Joseph A. FerroJune 15, 2010Presented at 2010 NASUCA Mid-Year MeetingSan Francisco, CA

Bay State Gas CompanyDistribution Rate Design

“What is in the Customer’s Best Interest”

Distribution Rate Design - Summary

• Summary of Recent Rate Order in MA D.P.U. 09-30

• Bay State Gas Co.’s Customer Rate Classes

• Revenue Decoupling

• Rate Design – Impact on Goals / Principles and Alternatives

• Q&A

Summary of Recent Rate Filing – D.P.U. 09-30

• Filed on April 16, 2009– Bay Sate first LDC to file under DPU directive to implement Decoupling– 6-month suspension period

• Revenue Decoupling -- as directed in generic order (DPU 07-50)– All utilities must implement by 2012 in context of a rate case

• Infrastructure Replacement Tracker

• Inclining Block Rate Structure – as directed by DPU (DPU 08-35; N.E. Gas / Fall River)

Summary of Rate Order

• New Rates Effective Nov. 1, 2009

• Revenue Increase of $19.1 million or 3.6% of Total Revenue– 56% of Request– ROE – 9.95%

• PBR Plan Terminated

• Revenue Decoupling, with Bay State modifications

• Infrastructure Replacement Tracker Approved– Replacement of non-cathodically protected bare steel– File every May 1 for effect November 1

• Inclining Block Rate Structure

Bay State Rate Classes - Residential

• Residential Heating– Average Distribution Bill - $39.11 / mo– Average Base Rate - $0.47 per therm

• Residential Heating LI Discount– Based on discount realized prior to March 1, 1998– 20.9% Discount off regular R-Heating Total Bill

• Residential Non-heating– Average Distribution Bill - $17.26 / mo– Average Base Rate per therm - $1.13 per therm

• Residential Non-heating LI Discount– Based on discount realized prior to March 1, 1998– 19.0% Discount off regular R-Non-heating Total Bill

Bay State Rate Classes – Commercial & Industrial

• C&I Low Annual / High Peak Period Use (70% or greater than annual use)– Annual Use less than 5,000 therms– Avg. Mo. Dist. Bill - $58 / Avg. Base Rate - $0.48 per therm

• C&I Low Annual / Low Peak Period Use (less than 70% of annual use)– Annual Use less than 5,000 therms– Avg. Mo. Dist. Bill - $61 / Avg. Base Rate - $0.47 per therm

• C&I Medium Annual / High Peak Period Use (70% or greater than annual use)– Annual Use between 5,000 therms and 39,999 therms– Avg. Mo. Dist. Bill - $274 / Avg. Base Rate - $0.26 per therm

• C&I Medium Annual / Low Peak Period Use (less than 70% of annual use)– Annual Use between 5,000 therms and 39,999 therms– Avg. Mo. Dist. Bill - $226 / Avg. Base Rate - $0.22 per therm

Bay State Rate Classes – Commercial & Industrial, cont.

• C&I High Annual / High Peak Period Use (70% or greater than annual use)– Annual Use between 40,000 therms and 249,999 therms– Avg. Mo. Dist. Bill - $1,243 / Avg. Base Rate - $0.19 per therm

• C&I High Annual / Low Peak Period Use (less than 70% of annual use)– Annual Use between 40,000 therms and 249,999 therms– Avg. Mo. Dist. Bill - $1,361 / Avg. Base Rate - $0.16 per therm

• C&I Extra High Annual / High Peak Period Use (70% or greater than annual use)

– Annual Use of 25,000 therms or more– Avg. Mo. Dist. Bill - $6,639 / Avg. Base Rate - $0.145 per therm

• C&I Extra High Annual / Low Peak Period Use (less than 70% of annual use)– Annual Use of 25,000 therms or more– Avg. Mo. Dist. Bill - $7,072 / Avg. Base Rate - $0.135 per therm

Decoupling - Public Policy Benefits

• Aligns LDC and customer interests by removing financial disincentive for utility to aggressively promote energy efficiency and conservation

• Contributes to lower total energy bills for customers

• Promotes stronger partnership between the LDC and policy makers on conservation issues

• Benefits the environment and future generations through reduced emissions

• Promotes investment community confidence in utility by ensuring that declines in customer usage do not dampen financial performance

• Throughput reductions not a contributing factor for LDC to file a base rate case

• Supported by broad array of stakeholders including environmental advocates, gas industry groups, consumer representatives and policymakers

REVENUE DECOUPLINGSevering the Link Between Revenue and Customer Use

Drivers or Intended Results – Utility Perspective

• Removes LDC disincentive to promote energy efficiency

• Stabilizes base revenue – unaffected by volume

• Preserves incentive to add new customers and retain existing customers

• Revenue tied to number of customers at benchmark revenue per customer• New customers excluded from Decoupling mechanism

DECOUPLING – A Reconciling Recovery Mechanism

• Revenue Requirement or Target equals:

Test Year (2008) or Benchmark base revenue per customer (“BRPC”) times the current number of customers taking service as of 2008 --- Plus revenue realized from new customers

Per Order - Exclude new customers added since December 31, 2008

• Revenue Decoupling Adjustment =

[Benchmark BRPC – Actual BRPC] x Current No. of Customers

Revenue Decoupling Illustrative Example

Test Year Residential Residential C&I TotalTotal Base Rev. $125 Million Actual Base Rev. $115 Million $66 Million $186 MillionTotal No. Customers 250,000 Actual No. Customers 249,000 30,000

