Understanding the Principals and Factors that Affect Your Members Rates Now and in the Future

1. Understanding the Principals and Factors that Affect Your Members RatesNow and in the Future Robert E. Rentfrow Vice-President of Power Supply Walton EMC rrentfrow@waltonemc.com

2. Understanding Power Cost What is the single best thing you will see in this Presentation Today? My New Granddaughter!!!

3. Understanding Power Cost • What are the Factors that Affect the Wholesale Cost of Electricity Today? • What are the Factors that Will Affect the Cost of Electricity in the Future? • Wholesale to Retail – What Price Signal Should We Be Sending our Customers?

4. I. What are the Factors that Affect the Wholesale Cost of Electricity Today? • Cost of Capacity • Cost of Energy • Cost of Other Services • Resource Reliability • 3rd Party Cost • Customer Load • Internal Cost

5. 1. Capacity Cost • GENERATION – “The Engines that pulls the Load”

6. Types of Generation 1.BASE • Designed to run full-time • Uses low cost fuel • Large capacity • Longest life • Least cost to maintain

7. Types of Generation 2.INTERMEDIATE • Designed to run 50% to 75% of the year • Designed for highest efficiency for fuel source • Uses higher cost fuel • Medium size capacity • Less expensive to build than BASE • Medium life • Medium maintenance Cost

8. Types of Generation 3.PEAKING • Designed to run less than 25% of the year • Lowest efficiency for fuel source • Uses higher cost fuel. • Small size capacity • Least expensive to build • Medium life • Highest maintenance cost

9. The Generation Load Curve 300 MW’s PEAKING 15% 180 MW’s 85% INTERMEDIATE 220 MW’s BASE Hr - 1314 Hr - 7446

10. 1. Capacity Cost (OPC 2010 Forecast) • BASE • Vogtle 1 & 2 - $ 42.66 / MW • Hatch - $ 25.75 / MW • Scherer - $ 10.50 / MW • Wansley - $ 13.88 / MW Average Cost - $ 22.62/ MW

11. 1. Capacity Cost (OPC 2010 Forecast) • INTERMEDIATE • Chattahoochee - $ 26.03 / MW • Rocky - $ 51.88 / MW Average Cost - $ 36.76/ MW

12. 1. Capacity Cost (OPC 2010 Forecast) • PEAKING • Smarr - $ 122.23 / MW • Sewell Creek - $ 158.90 / MW • Talbot - $ 159.16 / MW • Doyle - $ 171.65 / MW • Hartwell - $ 173.94 / MW • SEPA - $ 41.11 / MW Average Cost - $ 104.66/ MW

13. 1. Capacity Cost(OPC 2010 Forecast)

14. 1. Capacity Cost(OPC 2010 Forecast)

15. 2. Energy Cost FUEL – “The Stuff that makes the Engines Run”

16. 2. Energy Cost Types of Fuel Used: Nuclear ( Uranium ) Coal Natural Gas Fuel Oil Hydro

17. 2. Energy Cost (OPC 2010 Forecast) TypeMWH’S GeneratedCost Nuclear 9,766,807 $ 68,293,348 Coal 11,608,293 $362,024,677 Natural Gas 2,186,871 $141,119,650 Hydro 1,741,322 $ 40,654,111 * (*Estimated -Depends on Fuel Used to Pump Water) Fuel Oil (Used only in Emergencies- Gas not Available)

18. 2. Energy Cost(OPC 2010 Forecast)

19. 2. Energy Cost (OPC 2010 Forecast) TypeMWH’S GeneratedCost / kWh Nuclear 9,766,807 .699 ¢ Coal 11,608,293 3.119 ¢ Natural Gas 2,186,871 6.450 ¢ Hydro 1,741,322 2.344 ¢ * (*Estimated -Depends on Fuel Used to Pump Water)

20. 2. Energy Cost Fuel Cost- “A Constantly Moving Target”

21. 2. Energy Cost Fuel Cost- “A Constantly Moving Target” Nuclear and Coal Fairly Stable Pricing - Affected most by Coal Contracts and Coal Transportation Cost. Hydro Depends on Water at the Dam and the Cost to Pump up Rocky Natural Gas Price Moves Daily – Stabilized Somewhat thru Hedging and Gas Storage – But therein lies the Problem – “When to Buy? – When to Wait?”

