Contributions In Aid of Construction Mark Beauchamp Business & Finance Workshop Utility Financial Solutions

Objectives  Types of Line Extension Policies  Consideration when developing a line extension policy  Risk of investments  How much is a new customer worth?  How to determine the value and example calculations  Other Considerations when developing a line extension policy

Examples of Electric Line Extension Policies  Based on Annual Revenues  Some charge the difference between underground and overhead  Some contribute a per foot maximum amount  Some provide it free of charge  Some charge customers a System Development Charge

Types of Line Extension Polices  Many policies are not based on economics and do not consider the financial impact to existing rate payers.  Examples: Investing $15,000 to connect a residential customer Using a times revenue policy for a 15 mW Ethanol plant Not contributing to expansion of hospital that will increase electrical use

Considerations in developing a line extension policy  Often power supply represents 65% - 85% of the total revenue requirement for utilities.  Power supply can represent 85% - 90% of a high load factor customers revenue requirement and only 60% for a residential or small commercial  A times annual revenue policy will overvalue a high load factor customer  Example Ethanol Plant (87% Load Factor) Five times annual revenue valued customer at over $5.0 Million actual value to electric utility is less than $500,000

Utility Investment per kWh by Load Factor

Risk of Investments in Customer  Example: TransCanada Pipeline building line through rural areas of Nebraska substantial investment were needed to service pumping stations Investments of over $5.0 million were required by some utilities, kWh usage from the pipeline would more than double sales to utility Risks:  over-estimating sales in determination of line extension contribution  Bankruptcy  Stranded investments could substantially increase rates to utility  Contribution margins from distribution amounted to only $200,000 per year  Wholesale providers ratchet clause in rates

Value of a Customer?  Many Utilities are moving toward policies that places a value on a customer Reviews the contribution margin a customer will provide to the system Amount of risk of investing money to serve the customer  Objective Help ensure the investment to connect customer is a good investment for the utility and will benefit existing customers of the system Growth should be good for the system

Steps to Value a Customer  Determine variable cost to serve each customer class  Determine contribution margin (net revenue) from each class  Convert contribution margin of each customer class to a per kWh, kW, kVa or HP basis  Present value the contribution margin over an appropriate time (considering risk) assuming a discount rate = rate of return

Determination of Contribution Margin by Class

Determination of Contribution Margin on a billable basis

Types of Billable Basis  kWh Average  kWh projected for customer  kW projected for customer  kVa of installed capacity  Variable Costs = Power Supply costs from Cost of Service Study

Present Value Contribution Margin

Key Assumptions  Discount Rate Typically equal to Rate of Return Target for Utility  Length of time to recover investment Based on perceived risk of investment Residential 5-9 years Commercial 4-5 years Industrial 3 years

Perceived Risks  Company going out of business  Facility burning down  Co-Generation  Wind Mills/Solar/Fuel Cells  Alternative fuels

Other Considerations  Second customer connecting to line paid by another customer  Customer above certain size should require a special analysis  Existing customer expands facilities  Residential average not representative of the new customers usage  Risk to utility