The Minnesota Perspective: Allowing Limited Competition

for Small Projects

John KundertMay 22, 2018

Sections

Background

New Area Surcharge (NAS) Mechanism

Exemption from Regulatory Reporting Requirements

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Minnesota Department of Commerce (DOC)

• Our mission is to advocate for Minnesota consumers, ensure a strong, competitive and fair marketplace; and to represent the public interest.

• DOC provides analysis and advocates for the public interest before the Minnesota Public Utilities Commission (Commission).

• Any opinions or statements made are solely my own and are not necessarily reflective of the DOC’s policies or positions.

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When Might Competition Make Sense?

• Trans-Adriatic Pipeline is completed.• South-East European (SEE) regulators use cost of service

regulation to develop rates. • Natural gas distribution system is completed to the extent it is

economically feasible. • Maintaining current rates and excellent reliability become

primary objectives for SEE regulators.• Unserved communities still request natural gas service creating

pressure to socialize the costs of extending the network.• Allowing natural gas utilities to “compete” to serve those

unserved areas may be in the public interest.

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Natural Gas – Current Status in Minnesota

• Roughly 10 percent of the population doesn’t have natural gas.– could benefit economically from introduction of natural gas.

• Population density is too low outstate for profitable investment in natural gas local distribution systems unless it is subsidized.

• Minnesota Legislature decided not to subsidize provision of natural gas to outstate areas.

• Thus, system expansion must be cost-effective.

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Cost-Effective System Expansion Minnesota-style

• Do not create legal obligation to serve all customers by assigning exclusive service territories.

• Allow local distribution companies (LDCs) to charge higher rates than the average rates charged to existing customers.

• Lower the costs of providing natural gas service outstate by exempting gas utilities from certain regulatory requirements.– Regulate rates/reliability primarily via complaint.

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Where are the customers?

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Competitive Sources of Energy Outstate

• Wood – plentiful and inexpensive if you are willing to chop it. Not so much otherwise.

• Fuel Oil – price closely tied to price of oil, need to have it delivered, monitor usage and inventory. Really only good for space heating.

• Propane – similar to fuel oil, a little more versatile in that you use it in standard gas appliances with a slight modification.

• Electricity – expensive relative to propane and fuel oil under most circumstances unless its off-peak.

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Extension Economics – Annual Cost (€/yr) for Different Energy Sources

Energy Source Residential Small Commercial Large Commercial

Propane 1,201€ 1,405€ 11,951€

Off-Peak Electric 1,105€ Not applicable Not applicable

Wood 900€ Not applicable Not applicable

Natural Gas 770€ 1,110€ 5,417€

Percentage Diff.

Propane -36% -21% -55%

Off-Peak Electric -30% Not applicable Not applicable

Wood -14% Not applicable Not applicable

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The Competition

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Outstate Gas Nomenclature

• Intrastate pipelines – for this exercise, a short, small diameter transmission line that operates at low pressure.

• Local Distribution Company (LDC) – provide the system to deliver gas to customer premises.

• Intrastate pipelines have limited regulatory oversight– Contract rates must be just and reasonable and non-

discriminatory.– Service provided on open access, non-discriminatory basis.– Must obtain Commission approval for each contract.

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Intrastate Pipeline Example

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Intrastate Pipelines

• Some particulars– Lengths – 15 to 35 kilometers– Diameters – 10 cm to 15 cm– Material – high density polypropelene– Pressure – 275 to 620 kpa– Maximum daily delivery – 720 to 2000 dth

• More like a really long distribution line.• All new LDC’s will be connected to an intrastate

pipeline.

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Interstate and Intrastate Pipelines

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Local Distribution Companies

• No assigned service territories.– Existing system’s economics effectively creates service

territories even if they are not recognized legally.– Commission allows a small amount of duplication of facilities

in support of competition.

• New Area Surcharge –– Allows for direct assignment of expansion costs and

geographically de-averaged rates.

• Regulatory Exemption– Attempts to lower regulatory compliance costs.

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New Area Surcharge (NAS) - Calculation

• Company estimates:– annual revenue requirements for the investment;– number of new customers;– annual revenues from base rates.

• Subtracts annual revenue requirements from annual base rate revenues for each year of the investment.

• Calculates a Net Present Value of this estimated annual income stream.

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NAS Example - Costs

• €1.12 ($1.4) million investment to provide natural gas service to roughly 300 customers.

• Approximately €560,000 ($700,000) for pipeline related costs (expansion of a town border station or TBS).

• Approximately €560,000 ($700,000) for construction costs of the local distribution system.

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New Area Surcharge – Revenue Calculation

• Company estimates that it will receive €960,000 ($1.2 million) in base rate revenues over 25 years.

• Discounted to approximately €560,000 ($700,000) in Present Value

• NAS Revenues need to recover the €560,000 ($700,000) in costs not recovered through base rate revenues over same 25 year period.

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NAS Rate Calculation

• Surcharge considered a non-refundable customer contribution.

• Annual amount of revenue necessary to solve model at $0 NPV is designated as the additional revenue to be collected through a NAS.– Company remains financially neutral. Classified as

customer-contributed capital.

• Not all expenses are included in NAS revenue requirement to recognize base rate revenue.

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NAS Residential Avg. Monthly Costs & Revenues

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Base Rates

Revenue Requirement

New Area Surcharge – Sample Rates

Customer Class Monthly Rate with Monthly Rate with

25 year term 30 year term

Residential 20.21€ 18.20€

Small Commercial 38.30€ 34.48€

Large Commercial 95.74€ 86.20€

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New Area Surcharge Summary

• Develop “satellite” revenue requirement• Forecast annual revenue from base rates• Subtract annual revenue from annual “satellite”

revenue requirement• Calculate present value of the difference• Develop rates that recover the difference• True-up (adjust) the calculation over time if

necessary

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New Area Surcharge Example - Map

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Lowering LDC’s Regulatory Costs

• MPUC requires a minimum of 36 to 38 filings annually from an LDC.

• Annual cost of drafting and explaining those filings is probably around €80,000.

• Relatively large expense for a small LDC trying to compete in a marginal service area.

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Small LDCs Regulatory Exemption

• LDC can be regulated by local municipality; – Municipality must request exemption from state-level

regulation (MPUC).

• LDC must fulfill certain criteria;– Cannot have more than 650 customers in the municipality’s

jurisdiction and more than 5,000 customers in total.– Must comply with “Cold Weather Rule’, and other customer

protections.

• LDC is also allowed to serve “incremental” load outside of municipality’s jurisdiction.

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Exemptions (Cont.)

• Municipality can ask MPUC to end exemption if it chooses.

• MPUC still can investigate ratepayer complaints if necessary.

• LDC is not exempt from any safety or environmental regulations, only economic.

• Don’t have enough information to determine if it is working well or will be problematic in later years.

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Notes on Exempting Small LDCs

• Need– Favorable topography– One or more large commercial/industrial customers– Agreeable municipality

• Some examples of large customers served by exempt utilities– Casinos– Turkey farms– Cabinetmakers

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Summary – Adapting Regulatory Processes to Allow LDC’s to Compete in Marginal Service Areas

• Lightly regulate intrastate pipelines.• Allow for special cost recovery mechanisms –

New Area Surcharge.• Exempt small LDC’s from state-level

regulation.• Regulate by complaint.

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Questions?

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Contact Information

John KundertMinnesota Department of Commerce85 7th Place East, Suite 280Saint Paul, MN 55101-2198john.kundert@state.mn.usMn.gov/commercePhone: 1-651-539-1740

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