Cost of ServiceCost of Service
Indiana Industrial Energy Consumers, Inc.(INDIEC)
Indiana Industrial Energy Consumers, Inc.(INDIEC)
presented by
Nick PhillipsBrubaker & Associates, Inc.
presented by
Nick PhillipsBrubaker & Associates, Inc.
• Principles / purposes
• Types of cost studies
• Major steps in a cost study
• Class revenue recovery
• Results for use in rate design
• Principles / purposes
• Types of cost studies
• Major steps in a cost study
• Class revenue recovery
• Results for use in rate design
OverviewOverview
Main PrinciplesMain Principles
• Regulation is a surrogate for competition
– Limit on prices
– Nondiscriminatory prices
– Adequate service
• Rates based on cost of service
• Regulation is a surrogate for competition
– Limit on prices
– Nondiscriminatory prices
– Adequate service
• Rates based on cost of service
Rates Based on Cost of Service
• Stability
• Conservation
• Engineering efficiency
• Equity
• Stability
• Conservation
• Engineering efficiency
• Equity
Main Purpose of aCost of Service StudyMain Purpose of aCost of Service Study
To measure the responsibility of each class for the service
provided by the utility.
To measure the responsibility of each class for the service
provided by the utility.
Purposes of Cost Studies
• Regulatory
• Evaluation
• Rate Design
Regulatory PurposesRegulatory Purposes• Separate costs between different
regulatory jurisdictions
• Attribute costs to customer classes based on how those customers cause costs
• Calculate costs of individual typesof services
• Determine how costs are to be recovered from customers and categories
• Measure adequacy of Measure adequacy of current ratescurrent rates
Evaluation PurposesEvaluation Purposes
• Evaluate proposed changes
• Unbundling of costs$
$
$
• Amount to be recovered throughretail rates
• Rate design by classand rate type
• Components of rates:$ / month, $ per kWh,$ per kW-month
• Unbundling of rates
Rate Design PurposesRate Design Purposes
RETAIL RATERETAIL RATE
Fundamental ConceptsFundamental Concepts
• Many different types of cost
• Not all customers use allparts of system
• Usage patterns affectcost incurrence
Types of Cost Studies
• Embedded
• Marginal
• Embedded
• Marginal
The Generation and Delivery of ElectricityIntegrated Electric Utility
SubstationTransformer
PowerPlant
MainPower
Transformer
Circuit Breaker
DistributionPole
SwitchingEquipmen
t
SwitchingEquipment
Capacitor
Distribution Wires
Service
Network Transmission
Service
TransformationService
Customer
ABC Power & Light Company
Three Major StepsThree Major StepsFunctionalization
Identify different types of cost
ClassificationDetermine basis for each type of cost
AllocationDistribute costs among classes and services
Management Costs, Administrative Buildings
Management Costs, Administrative BuildingsAdministrative & GeneralAdministrative & General
Meters InstallationsBilling & Collection Service Drops
Customer InformationStreet & Outdoor Lighting
Meters InstallationsBilling & Collection Service Drops
Customer InformationStreet & Outdoor Lighting
Customer Service & FacilitiesCustomer Service & Facilities
Substations Distribution PolesOH & UG Lines Transformers
Substations Distribution PolesOH & UG Lines Transformers
DistributionDistribution
Step-up Stations High VoltageSub-Transmission
Step-up Stations High VoltageSub-Transmission
TransmissionTransmission
FunctionalizationFunctionalizationSteam Nuclear Hydro
Solar Wind Other Purchased Power
Steam Nuclear Hydro Solar Wind Other
Purchased PowerProductionProduction
