Contributions in Aid of Construction (Line Extension Policies)

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Contributions In Aid of
Construction
Mark Beauchamp
Business & Finance Workshop
Utility Financial Solutions
616-393-9722
Objectives
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
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


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
NPV Contribution per
$0.050
$0.045
$0.040
$0.035
$0.030
$0.025
$0.020
$0.015
$0.010
$0.005
$0.000
31%
36%
41%
46%
51%
56%
61%
Load Factor
66%
71%
76%
81%
86%
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:


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

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
Residential
Small Gen. Service
Medium Gen. Service
Large Gen. Service - Non-TOU
Small Ag Irrigation
Large Ag. Irrigation - w/o AFC
Cost of Service Revenues
$
42,987,045
6,594,016
8,297,661
11,385,141
775,153
550,948
Power Supply Contribution
Costs
Margin
$ 23,350,822 $ 19,636,223
3,945,071
2,648,945
5,746,617
2,551,044
8,200,790
3,184,350
460,391
314,762
375,104
175,844
Determination of Contribution Margin on a
billable basis
Rate Class
Combinations
Residential
Small Gen.
Medium Gen.
Large Gen.
Small Ag
Large Ag.
Class
Residential
Contribution
to Margin
$ 19,636,223
2,648,945
2,551,044
3,184,350
314,762
175,844
KWH, KW or
KVA for each
class
651,453,311
165,382
144,749
111,762
10,876
15,350
Costof
Service Power Contribution
Revenues SupplyCosts Margin
$42,987,045 $23,350,822 $19,636,223
Contribution
to Margin per
KWH, KW, or
KVA
0.0301
16.02
17.62
28.49
28.94
11.46
Basis
KWH
KVA
KVA
KVA
KVA
KVA
Types of Billable Basis
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
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
Year
1
2
3
4
5
6
7
8
9
Disc. Rate
Utility Invest.
Basis
Residential
Residential
Three Year
Residential
Five Year
Small Gen.
Service
0.0301
0.0301
0.0301
0.0301
0.0301
0.0301
0.0301
0.0100
0.0201
0.0301
0.0301
0.0301
0.0301
0.0301
0.0060
0.0121
0.0181
0.0241
0.0301
0.0301
0.0301
16.02
16.02
16.02
16.02
16.02
7.0%
7.0%
7.0%
$0.162
kWh
$0.135
kWh
$0.110 $
kWh
Medium
Gen.
Service
Large Gen.
Service Large
Non-TOU Industrial
Small Ag
Irrigation
Large Ag.
Irrigation w/o AFC
17.62
17.62
17.62
17.62
17.62
28.49
28.49
28.49
3.61
3.61
3.61
28.94
28.94
28.94
28.94
28.94
11.46
11.46
11.46
11.46
11.46
7.0%
7.0%
7.0%
7.0%
7.0%
7.0%
65.67
kVa
$72.26
kVa
$74.77
kVa
$9.47
kVa
$118.66
kVa
$46.97
kVa
-
Present Value Contribution Margin
Average
Contribution
per Customer
Customer Class
Residential
$
0.162
Residential Subdivision Three Year Phase In
0.135
Residential Subdivision Five Year Phase In
0.110
Small Gen. Service
65.67
Medium Gen. Service
72.26
Large Gen. Service - Non-TOU
74.77
Small Ag Irrigation
118.661
Large Ag. Irrigation - w/o AFC
46.970
Average
Usage
16,722
16,722
16,722
38
217
873
18
640
Maximum
Investment
per Customer
$
2,716
2,258
1,839
2,518
15,658
65,287
2,123
30,041
Basis
Estimated based on KWH
Estimated based on KWH
Estimated based on KWH
Estimated based on KVA
Estimated based on KVA
Estimated based on KVA
Estimated based on KVA
Estimated based on KVA
Present Value Contribution Margin
Customer Class
Residential
Residential Subdivision Three Year Phase In
Residential Subdivision Five Year Phase In
Small Gen. Service
Medium Gen. Service
Large Gen. Service - Non-TOU
Small Ag Irrigation
Large Ag. Irrigation - w/o AFC
Maximum
Investment
$
2,716
2,258
1,839
65.67
72.26
74.77
118.66
46.97
Basis
Per Connection
Per Connection
Per Connection
Per KVA Installed Capacity
Per KVA Installed Capacity
Per KVA Installed Capacity
Per KVA Installed Capacity
Per KVA Installed Capacity
Key Assumptions

Discount Rate

Typically equal to
Rate of Return
Target for Utility

Length of time to
recover
investment



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Based on perceived
risk of investment
Residential 5-9
years
Commercial 4-5
years
Industrial 3 years
Perceived Risks

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Company going out of business
Facility burning down
Co-Generation
Wind Mills/Solar/Fuel Cells
Alternative fuels
Other Considerations
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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
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