Agenda. Industry Rate Trends Summary of Financial Targets Cost of Service Information. Valuation of Solar

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2 Agenda Industry Rate Trends Summary of Financial Targets Cost of Service Information Customer charges Residential Demand Charges Time of Use Rates Valuation of Solar

3 Industry Trends Increasing demand charges to recover distribution costs Volatility in power supply markets resulting in more utilities using power cost adjustments Due to economy utilities are exploring economic development rates Residential inverted block rate designs are causing problems and utilities are minimizing the differentials Customer charges are rising to off-set some of the losses from distributed generation Time of use rates becoming more widespread Some utilities have implemented residential demand charges and many are considering implementation

4 Policies Significant to Financial Stability Power Cost Adjustments Cash Reserve Policy Five to ten year capital projection Periodic Rate Adjustments Rate Review Polices Recover power costs within the year How much cash needed in reserves Often drives financing decisions Smaller adjustments more frequently Debt Coverage Ratio Often expressed as days cash on hand Minimum Cash Reserves Targeted Operating Income

5 Reasons for Planning & Financial Projections Maintain financial stability of the utility When will rate adjustments be required Balancing large adjustments with phased-in approach Funds to maintain system reliability Assess impact of changing costs on financials and rates Do you have an asset management plan? Incorporate plan into projection to identify funding needs Avoid large unexpected rate adjustments

6 Assessment of Financial Stability Key Financial Targets Cash Reserves Do you have enough cash in reserves? Operating Income Debt Coverage Ratio Are you properly funding replacement of infrastructure? Critical to utilities ability to finance capital improvements Standard DC calculation Fixed Cost Coverage

7 Cash Reserves Helps to ensure timely payment of bills Operating Expenses Debt Service Payments Capital Improvements Creates a reserve fund for catastrophic events Hurricanes/Ice Storms/Wind Storms Helps ensure funds exist for system improvements and reliability Rating agencies consider this a significant factor when considering bond ratings

8 Financial Projection Base Case No Rate Increase Adjusted Projected Debt Fiscal Projected Rate Projected Projected Operating Cash Capital Coverage Year Adjustments Revenues Expenses Income Balances Improvements Bond Issues Ratio % 140,298, ,333,703 (1,034,980) 35,313,396 6,975, % 143,900, ,605,317 (2,704,765) 29,549,231 6,265, % 145,430, ,971,486 (5,541,229) 20,701,100 6,516, % 147,395, ,879,882 (8,483,988) 7,246,116 8,123, % 148,176, ,519,276 (12,343,175) (7,718,630) 7,068, Recommended Operating Income Target $ 10,887,198 Recommended Operating Income Target $ 10,273,763 Recommended Minimums $ 40,304, Recommended Minimums $ 44,995,

9 Financial Projection Recommended Rate Track Fiscal Year Projected Rate Adjustments Projected Revenues Projected Expenses Adjusted Operating Income Projected Cash Balances Capital Improvements Bond Issues Debt Coverage Ratio % 145,331, ,333,703 3,997,579 40,345,956 6,975, % 152,669, ,605,317 6,064,412 43,514,526 6,265, % 158,116, ,971,486 7,144,652 47,806,147 6,516, % 164,233, ,879,882 8,353,199 52,069,264 8,123, % 169,308, ,519,276 8,788,985 59,693,430 7,068, Recommended Operating Income Target $ 10,887,198 Recommended Operating Income Target $ 10,273,763 Recommended Minimums $ 40,304, Recommended Minimums $ 44,995,

10 Cost of Service Compares revenues from each class of customers with the cost to provide service to each class. Identifies the cost of service based rate adjustments for each class Identifies the energy rates by season Identifies demand rates by season Distribution costs are broken down by service level: Identifies cost to serve customers at various voltage levels Needed for value of solar studies and development of line extension policies for utility Identifies power supply cost by season Transmission costs by season

11 Cost of Service Summary Rate adjustment for class to meet cost of service Do you think you can get approval to make these types of changes in one year? Overall Adjustment to achieve cost of service results Customer Class Cost of Service Projected Revenues % Change Residential Service $ 25,850,540 $ 23,086, % Residential Net Metering 6,209 4, % Outdoor Lighting Service 497, , % Street Lighting 823, % Small Commercial Service 11,452,085 9,971, % Large General Service 9,219,271 8,662, % Large Power Service 14,468,123 13,252, % Institutional Service 3,672,738 3,486, % Municipal Service 579, , % Total $ 66,568,955 $ 59,708, %

12 Revenue Stability Assessment Utility Controllable: Customer Charge set appropriately Type of residential rate structures Recovery mechanism to recover distribution costs Rates ability to send price signals consistent with utility costs Line extension policies based economic or cost factors Not updating fee schedules Reliance on non-recurring revenues to meet operational targets

13 Customer Charges Cost Component Recovery Recovers cost for connection to Grid at zero kwh consumption Meter operation, maintenance and replacement costs Meter reading costs or AMR installation costs Billing Costs Customer Service Department Service into customers facilities Portion of Distribution System Cost to get a wire from the sub-transmission system to customer Based on minimum sizing (If all customers only used a single kwh)

14 Customer (Facilities) Charges Increasing customer charges helps stabilize revenue recovery for utility Reduces subsidy between year-round customers and seasonal customers Will impact low use customers Low income compared with low use At most utilities, low income customers tend to be higher than average users. A higher customer charge may benefit low income