ClassificationClassificationDemandDemand Costs that vary with demandCosts that vary with demand
EnergyEnergy Costs that vary with energy providedCosts that vary with energy provided
CustomerCustomer Costs related to customers servedCosts related to customers served
Direct AssignmentDirect Assignment
Classification of Plant & ExpensesClassification of Plant & Expenses
Customer Demand EnergyCustomer Demand Energy
ProductionProduction
TransmissionTransmission
DistributionDistribution
GeneralGeneral
Customer SvcCustomer Svc
Customer ClassesCustomer Classes• Residential
• General Service (Commercial)
• Large Power (Industrial)
• Lighting
• Other
Res
GS
Ind
Allocation FactorsAllocation Factors
• Represents class share of total
• Externally supplied Energy, customer, demand
• Internally generated Derived from prior allocations
Demand and EnergyAllocation FactorsDemand and EnergyAllocation Factors
• Based on class usage Based on class usage at generatorat generator, , not at meternot at meter
• Losses:Losses: Reduction in available Reduction in available electricity after being transmitted electricity after being transmitted over transmission and distribution over transmission and distribution (T&D) facilities(T&D) facilities
Energy Loss FactorsEnergy Loss FactorsEnergy AvailableEnergy Available
100.00 kWh100.00 kWh GenerationGeneration
Transmission /Transmission /SubtransmissionSubtransmission98.11 kWh98.11 kWh
95.88 kWh95.88 kWh PrimaryPrimary
93.34 kWh93.34 kWh SecondarySecondary
Expansion FactorExpansion Factor
100 / 98.11 = 1.01926100 / 98.11 = 1.01926Trans/Sub CustomerTrans/Sub Customer
100 / 95.88 = 1.04297100 / 95.88 = 1.04297Primary CustomerPrimary Customer
100 / 93.34 = 1.07135100 / 93.34 = 1.07135Secondary CustomerSecondary Customer
Demand AllocationDemand Allocation• Not all customers use all parts of system:
Primary Distribution Plant & Expenses: Primary & Secondary
Secondary Distribution Plant & Expenses: Secondary Only
• Timing of demand is important (CP vs NCP)
Demand Allocation FactorProduction (MW)Demand Allocation FactorProduction (MW)
ResRes GSGS LtgLtgIndInd
Coincident PeakCoincident Peak 1,3041,304 328328 402402 77
Loss FactorLoss Factor 1.07711.0771 1.07651.0765 1.04611.0461 1.07711.0771
1 CP At Gen1 CP At Gen 1,4041,404 353353 420420 77
1 CP Gen A.F.1 CP Gen A.F. 64.26%64.26% 16.18%16.18% 19.24%19.24% 0.32%0.32%
Demand Allocation FactorPrimary Distribution (MW)Demand Allocation FactorPrimary Distribution (MW)
ResRes GSGS LtgLtgIndInd
1 CP at Gen1 CP at Gen 1,4041,404
Prim & BelowPrim & Below 1,4041,404
Portion ServedPortion ServedAt SubtransAt Subtrans 00
1 CP Pri A.F.1 CP Pri A.F. 70.13%70.13%
1 CP Gen A.F.1 CP Gen A.F. 64.26%64.26%
353353
353353
00
17.63%17.63%
16.18%16.18%
420420
238238
182182
11.89%11.89%
19.24%19.24%
77
77
00
0.35%0.35%
0.32%0.32%
Demand Allocation FactorSecondary (MW) using NCPDemand Allocation FactorSecondary (MW) using NCP
ResRes GSGS LtgLtgIndInd
NCP DemandNCP DemandSecondarySecondary 1,3041,304
NCP A.F.NCP A.F. 66.1%66.1%
526526
26.6%26.6%
121121
6.1%6.1%
2323
1.2%1.2%
Two Types of DemandTwo Types of Demand
Non-Coincident (NCP):Non-Coincident (NCP):Maximum peakMaximum peakregardless of timeregardless of time
Coincident (CP):Coincident (CP):Measurement of demandMeasurement of demandat time of system peakat time of system peak
CP and NCP DemandsCoincident
Peak
NCP of BNCP of BNCP of ANCP of A
AA
BB
TimeTime
Dem
and
Dem
and
CP of ACP of A
CP of BCP of B
Demand Allocation MethodsDemand Allocation Methods• Coincident peak or peak
