1 Northeast Public Power Association Electric Utility Basics Electric Rates and Cost of Service Studies

2 What are we going to address today? The Supply Chain Annual Revenue Requirement Cost of Service Studies Electric Rate Design Reading an Electric Bill

3 The Supply Chain Initially, you must determine all the components of the supply chain that takes a commodity from production to the end user.

4 The Supply Chain Commodities (milk, sugar, natural gas, electricity, etc.) are very similar in that they all have a supply chain that include the following components: Production Operation Maintenance Distribution

5 The Supply Chain Components of an Electric System Generation Transmission Distribution End User Operation and Maintenance

6 Annual Revenue Requirement Once the supply chain components have been identified then the costs of each component needs to be determined. “The annual revenue requirement is the amount of money necessary to operate a company in a technically reliable and financially stable manner on an annual basis.”

7 Annual Revenue Requirements For an Electric Utility Component Cost Customer Billing $100,000 Power Supply $15,000,000 Oper. & Maint. $6,000,000 _________ Total $21,100,000

8 Annual Revenue Requirements How do you get the money necessary to meet the annual revenue requirements to operate the electric utility? Who do you bill? How much do you bill? What is it based on? You need to perform a Cost of Service Study!

9 Cost of Service Study A Cost of Service Study is performed by an electric utility to ensure that each customer class pays their fair and equitable share of the electric utility’s revenue requirements.

10 Cost of Service Study Identify the components of the Annual Revenue Requirements Assess Customer Base Residential, Commercial, Industrial, Other Customer Characteristics Business types Usage Patterns Regulatory Requirements State and Federal Rules and Regulations

11 Cost of Service Study Select the Customer Categories Residential Commercial Industrial Other

12 Cost of Service Study Customer Categories Residential Customer – A house, condominium, or an apartment. Commercial Customer – Any commercial establishment (store, office, restaurant, warehouse, municipal building, etc.) engaged in a business operation. Industrial Customer – Large energy user which is an industrial facility (factory, processing plant, cold storage, etc.) with a two or three shift operation.

13 Cost of Service Study Allocate, Allocate, Allocate! Each customer class causes a certain amount of cost for the utility. You have to allocate your annual revenue requirements to the customer classes to ensure that each customer class is paying their fair and equitable share of the annual revenue requirement.

14 Cost of Service Study Allocation of Customer Costs Based on Number of Customers Customer Customer Class Customers % Billing Rev. Req. ============ ======== ==== ======= ======== Residential 10, % $100,000$66,200 Commercial 5, % $100,000$33,100 Industrial 100.7% $100,000 $700 ______ ______ _______ Total 15, % $100,000

15 Cost of Service Study Allocation of Power Supply Costs Based on Peak Demand Use Peak Demand Pow. Sup. Alloc. Rev. Req. Customer Class (kW) % ($) ($) ============ ======== ==== ========= ======== Residential 17, % $15,000,000 $5,250,000 Commercial 15, % $15,000,000 $4,500,000 Industrial 17, % $15,000,000 $5,250,000 _____ _____ _________ Total 50, % $15,000,000 Note: Peak demand is the highest demand of the year.

16 Cost of Service Study Allocation of Oper. & Maint. Costs Based on Energy Use Energy Use O&M Costs. Rev. Req. Customer Class (kWh) % ($) ($) ============ ========= ==== ========= ========= Residential 61,320,000 30% $6,000,000 $1,800,000 Commercial 59,130,000 29% $6,000,000 $1,740,000 Industrial 84,315,000 41% $6,000,000 $2,460,000 ___________ ____ _________ Total 204,765, % $6,000,000 Note: Energy use is the kWh used annually by each customer class.

17 Cost of Service Study Total Allocation of Customer, Power Supply and Oper. & Maint. Costs Customer Class Ann. Rev. Req. % ($) ============ ========= ====== Residential $7,116, Commercial $6,273, Industrial $7,710, __________ ____ Total $21,100,

18 Cost of Service Study Allocation to Customer Class

19 Cost of Service Study Total Allocated Costs and Unit Cost Tot. Cost Ann. Sales Unit Cost Customer Class ($) (kWh) ($/kWh) ============ ======== ======== ======= Residential $7,116,200 61,320,000 $.116 Commercial $6,273,100 59,130,000 $.106 Industrial $7,710,700 84,315,000 $.091 _________ __________ _____ $21,100, ,765,000 $.103* * Unit Cost is Total Cost divided by Annual Sales.

20 Cost of Service Study “Electric rate design is as much art as it is science.”

21 Electric Rate Design Determine the components of the rates. Which may include the following: Customer Charge – minimum charge – cost to produce a bill. Demand Charge – cost of purchasing capacity for peak demand. Energy Charge – cost of energy, operation and maintenance, return on equity, etc. Fuel Charge – cost of the fuel to produce the kilowatt hours used by the customers.

22 Reading an Electric Bill Electric bills have many components that are used to bill costs to a customer. Each charge is either a minimum charge or a charge based on unit costs. Charges on an electric bill may include: Customer Charge Monthly minimum charge for billing Demand Charge Kilowatts X $ Energy Charge Kilowatthours X $ Fuel Charge Kilowatthours X $ Other Charges

23 Residential Bill

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25 Summary What did we learn today? Components of the Supply Chain. Determining an Annual Revenue Requirement. What is a Cost of Service Study? Elements of Rate Design. How to read an Electric Bill.

26 Summary What is the Supply Chain? “The supply chain for a commodity includes production, operation, maintenance, and distribution.”

27 Summary What is an Annual Revenue Requirement? “The annual revenue requirement is the amount of money necessary to operate a company in a technically reliable and financially stable manner on an annual basis.”

28 Summary What is a Cost of Service Study? A Cost of Service Study is performed by an electric utility to ensure that each customer class pays their fair and equitable share of the electric utilities revenue requirements.

29 Summary Elements of Rate Design The electric utility must determine the components of the rates that need to be charged to the customers (customer charge, demand charge, energy charge, fuel charge, and other.)

30 Summary How to read an Electric Bill? Electric bills can be complicated to the customer. Explaining the components of an electric bill to customers will eliminate confusion about what they are paying for. It also may educate the customer as to how they can save energy and lower their monthly bill.