July 30, 2019 EFFECTIVELY MANAGING SIGNIFICANT RATE CHANGES TPPA Annual Meeting
Agenda NEWGEN STRATEGIES AND SOLUTIONS, LLC 2
INTRODUCTION TO RATE STUDY DYNAMICS
Introduction to Rate Study Dynamics James C. Bonbright’s Desirable Attributes 1. Simplicity, understandability, public acceptability, and feasibility of application 2. Freedom from controversies as to proper interpretation 3. Effectiveness of yielding total revenue requirements under the fair return standard (i.e., fair, just, and reasonable rates) 4. Revenue stability from year to year 5. Stability of rates themselves, with minimal unexpected changes seriously adverse to existing customers 6. Fairness in allocating cost of service among different consumers 7. Avoid “undue discrimination” in rates 8. Discouraging wasteful use (encouraging efficient use) NEWGEN STRATEGIES AND SOLUTIONS, LLC
Introduction to Rate Study Dynamics Stakeholder Dynamics • Awakens customer base • Highlights utility operations and strategy • May be uncomfortable for Board and/or Council • Often brings change resulting in winners and losers – Behavior incentives – Cost recovery – New service offerings NEWGEN STRATEGIES AND SOLUTIONS, LLC
Introduction to Rate Study Dynamics Stakeholder Dynamics • Stakeholder resistance to significant change can wreck your rate case NEWGEN STRATEGIES AND SOLUTIONS, LLC 6
SIGNIFICANT CHANGE
Significant Change A Subjective Measure • The maximum acceptable rate change (increase) in a rate case: – Is subjective and varies by utility, stakeholder group, customer class, and individual – Heavily influenced by individual personal values NEWGEN STRATEGIES AND SOLUTIONS, LLC
Significant Change At the System Level • Financial distress – Large load loss – Change in power supply – Capital Investment NEWGEN STRATEGIES AND SOLUTIONS, LLC 9
Significant Change Inter-class Subsidization • Customer class definitions are changing • Customers grouped by cost of service (COS) rather than socio-economic or political descriptions • “Partial” rather than “Full” requirements service – Growing self-supply options – Load loss NEWGEN STRATEGIES AND SOLUTIONS, LLC 10
Significant Change Intra-class Subsidization • Rate Design – Fixed cost recovery – Non-traditional rate design using advanced metering infrastructure (AMI) metering capabilities • Real-time communication • Time-of-Use (TOU) • Scarcity pricing • Pre-Pay • Etc. NEWGEN STRATEGIES AND SOLUTIONS, LLC 11
Significant Change A Subjective Measure • Presentation of customer bill impacts to stakeholders should be done with care – Overly simplified presentation of results are easy to understand but often are misleading – Can erode public trust and be detrimental to a successful study NEWGEN STRATEGIES AND SOLUTIONS, LLC 12
Significant Change A Subjective Measure • Examples – Xcel energy looking to raise rates by 6% – AEP Texas seeks approval of $38.3M increase in base rate revenues NEWGEN STRATEGIES AND SOLUTIONS, LLC 13
Significant Change A Subjective Measure • Utility is seeking a $17 million or 6.5% rate increase Costs of Service Revenue Increase Percent Revenue Results by Class ($M) Increase Residential 13.3 37.1% Small Commercial 1.4 5.3% Large Commercial 1.3 1.3% Lighting 1.0 17.4% Total System 17.0 6.5% NEWGEN STRATEGIES AND SOLUTIONS, LLC 14
Significant Change A Subjective Measure Residential Units Current 2019 2020 2021 2022 2023 Customer Charges $/Bill $0.0000 $4.00 $4.00 $6.75 $6.75 $9.50 Energy Charge Energy-T1 Summer $/kWh $0.0774 $0.0847 $0.0847 $0.0849 $0.0849 $0.0849 Energy-T2 Summer $/kWh $0.0752 Energy-T1 Winter $/kWh $0.0655 $0.0746 $0.0746 $0.0748 $0.0748 $0.0748 Energy-T2 Winter $/kWh $0.0353 EAC $/kWh $0.0781 $0.0643 $0.0656 $0.0653 $0.0652 $0.0652 Average Rate $/kWh $0.1463 $0.1508 $0.1521 $0.1574 $0.1573 $0.1626 Average Bill $/Bill $74.96 $77.28 $77.94 $80.66 $80.59 $83.34 Percent Change % N/A 3.09% 0.86% 3.49% (0.09%) 3.41% Total Percent Change % N/A 11.17% NEWGEN STRATEGIES AND SOLUTIONS, LLC 15
Significant Change A Subjective Measure Average Cost/Rate ($/kWh) $0.24 30,000 Customer Count Current Rate Cost of Service Phase 1 Proposed Rate $0.22 25,000 Represents a significant increase Average Cost/Rate ($/kWh) $0.20 to these customers 20,000 Customer Count $0.18 15,000 $0.16 10,000 $0.14 5,000 $0.12 $0.10 0 250 500 750 1,000 1,250 1,500 1,750 2,000 2,250 2,500 Average Monthly Usage (kWh) NEWGEN STRATEGIES AND SOLUTIONS, LLC 16
