Contributions In Aid of Construction

Mark BeauchampBusiness & Finance WorkshopUtility Financial Solutions616-393-9722

Objectives

Types of Line Extension Policies Consideration when developing a line

extension policy Risk of investments How much is a new customer worth? How to determine the value and example

calculations Other Considerations when developing a

line extension policy

Examples 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 Some charge customers a System

Development Charge

Types of Line Extension Polices

Many policies are not based on economics and do not consider 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

Considerations in developing a line extension policy

Often power supply represents 65% - 85% of the total revenue requirement for utilities.

Power supply can represent 85% - 90% of a high load factor customers revenue requirement and only 60% for a residential or small commercial

A times annual revenue policy will overvalue a high load factor customer

Example Ethanol Plant (87% Load Factor) Five times annual revenue valued customer at over $5.0

Million actual value to electric utility is less than $500,000

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

ibut

ion

per

Risk of Investments in Customer

Example: TransCanada Pipeline building line through rural

areas of Nebraska substantial investment were needed to service pumping stations

Investments of over $5.0 million were required by some utilities, kWh usage from the pipeline would more than double sales to utility

Risks: over-estimating sales in determination of line

extension contribution Bankruptcy Stranded investments could substantially increase

rates to utility Contribution margins from distribution amounted to

only $200,000 per year Wholesale providers ratchet clause in rates

Value of a Customer?

Many Utilities are moving toward policies that places a value on a customer Reviews the contribution margin a customer will

provide to the system Amount of risk of investing money to serve the

customer Objective

Help ensure the investment to connect customer is a good investment for the utility and will benefit existing customers of the system

Growth should be good for the system

Steps to Value a Customer

Determine variable cost to serve each customer class

Determine contribution margin (net revenue) from each class

Convert contribution margin of each customer class to a per kWh, kW, kVa or HP basis

Present value the contribution margin over an appropriate time (considering risk) assuming a discount rate = rate of return

Determination of Contribution Margin by Class

Class Cost of Service Revenues

Power Supply Costs

Contribution Margin

Residential 42,987,045$ 23,350,822$ 19,636,223$

Small Gen. Service 6,594,016 3,945,071 2,648,945 Medium Gen. Service 8,297,661 5,746,617 2,551,044 Large Gen. Service - Non-TOU 11,385,141 8,200,790 3,184,350 Small Ag Irrigation 775,153 460,391 314,762 Large Ag. Irrigation - w/o AFC 550,948 375,104 175,844

Determination of Contribution Margin on a billable basis

Rate Class Combinations

Contribution to Margin

KWH, KW or KVA for each

class

Contribution to Margin per KWH, KW, or

KVA BasisResidential $ 19,636,223 651,453,311 0.0301 KWHSmall Gen. 2,648,945 165,382 16.02 KVAMedium Gen. 2,551,044 144,749 17.62 KVALarge Gen. 3,184,350 111,762 28.49 KVASmall Ag 314,762 10,876 28.94 KVALarge Ag. 175,844 15,350 11.46 KVA

Types of Billable Basis

kWh Average kWh projected for customer kW projected for customer kVa of installed capacity

Variable Costs = Power Supply costs from Cost of Service Study

Present Value Contribution Margin

Recovery ResidentialResidential Three Year

Residential Five Year

Small Gen. Service

Medium Gen.

Service

Large Gen. Service - Non-TOU

Large Industrial

Small Ag Irrigation

Large Ag. Irrigation - w/o AFC

Year1 0.0301 0.0100 0.0060 16.02 17.62 28.49 3.61 28.94 11.46 2 0.0301 0.0201 0.0121 16.02 17.62 28.49 3.61 28.94 11.46 3 0.0301 0.0301 0.0181 16.02 17.62 28.49 3.61 28.94 11.46 4 0.0301 0.0301 0.0241 16.02 17.62 28.94 11.46 5 0.0301 0.0301 0.0301 16.02 17.62 28.94 11.46 6 0.0301 0.0301 0.0301 7 0.0301 0.0301 0.0301 - 89

Disc. Rate 7.0% 7.0% 7.0% 7.0% 7.0% 7.0% 7.0% 7.0% 7.0%

Utility Invest. $0.162 $0.135 $0.110 65.67$ $72.26 $74.77 $9.47 $118.66 $46.97Basis kWh kWh kWh kVa kVa kVa kVa kVa kVa

Present Value Contribution Margin

Customer Class

Average Contribution

per CustomerAverage Usage

Maximum Investment

per Customer Basis

Residential 0.162$ 16,722 2,716$ Estimated based on KWHResidential Subdivision Three Year Phase In 0.135 16,722 2,258 Estimated based on KWHResidential Subdivision Five Year Phase In 0.110 16,722 1,839 Estimated based on KWHSmall Gen. Service 65.67 38 2,518 Estimated based on KVAMedium Gen. Service 72.26 217 15,658 Estimated based on KVALarge Gen. Service - Non-TOU 74.77 873 65,287 Estimated based on KVASmall Ag Irrigation 118.661 18 2,123 Estimated based on KVALarge Ag. Irrigation - w/o AFC 46.970 640 30,041 Estimated based on KVA

Present Value Contribution Margin

Maximum Investment Basis

Residential $ 2,716 Per ConnectionResidential Subdivision Three Year Phase In 2,258 Per ConnectionResidential Subdivision Five Year Phase In 1,839 Per ConnectionSmall Gen. Service 65.67 Per KVA Installed CapacityMedium Gen. Service 72.26 Per KVA Installed CapacityLarge Gen. Service - Non-TOU 74.77 Per KVA Installed CapacitySmall Ag Irrigation 118.66 Per KVA Installed CapacityLarge Ag. Irrigation - w/o AFC 46.97 Per KVA Installed Capacity

Customer Class

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

Other Considerations

Second customer connecting to line paid by another customer

Customer above certain size should require a special analysis

Existing customer expands facilities Residential average not

representative of the new customers usage

Risk to utility