American Public Power Association

1. American Public Power Association Business and Financial ConferenceTime of Use Pricing—The Fundamentals and ApplicationsSeptember 26, 2005Portland, Oregon Presented by: Gary Saleba, President A registered professional engineering corporation withoffices in Kirkland, WA; Bellingham, WA; Portland, OR; and Indio, CA Corporate Telephone (425) 889-2700 Facsimile (425) 889-2725 saleba@eesconsulting.com

2. Agenda • Introductions and Session Objectives • Time of Use Basics • Steps for Determining TOU Rates • Examples of TOU Rates • Observations on Impacts of TOU Rates • Structure of Tariffs in the Future • Summary/Conclusion 1

3. Introductions and Session Objectives • Objectives of Session • Background on Speaker • Disclaimers 2

4. Time of Use Basics • Why Time Differentiate/the Rationale • Higher principal of rate setting is fair, equitable and non-discriminatory • Cost based rates are fair, equitable and non-discriminatory • Cost based rates must follow cost causation • Cost causation requires customer causing costs should also pay • Costs vary by time of use • Time variant costs should be allocated to users based on who uses what during time variant costing periods (i.e., time of use rates) 3

5. Time of Use Basics (cont’d) • What are TOU Rates? • Time differentiated rates • Vary with time of day (TOD) or time of use (TOU) • Multiple periods • On-peak period • Off-peak period • Mid or shoulder period 4

6. Time of Use Basics (cont’d) • May be seasonally adjusted • Winter • Summer • Monthly • May be unbundled • Power supply component • Transmission component • Distribution component • Pricing based on the cost of electricity during a particular time block • Rates are higher during the peak period and lower than the standard rate during off-peak period because costs vary in same manner Do the function’s cost vary by TOU? 5

7. Time of Use Basics (cont’d) • Rewards customers for reducing consumption during high price periods/using more during off peak • Example for commercial customer: • Customer charge = $50/month • Demand charge = $3/kW/month • Energy charge = On-peak - 5¢/kWh / Off-peak – 2¢/kWh • TOU Rates are Not Real-Time Pricing • Real-time pricing differs from TOU pricing in that real time pricing is based on actual (as opposed to forecasted prices) • Real-time pricing is more applicable to utilities that purchase a significant portion of power supply at the market • Utilities that generate their own power may use TOU pricing to reduce costs 6

8. Time of Use Basics (cont’d) • Relative Merits of Time of Use Rates • Advantages • Closely tracks costs • Price signal • Disadvantages • Metering requirements • Acceptance level by customers • Cost differential between time periods may be small • Administration/billing costs • Impacts on utility net income 7

9. Time of Use Basics (cont’d) • Which Type of Costs Vary with Time? 8

10. Steps for Determining TOU Rates • Summary • Determination of time periods • Incorporate time periods into COSA analysis/allocation of costs to time periods • Allocate to customer classes • Calculate Unit costs by TOU period • Calculate TOU rates • Data needs 9

11. Steps for Determining TOU Rates (cont’d) • Determination of Time Periods • Number of periods should be feasible to administer • Hours and months having similar costs should be combined into like groups/look to system lambda or LOLP • Statistical techniques • Wholesale power rates • “Eye-ball” technique • Other utilities • Market • The periods chosen should be broad enough to allow for minor shift in loads without major impacts on revenues • Incorporate Time Periods into COSA • Functionalize—no change to standard methodology • Classification—need time period cost classifiers, demand and energy • Allocation—demand and energy allocation factors by time period 10

12. Steps for Determining TOU Rates (cont’d) • Classification of Plant and Expenses • Timing of peak loads may impact • Power supply investment and expenses • Transmission investment • Distribution investments • Power supply investment—look to causal variable (i.e., LOLP) • Power supply O&M—look to fuel costs • Determine if significant difference exists between time periods for transmission and distribution costs 11

13. Steps for Determining TOU Rates (cont’d) • Allocation of Rate Base and Revenue Requirement • Take classified costs and allocate to each class of service utilize TOU allocation factors • Results in time differentiated costs or revenue requirement by customer class • Calculate Unit Costs • Determine time-differentiated unit costs for demand and energy categories • Calculate TOU rates based upon unit costs • Reasons for deviation from unit costs 12

14. Steps for Determining TOU Rates (cont’d) • Data Requirements for TOU Analysis • Load data needed for each class/rate schedule • Energy (kWh) usage by period (on-peak, off-peak, shoulder) • Demand (kW) usage by period (on-peak, off-peak, shoulder) • Is the data available? • Metering • Load research • Estimation • Borrow • Accounting data • Power supply O&M costs by time period • Power supply capital costs by time period (?) • Transmission costs by time period (?) • Distribution costs by time period (?) 13

15. Steps for Determining TOU Rates (cont’d) • Other Considerations • Lack of data • Price elasticity impacts • Rate continuity • Rate stability/revenue shifts • Customer understanding 14