22. 2. Energy Cost Natural Gas – “Volatile Pricing in a Volatile Market” - EXAMPLE - May 3, 2008 - Natural Gas Price --- $ 10.87 DT Cost to run Smarr I for 10 Hours @ 100 MW’S/HR $ 122,287.50 May 3, 2009 - Natural Gas Price --- $ 3.62 DT Cost to run Smarr I for 10 Hours @ 100 MW’S/HR $ 40,725.00

23. 2. Energy Cost

24. 2. Energy Cost Why the Big Difference in Price Between a CT(Combustion Turbine) and a CC(Combined Cycle)? EFFICIENCY also known as HEAT RATE

25. 2. Energy Cost HEAT RATE – def. A number that tells how efficient a fuel–burning power plant is. The heat rate equals the Btu content of the fuel input divided by the kilowatt hours of power output.

26. 2. Energy Cost HEAT RATE COMPARISON Combustion Turbines Doyle ……….. 11,750 BTU/kWh Smarr ……….. 11,450 BTU/kWh Sewell Creek .. 12,700 BTU/kWh Talbot ………. 12,450 BTU/kWh Combined Cycle Chattahoochee . 7,275 BTU/kWh

27. 2. Energy Cost EXAMPLE HEAT RATE COST COMPARISON Fuel Cost ( $4.50 DT) - Run Time (1 Hr) – Output (1 MW) COMBUSTION TURBINE Doyle (Heat Rate) ------------------ 11,750 Btu/kWh HR (/1000) x Fuel Cost x Output (/1000) x Runtime 1.1750 x $4.50 x 1kW x 1 Hr 5.29 ¢ / kWh COMBINED CYCLE Chattahoochee(Heat Rate) ----7,275 Btu/kWh HR (/1000) x Fuel Cost x Output (/1000) x Runtime .7275 x $4.50 x 1kW x 1 Hr 3.27 ¢ / kWh

28. 3. Other Services SERVICECost /kWh • OPC …………………. 1.81¢(Export Transmission, Gas Storage, Cobb PPA, Gas Hedging, Green Power) • Transmission(GTC) … .005 ¢ • Control Area (GSOC).. .00025 ¢ Total Other Services ……. 1.81525 ¢

29. Total OPC/GTC/GSOC/SEPA Cost – (Estimated for 2010) $1,621,921,694.85 Cost per kWh 6.58 ¢

30. 4. Resource Reliability “When the Units Don’t Run …. TheEnergy Still Has to Come From..SOMEWHERE? How does this affect Energy Cost? Without Insurance (Hedges, Block Replacements, 3rd Party Deals) to cover the loss of a Major Unit(Base Load or Intermediate)You are exposed to the MARKET.. and the MARKET can beBRUTAL!!! How many of you remember December of 2000? Who can tell me what the peak Market Price for Electricity (per kWh) was in that Month? $1.40 for 1 kWh of ELECTRICITY

31. 5. 3rd Party Cost Today, most EMC’s in Georgia are supplementing their shortfall in Capacity and Energy through 3rd Party Contracts. The effect on their wholesale energy costs depends on how good a job they did in negotiating their Contract. In the past, 3rd Party Suppliers were willing to take some risk in their pricing and that resulted in some long-term deals at a very competitive price. The Problem… The Deals are going away!! The impact 3rd Party Deals have on your rates today depends on how they are structured. * Do they have a Capacity Charge? * Is Energy linked to the daily price of Gas? * Are you penalized when your Generating Units go down? * Did you trade the energy from your Units too cheaply?

32. 6. Customer Load Profile How your Customers use the Energy and Capacity you provide has a great deal with What YOU have to pay for Wholesale Energy. The common term used in our industry to describe this is .... “LOAD FACTOR” What is “LOAD FACTOR” ? Def…“the average power used divided by the peak power experienced over a specified period of time”

33. 6. Customer Load Profile System Peak Load = 714 MW’s Max Load per Day = 714 x 24 = 17,139 MW’s Total MW’s / Day = 11,072 MW’s LF = 11,072 / 17,139 LOAD FACTOR = 64.60% PEAKING INTERMEDIATE BASE

34. 6. Customer Load Profile INTERMEDIATE System Peak Load = 714 MW’s Max Load per Day = 714 x 24 = 17,139 MW’s Total MW’s / Day = 5,458 MW’s LF = 5,548 / 17,139 LOAD FACTOR = 31.84% BASE

35. 6. Customer Load Profile OBJECTIVE – “ Fill the VALLEYS Lower the PEAK”

36. 7. Internal Cost Two Types of Internal Cost: Controllable and Non-Controllable Controllable Cost: Labor, Benefits, Transportation Expense, General Plant Additions, A&G Expense, Member Expense, Maintenance Expense .. Non-Controllable Cost: Interest Expense, Taxes, Depreciation, Insurance..