15 Example: Comparison of Fixed and Variable

16 Comparison of Fixed and Variable After Net Metering

17 Dollars $ $ $ Comparison of Cost Recovery Flat Rate Structure Cost Recovery at Varying Load Factors $ $ $50.00 $- 4% 7% 10% 13% 16% 19% 22% 25% 28% 31% 34% Charges $41. $65. $89. $112 $136 $160 $184 $208 $231 $255 $279 Costs $78. $94. $111 $127 $143 $160 $176 $193 $209 $225 $242

18 Residential Demand Charges Many utilities are moving toward or considering demand charges for distribution cost recovery for Residential customers: Send better price signals to customers Promote electric vehicles Reduce distribution subsidies for customers with solar or wind installations

19 Residential Demand Implementation Salt River Project (SRP) added a seasonal, inclining block demand charge for future net-metered PV customers. One reason for this was to create an incentive for customers to install west-facing PV systems, so that generation better aligns with system peak. Westar Energy proposed a choice for residential DG customers Georgia Power has optional Residential Demand charge at $6.53.kW ComEd in Illinois has promoted legislation to move all residential customers to demand charges Black Hills Power offers a demand charge option for all residential customers. Polk County Public Power District Cornhusker Public Power District NorthCentral Public Power District is planning implementation in 2018

20 How Subsidies are Created Residential customers with Solar tend to create a peak demand after the sun goes down; peak demands are almost the same as a regular residential customer Subsidy can also be created if system peak is when solar is not producing power Under-recovery on power supply Under-recovery on transmission

21 Aggregated Residential Usage Pattern 2.50 Average Usage by Season and Hour Graph S W INTER2 INTER Residential peak demand occurs at 7 and 8 PM (19 20 hour) Diversified peak demand of each customer in the class is 2 kw

22 Aggregated Residential Usage Pattern with 5 kw Solar Array (0.50) (1.00) (1.50) (2.00) Average Usage by Season and Hour(MWH's) Graph S W INTER2 INTER4 This shows the duck curve that results when solar is installed. Customer provides energy back into the system between hours 9AM and 4 PM. (Except winter period) Diversified peak demand of typical residential customer remains at 2 kw

23 Residential Demand Rate Implementation Case Study Cost of Service Demand Charges for distribution costs Initial Implementation $0.50/kW Second Year implementation $1.00/kW Completed a review to identify the impact on all customers to ensure rate impacts were acceptable to Board of Directors

24 Phase in Starting at 50 cents/kw Customer Impacts Load Factor Current Bill Proposed Bill Dollar Change Percent Change 4% % 8% % 12% % 16% (1.25) -0.9% 20% (6.38) -4.0% 24% (11.50) -6.1% 28% (16.63) -7.7% 32% (21.76) -8.9% 36% (26.88) -9.9%

25 Phase in Starting at 50 cents/kw Customer Impacts Load Factor Current Bill Proposed Bill Dollar Change Percent Change 4% % 8% % 12% % 16% (0.69) -0.5% 20% (1.59) -1.0% 24% (2.49) -1.3% 28% (3.39) -1.6% 32% (4.29) -1.8% 36% (5.19) -1.9%

26 Residential Time of Use Rates Send better price signals to customers to move usage to off peak periods May benefits solar production if on peak period coincides with solar production Promote Electric Vehicles if charged at correct times Residential time of use will continue to become more common Better reflects costs customer creates on system

27 Residential Time of Use Pacific Gas and Electric SMUD Southern California Edison Duke Energy El Paso Electric CLECO Florida Power and Light Consumers Energy Detroit Edison This is only a small sampling Many utilities are moving to offer Residential time of use rates Many have on peak, off peak and critical peak time periods

28 Cost-Based Residential Rate Structure (Not Recommended Today) Cost Based Rate Design Customer Rates Power Supply Customers Demand Coincident with System Peak Distribution Recovery Based on Customers Maximum Demand 2.19 Energy Charge Customer Charge PILOT 9.28% Once cost based rates are identified, practical rate designs can be developed

29 Valuation Cost Elements Capacity Savings Factor to Consider Source Long-Run Short Run Feed In Rate Tarrif Production Capacity How much solar reduces system peaks X Land How much solar reduces system peaks X Production O&M How much solar reduces system peaks X Water How much solar reduces system peaks X Production Reserve Capacity How much solar reduces system peaks X Operating Reserves How much solar reduces system peaks X Market Capacity Value Capacity Auction X Energy Savings Production Fuel Natural Gas Current Prices X X Line Losses energy not delivered Marginal Losses not average system X X X Reduced line losses for generation close to load Marginal Losses not average system X X X Market Price of Power Supply Market Prices Projected X X Fuel Price Hedge Cost Solar reducing risk of fuel cost rising X Production Variable O&M How much solar reduces system peaks X Cost of Community Solar (Solar PPA) X

30 T&D Savings Valuation Cost Elements Factor to Consider Source Long-Run Short Run Feed In Rate Tarrif Transmission ISO or reduction in peaks X X Substations and Sub-Transmission ECOS X Distribution Lines ECOS X Distribution Transformers ECOS X Reduction in Environmental Compliance Costs X X Other Considerations Cost Impact on Solar Value Environmental Savings (Social Costs) Improved reliability (Distribution on a number of generating units) Reactive Supply and Voltage Control Frequency Regulation Energy Imbalance Scedualing/Forecasting Security Risk Carbon Air Pollutant emissions Renewable Power Standards Solar Integration Costs Board/Council Directed Cost Shift Increase Value Increase Value (Security Risk) Lower Value Lower Value Lower Value Lower Value Increase Value Increase Value Increase Value Increase Value Lower Value Increase Value

31 Valuation Cost Elements Solar Valuation Study Valuations Differ due to: methodology used: SRMC; LRMC Consideration of external benefits Characteristics of each utility Consideration of all potential benefits from solar to electric utility

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