How to Submit Your Question

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1 Mike Ganley & Rich Larochelle CEO Web Conference June 2, 2010 How to Submit Your Question Step 1: Type in your question here. Step 2: Click on the Send button.

2 Presenters Mike Ganley Director Strategic Analysis Rich Larochelle Senior Vice President, Corporate Relations How familiar are you with the 21 st Century Rate Strategies guide? A. Very familiar, I ve read it cover to cover. B. Somewhat familiar (I ve read the executive summary.) C. Not familiar at all (What guide?) Background Joint NRECA & CFC study Updates 1989 report Rate Issues and Strategies 20 years since last joint study a period of stable rates

3 Steps Focus group and panels (CFC Forum) Input from rate consultants and panels (NRECA Rate Summit) Input from NRECA Innovative Energy Strategies Task Force Presentation and Panels at Regional Meetings Panels at CFC Independent Borrowers Meeting NRECA and CFC newsletter articles About the report Intended as a helpful resource A starting point for discussions about rates Not an exhaustive review of rate issues Not a to do list All suggestions don t fit all co-ops Why This Report? New Challenges for Co-ops Higher demand growth than IOUs Rising construction costs Growing interest in energy efficiency State and Federal Mandates Climate Change Mitigation Proposals These trends may make it harder for co-ops with traditional rates to recover costs & margins.

4 Index 1974 = Co-ops Continue to Lead Industry kwh Growth Co-ops 4.2% Total Industry 2.4% Source: DOE/EIA Index 2008 =100 Projected Electricity Use Average Growth Rates: Co-ops v. Total Industry Co-ops 1.75% Total Industry 1.0% 60% 30% Source: Based on EIA AEO 2010 Co-ops Entering A New Building Cycle $ Billions A power plant that costs $1billion in 2000 would have Cost $2.17 billion in 2009 IHS CERA projected (survey results) Loans Approved* *not all loan approvals (shown in green) were subsequently drawn-down Source: 2009 G&T Survey

5 Growing Co-op and Consumer Interest in Energy Efficiency Co-ops Avoid building high cost generation Consumers Reduce bills Take advantage of incentives State and Federal Mandates 29 states & D.C. have RPS programs requiring electricity providers to acquire a percentage of generation from renewable resources. 43 states & D.C. have adopted net metering policies. 19 states & D.C. have adopted Energy Efficiency Portfolio Standards. Carbon Auction Impacts on Co-op Residential Bills WA 0% OR 0% NV CA 9% 4% AK 6% 1 Metric Ton = 2,204.6 pounds Source: 2007 EIA data Strategic Analysis Unit May 2009 This map shows how a $20 cost per metric ton of carbon dioxide (CO 2 ) could increase the monthly bill of an average electric co-op residential consumer. ME MT ND 6% 6% 26% MN VT ID 24% 4% NH 0% WI NY 4% SD 17% MI WY 22% 15% 2% 23% IA PA NE NJ 15% 6% 18% OH 6% UT IL IN 21% 28% WV DE 11% CO 20% 21% 17% MD 13% 19% KS VA MO KY 15% 9% 23% 26% NC TN 8% OK 17% AZ 16% NM 19% AR SC 14% 21% 18% GA MS AL 12% 16% 16% TX LA 14% 23% FL Percent Increase: 16% High 15% and above HI 2% Medium 9% to 14% Low 0% to 8% NRECA, all rights reserved. May not be copied, reprinted, published, translated, hosted or otherwise distributed by any means without explicit permission.

6 NJ Carbon Auction Impacts on Co-op Residential Bills 1 Metric Ton = 2,204.6 pounds Source: 2007 EIA data Strategic Analysis Unit May 2009 CA 9% AK 16% OR 1% WA 1% NV 23% ID 1% AZ 40% UT 70% This map shows how a $50 cost per metric ton of carbon dioxide (CO 2 ) could increase the monthly bill of an average electric co-op residential consumer. MT 14% WY 58% NM 36% HI 4% CO 47% ND 65% SD 55% TX 35% NE 46% KS 38% OK 46% MN 59% IA 37% MO 58% AR 53% LA 57% WI 43% IL 50% MS 40% IN 51% MI 38% TN 42% AL 41% Percent Increase: KY 65% High 15% and above Medium 9% to 14% Low 0% to 8% OH 52% GA 30% WV 43% VA 23% SC 46% PA 16% FL 40% NC 19% VT 10% NH 9% NY 6% NRECA, all rights reserved. May not be copied, reprinted, published, translated, hosted or otherwise distributed by any means without explicit permission. 15% ME 15% DE 27% MD 31% In what year was your last rate increase? A. Prior to 2000 B C. Since 2006 cents per kwh Rates Have Increased 39% Since 2000 Source: EIA and CFC December 2009

7 Implications of Industry Trends Higher costs Potential for lower per-capita usage Compatible with current rate structure? Rate Suggestion 1 Integrate Rates with the Business Plan Cooperatives should consider including rate objectives as key components of an integrated business plan that addresses the new challenges facing the electric industry. Does your co-op have an integrated business plan? A. Yes B. No If yes, does that plan address rates? A. Yes B. No

8 Why Integrate Rates? Rates need to be compatible with technology, power supply, communications non-rate programs, member services and financial goals. Synergies are created when all co-op functions work together. Industry challenges require more extensive advance planning. Example: If a co-op is planning to implement time of use rates its technology plan needs to budget for TOU meters. Rate Suggestion 2 Adopt a Rate Policy Statement Cooperative boards, working with management, should consider adopting a rate policy statement that provides specific objectives for rates that support the cooperative s strategic goals. Rates and rate policy provide important support of a cooperative s strategic goals

