1. 1 Before Ghana Public Utility Regulatory Commission Proposed Electricity Tariff Guidelines Workshop Ahmed Kaloko,Ph.D. Chief Economist Pennsylvania Public Utility Commission Harrisburg, Pa. 17105 (717) 787-2139

2. 2 Program for Electricity Tariff Guidelines Workshop OVERVIEW Ratemaking & Rate Design Methodologies The Development of Power Pools The Wholesale Bulk Power market Transmission Pricing Methodologies Pricing of Ancillary Services-Principles The Role of the Regulator/Regulated

3. 3 Residential Rate Design Methodologies Overview n Theoretically Correct Rates n Minimum Charges n Service Charges n Flat Demand Rates n Straight Line Meter Rates n Step Meter Rates n Block Meter Rates n Inverted Rates n Lifeline Rates n Time of Day Rates

4. 4 Commercial & Industrial Retail Rate Design n C & I Rates Vs. RT Rates n Hopkinson Demand Rate n High Tension Rates/Peak Width n Time of Use Rates n Voltage Discounts n Power Factor n Demand Ratches n Transformer Ownership Credits n Special Terms & Conditions

5. 5 Guidelines For Rate Making & Rate Design n Introduction n Rate Making Process n Definitions n Pricing Guidelines n Generation Pricing n Transmission Price n Distribution Price n Ancillary Services Pricing n Cost Allocation n Residential Class n Commercial Class n Industrial Class n Wholesale Class n Other Customers n Rate Methodologies n The End Result

6. 6 Rate Case Filing Requirements n Revenues n Operating Expenses n Operating Income n Rate Base & ROR n Financial Statements n All Taxes Applicable n Assumptions n Payroll & Benefits n Extraordinary Expenses n Affiliated Transactions n Anticipated Changes n Historic/Future Test Year. Provide all Work Papers

7. 7 Rate Making & Rate Design n Factors to consider in Rate Design – Cost of Service – Value of Service – Company Rate History-Continuity & Customer Impact – Revenue Stability- Class Risk – Improvement of System Load Factor – Social Objectives – Optimum Use of Natural Resources

8. 8 Rate Making & Rate Design Components of Theoretically Correct Rate:. Customer Charge. Capacity Charge. Energy Charge

9. 9 Rate Making & Rate Design Residential Rate Design – Why Residential Rates Differ From Theoretically Correct Rates – Cost of Metering – Social Factors – History

10. 10 Rate Making & Rate Design Minimum Charge Vs. Service Charge Rates – Total Monthly Charge – Service Charge Rate – $2.00/Month – 4c Per all Kwh – Minimum Charge Rate – E.g... $2.00 – 4c/Kwh after 50 KWH

11. 11 Rate Making & Rate Design Progression of Residential Rates – Flat Demand Residential (Connected Load) – Meters weren’t available – Simple – Encouraged Waste – Still in use--Street Lighting

12. 12 Rate Making & Rate Design Straight Line Meter Rate – No Customer No Demand – Does Not Follow Cost – Still in Use --Off Peak water heating service – Step Meter Rate: – Forerunner of block meter rate – Different Pricing for all consumption depending upon amount

13. 13 Rate Making & Rate Design Alternative Residential Rate Forms – Inverted Rates – To discourage excess and wasteful consumption – Could be based on Marginal Cost – Revenue or earnings instability – Floating block for water heating – Political or social influences

14. 14 Rate Making & Rate Design Lifeline Rate – Objectives of Lifeline Rates – Political & Social aspects – Efficiency of Lifeline Rate – Income Vs. Usage Studies – Experience with Lifeline Rates – Alternatives to Lifeline Rates

15. 15 Rate Making & Rate Design Alternative Residential Rate Forms – Residential Time of Day Rate – Basis for On-Peak & Off-Peak Hours – On Peak 8 a. m. to 8 p. m. – Off Peak 8 p. m. to 8 a. m. – Basis for On-Peak & Off-Peak Rates – Rates--On Peak 6.80C/Kwh – Rates Off Peak 4.90C/Kwh – Meter Charge $6.25 Per Month

16. 16 Rate Making & Rate Design Commercial & Industrial Retail Rate Design – Differences from Residential Rates – Includes Demand Charges – Recognizes Load Factor – Hopkinson Demand Rate-1892 – Recognizes Load Factor – Separate Demand Charge e.g.. $6.00 Per kW – Separate Energy Charge e. g. 2.5c/Kwh

