same horsepower

! Added capacity can be marketed:

1. Certificated and sold as base capacity

2. Made available for Park & Loan services

without adding operational risk

! Significant tangible revenues with no

incremental operating costs.

16

Reduce Expenses

! With fixed throughput requirements, less

compression horsepower is required.

! Lower Operating and Maintenance costs.

– Maintenance

– Fuel

– Operating Labor

17

What’s Next…

Typical efficiency studies have paybacks of less

than 1 year (including the equipment upgrades)

The next significant

gain in profits will be

achieved by focusing

on efficiency.