Significant Change A Subjective Measure NEWGEN STRATEGIES AND SOLUTIONS, LLC 17
Significant Change A Subjective Measure NEWGEN STRATEGIES AND SOLUTIONS, LLC 18
EFFECTIVE STRATEGIES
Effective Strategies Management Techniques NEWGEN STRATEGIES AND SOLUTIONS, LLC
Effective Strategies Management Techniques – Prepare • Understand Study objectives, policies, and strategies – What is the desired outcome from the: • Utility perspective • Customer perspective • Regulator perspective – Develop a policy and principles document NEWGEN STRATEGIES AND SOLUTIONS, LLC 21
Effective Strategies Management Techniques – Prepare • Policy and Principles Document – Examples guiding policies – Excellent opportunity for and principles safe early engagement of Board and/or City Council • Legality • Fairness, equity, and – Example rate-related goals defensibility • Meet the needs of the • Conservation and demand community management • Support of the City’s • Etc. renewable energy goals • Support local economic development • Etc. NEWGEN STRATEGIES AND SOLUTIONS, LLC 22
Effective Strategies Management Techniques – Prepare • The reasonableness and defensibility of a Study is directly proportional to quality of data and thoroughness of analyses – Identify study weaknesses or “flash points” likely to create controversy in your study – Understand study results – Identify likely high-impact stakeholders NEWGEN STRATEGIES AND SOLUTIONS, LLC 23
Effective Strategies Management Techniques – Develop a Theme • Develop a few key compelling points that will be reiterated throughout the rate case process – Direct utility communications – Media – Presentations – Public meetings – Etc. NEWGEN STRATEGIES AND SOLUTIONS, LLC 24
Effective Strategies Develop a Theme – Example (AEP – Texas) • [AEP Texas] said the expanding economy and population growth in its service territory, as well as the need to upgrade and maintain the existing transmission and distribution (T&D) infrastructure ……., the company said that the additional T&D investment, for which AEP Texas requests a prudency determination, supports the new and expanding oil and gas businesses, as well as the expanding communities that create increased need for housing, schools, and commercial enterprises . NEWGEN STRATEGIES AND SOLUTIONS, LLC 25
Effective Strategies Develop a Theme – Example (Xcel Energy – Colorado) • Important notice about your electric service and prices – On May 20, 2019, we [Xcel] submitted an electric regulatory rate review to the Colorado Public Utilities Commission that incorporates investments to expand and strengthen the electric grid, including protecting it from emerging risks, such as wildfires . The investments also begin to establish a platform for enhanced customer experiences . NEWGEN STRATEGIES AND SOLUTIONS, LLC 26
Effective Strategies Management Techniques – Education, Policy & Early Engagement • Board and/or City Council – Early engagement to clarify understanding and supporting policy • Rate Policy and Principles Document • Ratemaking 101 – Periodic check-ins to monitor support and direction • Financial Plan • Cost of Service • Rate Design • Develop engagement strategy cognizant of open meeting regulations – Public workshops – Public meetings – One-on-one communication NEWGEN STRATEGIES AND SOLUTIONS, LLC 27
Effective Strategies Education, Policy & Early Engagement – Other Stakeholders • Identify important • Educate and engage stakeholder groups – Justification requiring special • Cost of service attention • Policy – To follow Board and/or – Local media Council feedback – Special interest – Keep it simple • Local and national – Document and – Significant rate impacts summarize • Don’t forget the winners – Internal functions • Customer service NEWGEN STRATEGIES AND SOLUTIONS, LLC 28
Effective Strategies Management Techniques – Present Options • Develop options that meet your study objectives, yet give stakeholders a choice – Subsidization levels – Phase-in plans • Rate structures • Options help stakeholders understand the “cause and effect” inherent in ratemaking • Helpful in achieving acceptable, compromise outcomes NEWGEN STRATEGIES AND SOLUTIONS, LLC 29
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