17. 17 Rate Making & Rate Design Wright Demand Rate-1896 – Hours of Use Concept – Energy Blocks – Blocks Increase Size of Load – Price per Kwh same for same Load Factor – Combined Wright-Hopkinson Demand Rate – Considered Ideal – First Energy Block Determined by Customer’s Demand E.g.. 50 Kwh Per kW @ 5c. Next 100 Kwh Per kW @ 4c--Excess @ 3c

18. 18 Rate Making & Rate Design Important Components of Commercial & Industrial Rates – Peak Width & Averaging – Needle Peaks – Broad Peaks – Time-of Use Provisions – Differing Demand Charges – Differing Energy Charges

19. 19 Rate Making & Rate Design Voltage Discounts – Recognizes Cost of Service Differential – Several methods of handling – Power Factor – Demand Ratchets – Transformer Ownership Credits – Special Terms & Conditions

20. 20 Rate Making & Rate Design n Electric Fuel, Energy & Purchased Power Adjustment Clauses – Historic Background – Important Features of Fuel, Energy and Purchased Purchased Power Adjustment Clauses n Other Adjustment Clauses – O & M Adjusted for CPI, System Average Incentive Provision, Cost of Service Indexing & Revenue Adjustment.

21. 21 National Energy Act Standards for Rate Design n Cost of Service n Declining Block Rates n Time of Day Rates n Seasonal Rates n Interruptible Rates n Curtailable Rates n Load Management n Lifeline Rates n Conservation Rates

22. 22 Transition From Marginal Cost to Rates Rate Making & Rate Design n General Observation n Impartiality n Shifting of Risk n Future Planning n Effects on Revenue n Constraints by PUC n Other Constraints n Specific Rates

23. 23 General Service Rate Rate GS n Customer Charge:$5.00--Single Phase Poly Phase $5.00 n 17.00c for 1st 65 hours use of Billing Demand n 10.00c for next 80 hours of Billing Demand n 7.00c Additional use: Except n 6.00c Over both 400 hours use of Billing Demand and 2000 Kwh

24. 24 Industrial Power Service Rate HT n Customer Charge: $250.00 n Capacity Charge: $4.00 Per kW n ENERGY CHARGE – 7.00c Per Kwh-1st 150 Hours use of Billing Demand – 5.00c Per Kwh-Next 150 Hours of Billing Demand BUT not more than 7,500,000 Kwh – 4.00c Per Kwh additional use

25. 25 Primary Service Rate PD n Customer Charge: $200.00 n CAPACITY CHARGE – $5.00 Per kW of Billing Demand n ENERGY CHARGE – 7.30c/ Kwh 1st 150 hours of Billing Demand – 5.20c/Kwh Next 150 hours use of Billing Demand – 4.20c/Kwh additional use

26. 26 Development of Energy Cost Rates n Cost of Service Study to functionalize, classify, and allocate costs n Load Study results to allocate demand Study costs to rate classes n Determination of Billing Units to calculate Prices n Allocators to allocate demand, energy, and customer costs to the classes of service

27. 27 Cost of Service Study n Functionalize means to determine whether costs are related to production, transmission, distribution, etc... n Classify means to determine whether functionalized costs are related to demand, energy, customer or combination.

28. 28 Cost of Service Study-Continued n Allocate means how costs are spread among the various rate classes such as residential, commercial, and industrial. Need various allocators n Cost of Service Study results in cost conversion to revenue requirements. Revenue requirements ultimately lead to pricing

29. 29 Load Study n The Load Study allows you to allocate demand related costs to classes of service such as residential, commercial, and industrial. n Results of Load Study indicate various aspects of demand for the classes of service. n Coincident Peak Demands are primary allocator – Single Peak – 12 Month Average

30. 30 Load Study-Continued n Non Coincident demand – Billing Units – Used to determine pricing

31. 31 Billing Units n Used for Pricing n Billing Units for development of Energy Cost Rates – Demand Rev. Req.. = sum of non- coincident peak in kW – Energy Rev. Req.. = Kwh Sales – Customer Rev. Req.. = number of customers

32. 32 Billing Units-Continued n Take separate revenue requirements for demand, energy, and customer portions n Divide by complementary billing units n Result is a demand, energy, and customer rate n Example: Effect of Load Factor on cost/Kwh of a Customer Bill

33. 33 Billing Unit-Example n Load Factor = Avg.. Demand/Billing Demand n Look at a situation of a rate where load factor is not taken account and a situation where it is n Good rates will reward customers that have a higher load factor by producing a bill with a lower cents/Kwh cost

