1. Glenn R. Jennings Chairman, President & CEO Delta Natural Gas Company, Inc. 1

2. NARUC-October 14, 2008 Delta is smallest larger LDC in Kentucky 40,000 customers Transport, storage, distribution, gathering Only stand-alone investor owned gas Started in 1949; Public since 1981 2500 miles of pipe; 23 counties Rural service area; 157 employees Regulated by KYPSC 2

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4. NARUC-October 14, 2008 Must keep rates current to remain financially viable Cap Ex for replacements and new service Reduced usage by customers Decline in customers in last few years Operations and maintenance costs Changes in cost of capital 4

5. NARUC-October 14, 2008 Hard to promote conservation and efficiency Why? Volumetric rates Lost revenues Promotion costs What to do? 5

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7. NARUC-October 14, 2008 Our solutions for the future Rate cases to stay current with impacts Rate design toward decoupling Demand side management(DSM) Less costly methods to streamline ratemaking process for the future- Customer Rate Stabilization(CRS) Proposed our CRS tariffs to lessen rate case cost 7

8. NARUC-October 14, 2008 Case in 2004- KYPSC; filed for $4.2mm; received $2.8mm; 10.5% ROE Case in 2007- Filed for $5.6mm; received $3.9mm; Settled with intervenors at 10.5% ROE 2004 and 2007 rate cases provided more of increase to monthly customer charge Residential- now $15.50 including $.20 EAP Small non-residential- now $25.00 Large non-residential- now $100.00 Moved further toward cost of service for customer charge 8

9. NARUC-October 14, 2008 Rate case included Rate Stabilization (CRS) tariffs and Demand Side Mgt (DSM) tariffs In order to settle with AG we withdrew both Right to seek again at KYPSC or legislatively We filed DSM with KYPSC in early 2008 under KRS 278.285 Approved by KYPSC in July, 2008 (copy of KYPSC filing and order included with handout) We are in process of implementing DSM 9

10. NARUC-October 14, 2008 Our DSM program is our customer Conservation/Efficiency Program (CEP) CEP includes home energy audits Rebate incentives for high efficiency appliances CEP surcharge for residential Includes direct and indirect costs, lost revenues, incentive of 15% of net savings and a true-up Used California tests to consider the impact Includes 4 mathematical measures of cost-effectiveness Calculated ratios for participants, customers, total resources, program administrator Our tests were all > one, indicating no undue customer burden 10

11. NARUC-October 14, 2008 DSM surcharge on residential bills as separate item Surcharge=CEPCR+CEPLS+CEPI+CEPBA CEPCR-Cost recovery of direct and indirect costs CEPLS-Recovers revenue lost from reduced usage CEPI-Collects 15% of net resource savings CEPBA-True up to actual costs versus collections Home energy assistance and home energy audits Rebates of $100-$400 for high efficiency equipment DSM/CEP aligns our interests with our customers interests….lets us promote conservation/efficiency 11

12. NARUC-October 14, 2008 We are very interested in having a Customer Rate Stabilization(CRS)mechanism We are seeking a new way to adjust rates Could be done legislatively like SC Could be sought again at KYPSC Why propose CRS? Keep rates current with annual adjustments Rate changes generally smaller If over-earning, rates decline Less burden on company staff Less burden on KYPSC, AG staff Rates stabilize 12

13. NARUC-October 14, 2008 Need to keep rates current Why not just file a lot of rate cases? Cost- for us $300-$400,000 per case Customers rates eventually reflect For smaller companies- internal burden Need better alternative We proposed five year experimental tariff Copy of last filed tariffs in handout 13

14. NARUC-October 14, 2008 Annual evaluation proposed using fiscal year June 30 File by September 15 Review period of 45 days Rates implement October 31 of each year Use same approach to rate base, expenses, revenues, depreciation, cost of service, cost of capital from last rate case If too stale, file new base case as starting point Return on equity from last rate case with 50 points band, adjust to return allowed if outside band Include incremental costs for one incremental employee each for PSC and AG Proof of revenues to be provided for proposed rates Proposed rates use prior rate design Adjust for prior over-under collections 14

15. NARUC-October 14, 2008 Works well in AL, SC; similar versions appearing in other jurisdictions Some states legislative Some regulatory Total rates lower due to less cost Not a return guarantee any more than currently exists, we can file a rate case any time Will restrict over-earning due to target return Still have involvement of KYPSC and AG Some help with staffing for them 15

16. NARUC-October 14, 2008 Rate stabilization can help in many areas Somewhat like decoupling Weather normalization then maybe not critical Rate design such as straight-fixed variable or similar maybe not so critical with it DSM still helps but not as critical Conservation/efficiency impacts lessened Adjusting annually is good trend developing across the country Will Kentucky get there? 16

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18. NARUC-October 14, 2008 THANK YOU FOR VISITING KENTUCKY! 18