9 Elements of a Rate Policy Statement Establish targets to meet the cooperative s strategic financial goals Set objectives for rate design Examine the fairness of rates between classes of customers within customer classes Identify issues other than cost of service that should be considered Provide other necessary direction to staff Examples of Rate Policy Objectives The Co-op will implement rates based on an embedded cost of service study. Costs should be allocated to the rate classes causing costs to be incurred. All members must provide a margin to the system. Rates should support energy efficiency. Collect fixed costs via fixed charges, variable costs via variable charges. Has your system adopted a rate policy statement? A. Yes B. No If no, are you considering adopting a plan? 1. Yes 2. No

10 Rate Suggestion 3 Support Financial and Other Strategic Objectives through Effective and Complementary Rate Design Retail rates should be designed to: Consistently produce sufficient revenue to recover the cost of providing service to consumers, including its margin targets. Give price signals to consumers that are aligned with the strategic objectives of the business plan. Minimize abrupt changes in rates through use of automatic adjustments clauses. Assure compliance with legal and tax requirements. Rate Design Communicates Price Signals Sample size = 372 Distribution Co-ops What rate design does your system currently offer for residential consumers? A. Declining block rate B. Flat rate C. Inverted rate D. Combination/Other

11 45% of co-ops now have a wholesale power adjustment clause Sample size = 372 Distribution Co-ops Antidiscrimination Considerations Discrimination in rates is not permitted as between customers similarly situated; however, because a difference in charges may be justified under some circumstances, not every difference is an unlawful discrimination C.J.S. Electricity 67 (2009) Federal Tax Law Considerations To maintain exempt status, a cooperative must operate on a cooperative basis, which requires, among other things, equitably allocating costs and revenues. Excessive cross-subsidization between member rate classes would violate cooperative tax law principles. The more a cooperative deviates from strict cost-based accounting by rate class, the greater risk it runs of not operating at cost.

12 Rate Suggestion 4 Consider Decoupling Revenues from Sales Cooperatives should consider moving, to the extent practicable, toward recovering costs in the way they are incurred. Fixed costs and margins should be recovered through fixed charges, and variable costs should be recovered through variable charges. To the extent that this cannot be fully achieved, due to competitive pressures, cooperatives should consider adopting an adjustment mechanism clause that permits recovery of appropriate margins, regardless of kwh sales. Aligning Costs & Charges Costs Components Charges Customer Consumer Acct/Sales Portions of A&G, Dist O&M, Depreciation Fixed Monthly Charge per Customer Demand Energy Wholesale Power Bill Demand Components Transmission O&M Portions of A&G, Dist O&M, Depreciation Wholesale Power Bill Energy Charges Metered Demand Variable per kwh Charge U.S. Median Distribution Co-op % of Revenue Wholesale Power Bill Other Costs 65% 35% Energy Demand Customer

13 Cooperative and Investor-Owned Utility (IOU) Customer Charges Graph based on sample of 371 distribution co-ops and 163 IOUs How much is your system s current monthly customer charge? A. Less than $5.00 B. $ $10.00 C. $ $15.00 D. $ $20.00 E. $ $25.00 F. $ $30.00 G. $ $35.00 H. Over $35.00 Revenue Trackers ABC Electric Cooperative Ceiling 2.5 Floor 1.75

14 Do your rates include an adjustment factor? A. Yes B. No If yes, what is the basis (may answer more than one?) 1. Fuel 2. Purchased power 3. Financial (e.g. TIER) 4. Other (please specify) Rate Suggestion 5 Align Wholesale and Retail Rates with Wholesale Cost Drivers G&Ts should consider designing rates that reflect wholesale cost drivers. G&T and distribution systems should consider coordinating rate policies in order to align both wholesale and retail rates to send the appropriate price signals to consumers. Wholesale Retail Coordination Win / Win Power Supply costs 65% of electric bill. Wholesale power costs depend on load characteristics of distribution co-ops. Wholesale rates should reflect wholesale cost drivers. Distribution systems rates should send the correct price signals to consumers.

15 Benefits of Coordinating Rates Delay the need for new generating capacity Delay the need for new T & D capacity Reduce exposure to high fuel prices and high wholesale market price for electricity Reduce coincident peak demand Develop energy efficiency and demand response capacity resources Better utilize technological capabilities Help consumers to manage their bills Rate Suggestion 6 Develop a Rate Implementation Plan Rate implementation plans assist a cooperative to achieve member, community, and regulatory acceptance of rate changes and continued satisfaction with the cooperative. A key aspect of such a plan is internal coordination of rate objectives and activities across a co-op s functional lines. Implementation Plan Promotes Member Satisfaction Assure adequate technological capabilities to support tariffs. Introduce rate adjustments at a time that will have the least impact on consumers. Explain co-op s rate strategy to key audiences. Empower consumers to manage energy use and bills.

16 A Plan Should Address Schedule for ratemaking process Assigned roles and responsibilities for successfully implementing the rate change Approach to educating key audiences Technology, software staff, staff training and other resources needed to implement the change smoothly 1 of 2 Coordination Enhances Financial performance Member relations Communications Business development System engineering and operations Long-term technology acquisition Other cooperative functions Rate Suggestion 7 Review Rates At Least Annually An annual review of rate strategies and policy is recommended more frequently if a significant change occurs.

17 Reasons for Annual Review Avoid delaying rate increases Determine if rates are contributing to co-op goals Evaluate consumer response to rates Modify rate design if needed How to Submit Your Question Step 1: Type in your question here. Step 2: Click on the Send button.

18 Additional Information: Resources: Request for printed copies contact: At NRECA, Louise Williams ( ) or At CFC Jerry Spears, ( ) Thank you for attending today s Web conference: Introducing Rate Strategies for 21 st Century Challenges, a Guide to Rate Innovation for Cooperatives.

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