16. Examples of TOU Rates • Puget Sound Energy’s Time-of-Use Program • Created in 2000 during the west coast energy crisis to provide financial incentives for customers to shift electric consumption to off-peak times • Launched in may 2001--296,000 program participants shifted approximately 5 percent of their demand away from peak hours • Revised program rates in 2002 to reflect calmer wholesale electricity market; added a $1.00 monthly administration charge to cover incremental meter reading and data handling costs • 94% of participants lost an average of 81 cents per month during the third quarter of 2002 compared to standard customers • After receiving the disappointing usage summaries in October 2002, approximately 26,000 customers withdrew from the program • TOU program was cancelled 10 months ahead of schedule so the company and interested parties could evaluate and possibly re-tool the program 15

17. Examples of TOU Rates (cont’d) • Pacific Power’s Time-of-Use Programs • Required as a result of Oregon’s electricity restructuring bill that went into effect March 1, 2002 • Time-of-use pricing plan requires the installation of a time-of-use meter and a 12-month enrollment commitment • PacifiCorp participants pay a $1.50 monthly surcharge and PGE customers pay $1.00 per month to cover a portion of the additional cost for the time-of-use meter, including meter installation charges • The first year a customer selects the time-of-use pricing plan, if the total annual energy costs incurred under the time-of-use exceeds 10% over what costs would have been for the same period under standard rate, the net difference, guarantee payment, will be credited on the customer’s bill following the last month of the initial one-year commitment 16

18. Examples of TOU Rates (cont’d) • PGE’s Oregon Time-of-Use Programs • PGE rate structure • 3 tiers: on-peak, mid-peak and off-peak • Mid-peak equals the standard service rate • Ratio of on- to off-peak rates roughly 3-to-1 or near 5¢/kWh • Customers pay a surcharge on top of inclining block rates for usage during on-peak hours and get a credit during off-peak hours • On-peak surcharge is twice as high from April through October • Results of PGE study show that time-of-use households used 292 kWh less energy and saved $28 (or 5 percent) per year on average • Enrollment statistics as of March 2005 • 1,367 or 0.3% of Pacific Power’s 517,000 residential customers • 1,998 or 0.3% of PGE’s 742,555 residential customers 17

19. Examples of TOU Rates (cont’d) • Southern California Edison Time-of-Use Programs • TOU programs are available for residential, commercial and industrial customer classes • Standard TOU and new critical peak pricing • For the residential class, TOU pricing only occurs in the generation component of the rate • For the remaining rate schedules, both the distribution and generation components have time related components • SCE – Residential • 2 tiers: on-peak and off-peak for each session • Ratio of on- to off-peak rates roughly 3-to-1 or near 20¢/kWh on peak • SCE charges an additional TOU meter charge of 0.09 cents ($2.70/month) per meter per day in addition to the standard customer charge, an increase of approximately 35% 18

20. Examples of TOU Rates (cont’d) • Commercial and Industrial Programs • Three tiers (on-peak, mid-peak and off-peak) • Both generation and distribution rates include time related components • Enrollment Statistics as of March 2005 • 4,127 or 0.1% of SCE’s 3,987,127 residential customers • 21,836 or 3.4% of SCE’s 634,941 commercial & industrial customers 19

21. Examples of TOU Rates (cont’d) • Example of TOU Delivery Charge Source: Orange & Rockland, Residential TOU Rate (NY) 20

22. Examples of TOU Rates (cont’d) • Example of TOU Delivery Charge Source: Orange & Rockland, Residential TOU Rate (NY) 21

23. Observations on Impacts of TOU Rates • Success of TOU Programs Depends On: • Price of power • Design of the program • PSE Program Was Not Successful • Price differential not significant enough • Expensive to participate • Studies in CA Have Shown that: • Residential customers will reduce peak load by approximately 5% given on-peak TOU rates approximately double the standard rate • Residential customers will reduce peak load by approximately 15% given on-peak CPP rates approximately 5 times the standard rate • PSE’s Program also Reduced Peak Demands by Approximately 5% 22

24. Observations on Impacts of TOU Rates (cont’d) • Commercial TOU Customers Reduce Demands by 2% - 10% Due to TOU Rates • Industrial TOU Customers Reduce Demands by 4% - 25% Due to TOU Rates • Online Energy Management Systems are Likely to Increase the Demand Response 23

25. Structure of Tariffs in the Future • Continuing Price Volatility Under Deregulation as Supply/Demand Balance Vacillates • Price and Availability of Advanced Meters Better (AMR) • Increased Education of Customers/Up the Learning Curve • Results in More Complex Time Differentiated Tariffs • For the Future: Dynamic Pricing • Critical peak pricing tariffs • Real-time pricing • Day ahead tariffs • Assumes Resources are Periodically Scarce and Deregulation Continues to Evolve 24

26. Summary/Conclusion • Grandpa Salebaisms • If it ain’t broke, don’t fix it 25

27. Summary/Conclusion (cont’d) • Grandpa Salebaisms • If it ain’t broke, don’t fix it • Never have time to do it right butalways have time to do it over 26

28. Summary/Conclusion (cont’d) • Grandpa Salebaisms • If it ain’t broke, don’t fix it • Never have time to do it right but alwayshave time to do it over • Better to be roughly right thanprecisely wrong 27