Contributions In-Aidand Development of Fees

Utility Financial SolutionsMark Beauchamp, CPA, CMA, MBA

President616-393-9722

Contribution in Aid Polices Many policies are not based on

economics but on policies that connect customer’s without considering the financial impact to existing rate payers.

Examples: Investing $15,000 to connect a residential

customer Using a times revenue policy for a 15 mW

Ethanol plant Not contributing to expansion of hospital

that will increase electrical use

Example of Electric Line Extension Policies

Based on Annual Revenues Some charge the difference

between underground and overhead

Some contribute a per foot maximum amount

Some provide it free of charge

Industry Trend Many Utilities are moving toward policies

that places a value on a customer Considers the contribution margin of the

customer Risk of investing money to serve the customer

Objective Investment to connect customer is a good

investment for the utility and will benefit existing customers of the system

Customers Contribution per kWh

Commercial

Residential - Rate 20

Large Power - Rate 75

Test Customer Number Two

Test Customer Number Three

Test Customer Number Four

Revenues 2,155,045$ 8,368,750$ 3,391,683$ 186,043$ 775,015$ 2,035,237$ Total Variable Expenses 1,390,719 6,093,946 2,518,204 150,175 613,535 1,876,713 Fixed Cost Contribution 764,326$ 2,274,804$ 873,479$ 35,869$ 161,480$ 158,524$

kWh's 29,838,019$ 135,446,507 52,909,064 3,424,873 17,355,582 56,503,245 Contribution per kWh 0.0256$ 0.0168$ 0.0165$ 0.0105$ 0.0093$ 0.0028$ Load Factor 31.25% 55.20% 59.44% 86.00%

Utility Investment per kWh

Year CommercialResidential -

Rate 20Large Power -

Rate 75Test Customer Number Two

Test Customer Number Three

Test Customer Number Four

1 0.0256 0.0168 0.0165 0.0105 0.0093 0.0028 2 0.0256 0.0168 0.0165 0.0105 0.0093 0.0028 3 0.0256 0.0168 0.0165 0.0105 0.0093 0.0028 4 0.0256 0.0168 5 0.0256 0.0168 6 0.0168 7 0.0168

Discount Rate 7.0% 7.0% 7.0% 7.0% 7.0% 7.0%

Utility Investment per kWh $0.11 $0.091 $0.043 $0.027 $0.024 $0.007Average Annual Class Usage 10,056 Average Investment per Home $910.15Load Factor 31.25% 55.20% 59.44% 86.00%

Utility Investment per kWh by Load Factor

Contribution Margin (kWh) by Load Factor

$0.000

$0.005

$0.010

$0.015

$0.020

$0.025

$0.030

$0.035

$0.040

$0.045

$0.050

31% 36% 41% 46% 51% 56% 61% 66% 71% 76% 81% 86%

Load Factor

NPV C

ontr

ibution p

er

Contribution Margin - Subdivision

Year

Subdivision Development -

Three Year Phase In

Subdivision Development -

Five Year Phase In

1 0.0055 0.0034 2 0.0112 0.0067 3 0.0168 0.0101 4 0.0168 0.0134 5 0.0168 0.0168 6 0.0168 0.0168 7 0.0168 0.0168

Discount Rate 7.0% 7.0%

Utility Investment per kWh $0.075 $0.061Average Annual Class Usage 10,056 10,056 Average Investment per Home $755.28 $614.47

Key Assumptions Discount Rate

Typically equal to Rate of Return Target for Utility

Length of time to recover investment Based on perceived

risk of investment Residential 5-9

years Commercial 4-5

years Industrial 3 years

Perceived Risks

Company going out of business Facility burning down Co-Generation Wind Mills/Solar/Fuel Cells Alternative fuels

Fees

NSF Check Charge Late Payment Charges Disconnect/Reconnect Truck Rental Charges Pole Attachment Fees

Biggest Problem with Fees

Once set not looked at again for years Results in drastic changes

Set-up a program and set fees annually

Pole Attachment Fees Cable TV Companies were typically subsidized by the

electric utility and allocated the cost of 1 foot in the center of the pole - Annual rates were typically under $5.00 per year

Telecommunications Act allows utilities to remove the subsidy and charge the common costs of the pole to all attachments – Annual rates range from $15.00 - $30.00

FCC has a formula to help determine the pole attachment fees

APPA has a program you can purchase to determine fee Communication companies have substantially increased

the number of attachments to utility poles Review and audit the number of attachments

Late Payment Fees Can vary by utility – Need to have

sufficient incentive for customers to pay on time Some utilities have a fixed Late Payment

charges that does not vary Some utilities use discounts if bill paid on time

– i.e. 10% discount Discounts cause utility to lose money when discounts

are applied to fuel adjustment charges Most common are:

10% late payment charged only once on outstanding balance

1.5% - 2.0% late payment charges on outstanding balances

Calculation of Disconnect/ Reconnect Fees Issues:

Should you charge customers when doing electrical work on their homes?