Avg. Rev per Customer $500 Actual BRPC $462 $2,200 (Benchmark)

Benchmark BRPC $500 $2,000 Test Year C & ITotal Base Rev. $60 Million Less Actual BRPC $38 ($200)Total No. Customers 30,000 Times Actual Custs 249,000 30,000

Avg. Rev. per Customer $2,000 (Benchmark) Decoupling Revenue 9,500,000$ (6,000,000)$ 3,500,000$

Projected Therms 250,000,000 200,000,000 450,000,000 Total Target Base Rev. from TY Customers $185 Million Decoupling Rate Adj. 0.038$ (0.030)$ 0.008$

Illustrative Decoupling Benchmark Illustrative Revenue Decoupling Charge Calculation

DECOUPLING – Application of Rate Adjustment

• All rate classes charged the same volumetric decoupling charge --- Revenue Decoupling Adjustment Factor (“RDAF”)

– RDAF = Sum of decoupling revenue adjustment by rate groups / Firm sales + FT

– Uniform charge designed to limit rate impacts to any one class

– Potential shifting of revenue requirement• Temperature sensitive vs. non-temp. sensitive• Energy Efficiency participants vs. non-participants• High volume customers vs. all other customers

• Example:– TY Rev = $1,000– No. Customers = 100– ARPC = $10

• Warmer than normal year/period, EE measures installed and Company loses 5 customers– Actual Revenue = $760– Actual ARPC = $760 / 95 = $8– Decoupling Adj. = 95 x ($10 - $8) = $190– Company Revenue = $760 + $190 = $950– Revenue down by $50 => 5 lost customers at $10 ARPC

• Not $240 ($1,000 - $760)

DECOUPLING – A Reconciling Recovery Mechanism

DECOUPLING – Tracking Revenue by Rate Group and Season

• Three Decoupling Rate Groups with 6-month seasonal Benchmark ARPC– Bay State proposed variation from MA DPU Generic Order– ARPC based on revenue per Order :

• Residential Heating– Winter ARPC = $340– Summer ARPC = $130

• Residential Non-heating– Winter ARPC = $114– Summer ARPC = $ 96

• All 8 C&I classes– Winter ARPC = $1,410– Summer ARPC = $ 487

DECOUPLING – Tracking Revenue by Rate Group and by Season

• Why by Season?– Fair to separate winter/temperature sensitive ARPC and summer/non-

temperature sensitive ARPC– Consistent with Bay State base rate (and CGA) structure– More timely reconciliations as compared to annual

• Why by 3 Rate Groups combining all 8 C&I classes?– Avoids unintended revenue impact caused by C&I Rate reclassification– Example Extra High, G/T-53, reclassified to High Annual Use, G/T-52:

• G/T-53 at $64,000 ARPC (winter) and $23,000 (summer)• G/T-52 at $12,000 ARPC (winter) and $ 4,500 (summer)• Rev Loss:

$52,000 $18,500 = $70,500

RATE DESIGN

• Inclining Block Rate Structure as directed by MA DPU and in conjunction with Decoupling

• All Company proposed Customer Charge increases rejected– Maximize volumetric charges in the spirit of encouraging conservation

• Inclining rates intended to encourage customers to conserve– Tail Block price $0.02 to $0.05 per therm higher than head block price

• Do inclining rates promote conservation?– Res. Heating total rate of $1.30 per therm; commodity $0.85 / therm

• Could inclining rates disadvantage high use customers?– No applicable energy efficiency measures– Business / operation requires maintaining or increasing high use level

RATE DESIGN – Longstanding Goals / Principles

• Efficiency – promote economic use of distribution system– Unit marginal cost

• Simplicity – consumers easily understand rates / charges– Could expand to also make it easy to administer

• Continuity – gradual changes in rates to allow for consumers to adjust their usage patterns

• Fairness – rates reflect the underlying or embedded cost of providing service to each rate class– Also intra-class considerations

• Earnings Stability – company earnings should not vary significantly over a few years

Rate Design – Goals vs. Decoupling & Inclining Rates

Goals / Principles Decoupling Inclining Rates Combined and Comments

Efficiency No - Vol. Rate for last year revenue

No – Tail Block much > unit MC

Double No Redefined by EE

Simplicity No – “Use less last year, pay more this year.”

No – Why is additional use more costly?

Use less pay more and use more pay more – Huh??

Continuity No – But, by same rate to all custs, mitigate volatility

No – But, since TB moderately higher, insignificant

Esp., troublesome for high use customers

Fairness No – Undoes ACOS by uniform rate to all classes

No – Intra-class subsidy

Double No

Earnings Stability Yes – To some extent

No – But Decplng “corrects”

Better than before

Rate Design - Alternatives

• Straight Fixed Variable Rate Design– Efficient, Simple, Fair and Earnings Stability– Reasonable Continuity, thus viable for the existing homogenous classes

• Residential Heating - $39.11 / mo • Residential Non-heating - $17.26 / mo• C&I Low Annual, High Winter - $58 / mo• C&I Low Annual, Low Winter - $61 / mo

– For other High Annual C&I classes, either create additional classes or base on customer design day demand

– For Extra High Annual, currently partially based on monthly MDQ

• “Modified” Fixed Variable Rate Design– Based on ACOS, 80% - 90% of revenue from fixed Distribution Charge– Remaining revenue from volumetric rate close to unit MC– More Efficient, Simple, More Fair and reasonable Earning Stability

Bay State Gas – Distribution Rate Design

Q & A ?