34. 34 Billing Unit-Situation-1 n Residential Customer rate n Customer Charge = $5/month, Usage rate = 3c/Kwh n There is no separate demand rate. Thus, this rate does not take into account the customer’ load factor n Look at two Customers A & B

35. 35 Billing Unit -Situation-1 Two Customers: A & B n A B n Usage 1000 Kwh 1000 Kwh n Billing Demand 2 kW 4 kW n Total Bill Customer $5 $5 Usage $30 $30 Total $35 $35

36. 36 Billing Unit Situation 1 Continued Two Customers: A & B n A B n Cost/Kwh $35/1000kwh $35/1000kwh 3.5c/Kwh n Load Factor n Avg. Demand 1000kwh/720hrs =1.388 kW Same n Billing Demand 2kw 4 kW n Load Factor 69% 35%

37. 37 Billing Unit Situation 2 n Industrial Customer Rate n Customer Charge =$5/month, Usage rate = 3c/Kwh, Demand rate =$2/kW n There is a separate demand rate. Thus, this rate does take into account the customer’ load factor n Look at two customers A & B

38. 38 Billing Unit Situation-2 Two Customers n A B n Usage 1000kwh 1000kwh n Billing Demand 2kw 4kw n Total Bill n Customer $5 $5 n Demand $4 $8 n Usage $30 $30 n Total $39 $43

39. 39 Billing Unit Situation 2 Two Customers A B n Cost/Kwh $39/1000kwh $43/1000kwh n 3.9c/Kwh 4.3c/Kwh n Load Factor n Avg. Demand 1000kwh/720 hrs =1.388 SAME n Billing Demand 2 kW 4 kW n Load Factor 69% 35%

40. 40 Rate Design Cost of Service Study n Input Data-Load & Customer Class Data n Functionalization-Rate Base Items & Utility Operating Expenses n Classification-(1) Demand,(2) Energy, (3) Customer (4) Direct Assignment-Use Allocation Factors for all four Items. n Allocation-(1) Residential, (2) Commercial, (3) Industrial, & (4) Other

41. 41 Proposed Residential Rates & Costs n Proposed Revenues n Cost Allocators Annual n Demand (kw) n Energy (kwh) n Customer Bills (# Bills) n Cost of Service Costs n $ 39,489,000 n $ 19,886,000 n $ 9,175,000 n $ 10,428,000 n $ 39,489,000

42. 42 The Typical Electric Utility Other Electric Retail ClassWholesale Utilities & Customers Customers Marketers Residential Municipals Intra-System Commercial REA Inter-System Industrial Lighting Other

43. 43 The Cost of Service Function Overall Concept To Identify all of the Costs of Providing Electric Service and Assign or Allocate these Costs to Customer Classes or Rate Groups on the basis of Cost Causation.

44. 44 Revenue Requirement n RR = OE + AD + IT + R Where: n RR =Revenue Requirement n OE =Operating Expenses n AD =Annual Depreciation n IT =Income Taxes n R =Revenue =(v-d) r Where: n V =Valuation of Rate Base Items n D =Accumulated Depreciation n R =Weighted Cost of Capital

45. 45 Major Rate Base & Expense Items in a Rate Case n Production Plant n Transmission Plant n Distribution Plant n General Plant n Materials & Supplies n Cash Working Capital n Construction Work n Fuel, Adm/General n Purchased Power n Maintenance n Customer Accounts n Depreciation n Property & Payroll Taxes & Income Tax n Revenue Taxes

46. 46 Capital Structure Fair Rate of Return Calculation AmountCapital of StructureCost Weighted DescriptionCapitalRatioRate Cost Debt$2.4B53.0%10.1% 5.4098% Preferred$416M 9.0% 8.7% 0.7992% JDIC$ 60M1.3% 11.1% 0.1479% Def.Tax. Cr.$443M9.6%------- ------ Common$1.2B26.8%18.0% 4.8311% Total$4.5B100% 11.1880%

47. 47 State Regulatory Commission Jurisdiction Total Electric System Key Items Utility Request PUC Award n Total Revenues $1.8B $1. 4B n Total Expenses $1.0B $1. 0B n Operating Income $793.5M $350.1M n Income Taxes $277.0M $66. 4M n N. Operating Income $516. 4M $283.6M n Rate Base $4.6B $4.6B n Rate of Return 11.1% 6.145%

48. 48 Summary/Conclusion Rate Making is an Art not a Science. The Regulator must strive to balance the interest of all the parties involved. Utilities must not expect to recover 100% of their Rate Request. The PUC must not function for the benefit of any one Group. It must protect the Public Interest.