responsibility
• Multiple CP – e.g. 4 CP, 12 CP
• Average & Excess
• Capital Substitution
• Peak & Average
• Energy Based
Monthly Peak Demands as a Percent of Total System Peak
J F M A M J J A S O N D
40%
60%
80%
100%
Summer Peaking UtilitySummer Peaking Utility
Monthly Peak Demands as a Percent of Total System Peak
Winter Peaking UtilityWinter Peaking Utility
J F M A M J J A S O N D
40%
60%
80%
100%
Monthly Peak Demands as a Percent of Total System Peak
12 Month Peaking Utility12 Month Peaking Utility
J F M A M J J A S O N D
40%
60%
80%
100%
Coincident Peak DemandAllocation Factor Coincident Peak DemandAllocation Factor
J F M A M J J A S O N DJ F M A M J J A S O N D
500500
1,0001,000
1,5001,500
2,0002,000
2,5002,500MWMW
Coincident PeakCoincident Peak
00
ResRes
GSGS
IndInd
MWMW PercentPercent
64.26%64.26%
353353 16.18%16.18%
420420 19.24%19.24%
2,1852,185 100.00%100.00%
1,4041,404
LtgLtg 77 0.32%0.32%
Gas IndustryFunctional StructureGas IndustryFunctional Structure
City Gate
Burner Burner TipTipPipeline 1
Pipeline 2
Pipeline 3
WellheadWellhead
PRODUCTIONPurchased Gas Cost
TRANSMISSION – STORAGEPipeline Transportation Cost
PipelineStorage
DISTRIBUTION - STORAGE
LDC
Storage
ResRes LtgLtgIndInd
Rate BaseRate Base $ 221.5$ 221.5 $ 279.5$ 279.5 $ 19.2$ 19.2
RevenueRevenue 111.7111.7 195.9195.9 7.67.6
ExpenseExpense 96.196.1 175.0175.0 6.76.7
Income (Return)Income (Return) 37.137.1 15.515.5 20.920.9 0.90.9$$ $$ $$ $$
$ 629.8$ 629.8
293.5293.5
256.4256.4
RORROR 7.0%7.0% 7.5%7.5% 4.9%4.9% 5.9%5.9%
RRORRROR 108108 115115 75759191
SubsidySubsidy 2.02.0 4.64.6 (0.5)(0.5)$$ $$ $$(6.0)(6.0)$$
TotalTotal
$1,150.0$1,150.0
608.7608.7
534.2534.2
74.574.5$$
6.5%6.5%
100100
--$$
Source: Cost Study Summary - $ MillionsSource: Cost Study Summary - $ Millions
Cost Study ResultsCost Study Results
GSGS
Cost Study MeasuresCost Study Measures
Return (Income) =Return (Income) = Revenue - ExpensesRevenue - Expenses
ROR =ROR = IncomeIncomeRate BaseRate Base
(1)(1) Class Rate of Return (ROR): Class Rate of Return (ROR):
RROR =RROR = ROR of classROR of classROR of systemROR of system
(2)(2) Relative Rate of Return (RROR): Relative Rate of Return (RROR):
Cost Study MeasuresCost Study Measures
Subsidy = Revenue - Cost of ServiceSubsidy = Revenue - Cost of Service
(3)(3) Subsidy: Subsidy:
Cost of Service =Cost of Service = Expenses +Expenses +Return @ Return @ TargetTarget ROR ROR
Cost Study MeasuresCost Study Measures
Cost Study ResultsCost Study Results
Rate of return
Relative ROR
Subsidy
Rate of return
Relative ROR
Subsidy
< System Average
<100%
Negative
< System Average
<100%
Negative
Rate isToo LowRate is
Too LowRate is
Too HighRate is
Too HighRate isAt CostRate isAt Cost
= System Average
100%
Zero
= System Average
100%
Zero
> System Average
>100%
Positive
> System Average
>100%
Positive
Source: Cost Study Summary - $ MillionsSource: Cost Study Summary - $ Millions
ResRes GSGS LtgLtgIndInd TotalTotal
$ 221.5$ 221.5 $ 279.5$ 279.5$ 629.8$ 629.8
8.90%8.90% 8.90%8.90% 8.90%8.90%
19.719.7 24.924.956.156.1
37.137.1 15.615.6 20.920.9$$ $$ $$
4.14.1 4.04.019.019.0
1.6441.644 1.6441.6441.6441.644
6.96.9 6.56.5$$ $$31.131.1$$
Rate BaseRate Base
Fair RORFair ROR
Req’d ReturnReq’d Return
IncomeIncome
Income Def’cyIncome Def’cy
Tax FactorTax Factor
Revenue Def’cyRevenue Def’cy
$ 19.2$ 19.2
8.90%8.90%
1.71.7
0.90.9$$
0.80.8
1.6441.644
1.31.3$$
$1,150.0$1,150.0
8.90%8.90%
102.4102.4
74.574.5$$
27.927.9
1.6441.644
45.845.8$$
Using Cost Study For ClassRevenue IncreasesUsing Cost Study For ClassRevenue Increases