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Paying for Load Growth and New Large Loads
September 24, 2007 | Presented by: Joe Mancinelli
American Public Power AssociationBusiness & Financial Conference
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The Bottom Line
Load growth pricing strategies must be inalignment with marginal costand average cost
Cost
per
Un
it
MC
AC
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Significant Upward Pricing Pressure in Today’s Marketplace
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Cost of Service Comparison
Embedded Cost Marginal Cost
Use Frequent Infrequent
Cost Examination
Historical Future
Cost of Service
CostTotal
Price
Complexity
Low to High High
Price
Quantity• Adj. Factor
CostTotal
QuantityTo
tal
Price
Quantity• QTotal • Adj.
Factor
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Cost of Service Comparison (cont.)
Embedded Cost Marginal Cost
Standard of Proof
Audited Financial statements & normalized customer usage
Special studies & normalizedcustomer usage
Process
Develop Revenue Requirement (RR)
Unbundle RR Classify RR Allocate RR
Develop marginal cost by function
Classify marginal cost Allocate marginal cost Reconcile marginal cost with
RR
Application of Results
Traditional rate design
Time of use rate design Justification of CIAC and other
fees & charges
Cost of Service Considerations
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Who Benefits from Infrastructure Installed to Meet Growth?
ResidentialCustomer
CommercialCustomer
DistributionSubstation
IndustrialCustomer
High VoltageTransmission
TransmissionSubstation
Generating Station
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Cost Implications
Distribution: Customer-specific usefulness Non-coincident demand High correlation between benefit of new
infrastructure and new load
ResidentialCustomer
CommercialCustomer
DistributionSubstation
IndustrialCustomer
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Generation and Transmission:Used and useful by all Coincident demand Lower correlation between
benefit of new infrastructure and new load
Cost Implications
High VoltageTransmission
TransmissionSubstation
Generating Station
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Rates and Fees
Key Considerations
Effective rate & fee structures balance multiple considerations
Pricing Considerations by Load Size
12
12
Com
peti
tio
n
Class-specific Marginal cost pricing Customer pay majority of
connection costs through CIAC
Gen/Trans stranded investment less of a concern
Customer-specific Marginal cost pricing Customer pays for majority
of connection costs through CIAC
Customer may pay for Gen/Trans costs
Gen/Trans stranded investment less of a concern Marginal cost or subsidies
(varies depending upon persuasiveness and constituency)
Growth pays for growth
Low CIAC Average cost pricing Residential subsidies
Growth pays for growth
MC
> A
C
kW
Eco
nom
ics
Polit
ics
Fair
nes
s
Differentiate on benefits rather than price
Subsidies
Differentiate on benefits rather than price
Subsidies
13
13
Com
peti
tio
n
Waive connection fees Economic development rates
Eco
nom
ics
Polit
ics
Fair
nes
s
Class-specific pricing Embedded cost pricing Utility pays majority of
connection costs; minimal CIAC
Gen/Trans stranded investment more of a concern
Customer-specific pricing Embedded cost pricing Customer pays for
majority of connection costs
Gen/Trans stranded investment more of a concern
Residential subsidies
Everyone pays the same
MC
< A
C
Marginal cost pricing (favor lowest pricing alternative)
Everyone pays the same
kW
Rate Design and Fee Strategies
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Rate Design & Fee Strategies (MC > AC)
Distribution Function Contributions in Aid of Construction
Trend toward full cost recovery Vintage-based rates
Rate phase-out strategies Increased complexity
Accounting Administration Long term rate volatility Equitable cost recovery
Location-based rates Density Construction costs
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Rate Design & Fee Strategies
Generation & Transmission Function Time of Use Load reduction Baseline
Residential Daily Load Profile July, Texas
0
0.5
1
1.5
2
2.5
3
3.5
4
Hour
kW
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Rate Design & Fee Strategies
Very Large Commercial and Industrial Loads
Pay full cost of facilities required to connect T&D infrastructure
Insulate system from negative economic impacts
Customer-specific rates Minimum charges Deposits Disconnect or exit fees (stranded cost)
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Final Thoughts
Know your cost of service Marginal costs Embedded costs
Send consistent pricing signals to customers
Educate stakeholders
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Questions?
Joe MancinelliVice President(303) [email protected]
