Paying for Load Growth and New Large Loads September 24, 2007 | Presented by: Joe Mancinelli American Public Power Association Business & Financial Conference

APPA – Business & Financial Conference 2 The Bottom Line Load growth pricing strategies must be in alignment with marginal cost and average cost Cost per Unit MC AC

APPA – Business & Financial Conference 3 Significant Upward Pricing Pressure in Today’s Marketplace

APPA – Business & Financial Conference 4 Cost of Service Comparison Embedded CostMarginal Cost Use FrequentInfrequent Cost Examination HistoricalFuture Cost of Service Cost Total Price Complexity Low to HighHigh  P rice  Q uantity Adj. Factor Cost Total Quantity Total  P rice  Q uantity Q Total Adj. Factor

APPA – Business & Financial Conference 5 Cost of Service Comparison (cont.) Embedded CostMarginal Cost Standard of Proof Audited Financial statements & normalized customer usage Special studies & normalized customer 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

APPA – Business & Financial Conference 7 Who Benefits from Infrastructure Installed to Meet Growth? Residential Customer Commercial Customer Distribution Substation Industrial Customer High Voltage Transmission Transmission Substation Generating Station

APPA – Business & Financial Conference 8 Cost Implications  Distribution: Customer-specific usefulness  Non-coincident demand  High correlation between benefit of new infrastructure and new load Residential Customer Commercial Customer Distribution Substation Industrial Customer

APPA – Business & Financial Conference 9  Generation and Transmission: Used and useful by all  Coincident demand  Lower correlation between benefit of new infrastructure and new load Cost Implications High Voltage Transmission Transmission Substation Generating Station

APPA – Business & Financial Conference 10 Rates and Fees Key Considerations Effective rate & fee structures balance multiple considerations

Pricing Considerations by Load Size

12 Competition  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 > AC kW Economics Politics Fairness  Differentiate on benefits rather than price  Subsidies  Differentiate on benefits rather than price  Subsidies

13 Competition  Waive connection fees  Economic development rates Economics Politics Fairness  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 < AC  Marginal cost pricing (favor lowest pricing alternative)  Everyone pays the same kW

Rate Design and Fee Strategies

APPA – Business & Financial Conference 15 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

APPA – Business & Financial Conference 16 Rate Design & Fee Strategies Generation & Transmission Function  Time of Use Load reduction Baseline

APPA – Business & Financial Conference 17 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)

APPA – Business & Financial Conference 18 Final Thoughts Know your cost of service  Marginal costs  Embedded costs Send consistent pricing signals to customers Educate stakeholders

APPA – Business & Financial Conference 19 Questions? Joe Mancinelli Vice President (303)