37. These are the Factors that Impact your Energy Cost TODAY. • Cost of Generation • Cost of Other Services • Resource Reliability • 3rd Party Cost • Cost of Capacity • Customer Load/Use Characteristics • Internal Cost The Big Question Is………..

38. II. What are the Factors that Will Affect the Cost of Electricity in the Future? • Load-Growth (Positive/Negative/Neutral) • New Generation • Government Regulation / Mandates • Loss of 3rd Party Providers (Competition) • Technology • Cost of Doing Business

39. 1. Load Growth in the Future “ OPC Projects that between Now and 2025 – EMC’s in Georgia will need an Additional 15,000 MW’s of New Capacity!” 750 MW’s Peaking 200 MW’s Intermediate 100 MW’s Base

40. 2. New Generation “The Days of Cheap Electricity are Gone” Vogtle 1 & 2 Estimated Cost in 2017 5.275¢ / kWh Vogtle 3 & 4 Estimated Cost in 2017 12.13¢ / kWh

41. 3. Government Regulation / Mandates Waxman / Markey Kerry / Boxer “The Climate Bill”

42. 3. Government Regulation / Mandates Cap & Trade to reduce emissions by 20% by 2020. Covers any entity that emits 25,000+ Tons of CO2 Annually. Sets up a Strategic Reserve Auction – Sold on Open Market Free Competition means Cost Increase. Establishes an Energy Cooperative to look at ways to Improve Efficiency , Reduce Demand ,and Reduce GHG’s. Set’s up a$1 Billion Annual Budget ….collected from…….?? You guessed it --- Electric Companies!! There is much more……But I’m running out of Time! The Bottom Line is This…. “In the end, none of their Energy Bills.. Are going to reduce your Energy Bill’s”

43. 4. Loss of 3rd Party Providers Very Simple… Since the ENRON debacle, there have been fewer and fewer Independent Marketers every year. Fewer Players mean Less Competition and Less Competition means …….?? HIGHER PRICES !!

44. 5. Technology “Who knows what tomorrow brings.”Joe Cocker &Jennifer Warnes – 1982 The Search for Cleaner, More Efficient, Cheaper Energy Sources and a direct connection from the Seller to the User (Smart Grid) will result in a multitude of changes for the Electric Utility Industry in general over the next several years. Will all the changes really help lower cost to our Customers…….?? PROBABLY NOT!

45. 6. The Cost of Doing Business We can all expect Costs to go up in most every area that impacts our business on a Day-to-Day basis…. • Health Care Cost • Benefits • Fuel Cost • Taxes • Material • Labor …….. Higher Operating Costs will mean one thing .. Higher Bills to Our Members!

46. III. Wholesale to Retail – What Price Signal Should We Be Sending our Customers? “Designing Retail Rates for your Customers is like buying Clothes for your Wife…… No matter how hard you try …. You’ll never get them exactly what they want. And most of the time … You get fussed at because they don’t fit them PERFECTLY!!!”

47. Types of Rates (Residential) • Level Rate Same price for every kWh used. • Declining Block The more you use – The less it cost per kWh. • Inverted Block The more you use - The more it cost per kWh. • Seasonal Varied Split rate – Summer and Winter. • Time of Use Rate increases during pre-set peak time periods.

48. Types of Rates (Residential) Which Type of Rate Structure is Best ? It depends – there are a lot of Variables to consider… • The Philosophy of Management • The Political Climate of the EMC • The Demographics of the Members • The EMC’s Growth and, • The EMC’s Cost that have to be covered. The bottom line is … What Signal do you want to send to your Members?

49. Types of Rates “The biggest risk in implementing a Change in any Retail Rate Structure is that, in the end, it doesn’t accomplish what you thought it would.”

50. Types of Rates EXAMPLE The Inverted Rate “The More You Use.. The More You Pay” OBJECTIVE To shift Cost to those Members who use the Most Electricity. PHILOSOPHY If they use more ..they should bear a greater share of the EMC’s Cost and … by using less, the EMC’s cost of generation will be less in the future. RESULT Members lower their Energy Use