Should you charge customer for disconnection when initiated by utility?

Normal Hours After HoursPersonnel needed 1 1Pay - at overtime $18.96 $25.31Average length of time 0.62 2.00 Total labor and benefits $16.13 $50.61Cost of materials $1.00 $1.00Vehicle cost per trip $11.30 $11.30Overhead $2.84 $6.29Margin $4.69 $10.38Total Fee per connection $35.97 $79.58

Return Check Charge Issues:

You may be charged a discounted fee from the bank for a customers return check

Most Utilities determine charge by surveying area businesses

Returned CheckPersonnel needed 1Pay $11.32Average length of time 0.10 Total labor and benefits $1.56Average Bank Charges $1.50Vehicle cost per trip $0.00Overhead $0.31Margin $0.51Total Fee per returned check $3.87

Vehicle Fees

Step one: Calculate per hour costs for Annual/Fixed costs

Step two: Calculate per mile costs for variable costs

Step Three: Add Administrative/Overhead Costs

A Number of Assumptions Must be Used

Vehicle Rental Fees – Step One:

Line No. Annual Expenses1 Cost of Vehicle $18,000 Annual Costs2 Life of Vehicle - Years 43 Return on Investment 6.5%

Depreciation Expense Line 1 divided by line 2 $4,500Return on Investment Line 1 times line 3 1,170 Insurance 4% of Line 1 720 Total Annual Costs 6,390$

Number of hours vechicle operating per year Review of operations 1,000

Annual Cost per Hour 6.39$

Vehicle Rental Fees – Step Two

Line No. Variable per Mile Expenses1 Gas Price per Gallon 2.00$ 2 Mile per Gallon 153 Oil $30/3000 miles'4 Repairs 5% of original cost = $9005 Annual Miles for Vehicle 5,000 6 Miles per trip

Gas Cost Line 1 divided by line 2 0.13$ Oil Costs $30 divided by 3000 miles 0.01Repair Costs Line 4 divided by line 5 0.18 Total Cost per mile 0.32$

Miles per trip Estimated 15 4.85$

Vehicle Rental Fee

Annual Cost per Hour 6.39$ Variable Cost per Hour 4.85 Total Cost per Hour 11.24$

Administrative Cost 24% 2.70 Total Cost per Hour 13.94$

Pricing of Fees and Charges

Ralph Carlson

APPA Business and Financial Conference

Minneapolis, MinnesotaSeptember 17-20, 2006

SMUD Fee Policy

Reflect costs incurred Updated each year Average costs for three most

recent years Proposed changes reviewed by

Rates Policy and Procedures Committee

Categories of Charges

Connection Charges Line Extensions Basic Service Facilities

Special Facilities Charges Non-standard (value-added)

equipment Deposits and Fees

Connection Charges

Line Extensions

All Customer Classes No Charge

Commercial New Construction*

<3 mW of connected load at secondary or primary voltage

Per kW of service panel rating or service panel upgrade

$40.00

Commercial Upgrade Service

>3 mW of connected load, dedicated facilities and all transmission and network level service

Estimated cost of service

Site Specific

Meter and Service

Standard installation for existing panel and meters already in service

None No Charge

Residential New Construction

All new residential Per new residential lot

$1,050.00

Special FacilitiesOption 1 Option 2 Option 3

Monthly Lease with Advance

10-year Renewable Lease

One-Time Payment

Average Life

Minimum Advance

per $1,000

Monthly Cost per $1,000

Cost at beginning of each 10th year per

$1,000

Cost per $1,000

10-14 $200 $24.15 $2,148 $4,375

15-19 $150 $17.25 $1,534 $3125

20+ $100 $12.94 $1,151 $2,344

Transmission 20+

$100 $11.64 $1,036 $2,109