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Contributions In Aid of Construction

Contributions In Aid of Construction. Mark Beauchamp Business & Finance Workshop Utility Financial Solutions 616-393-9722. Objectives. Types of Line Extension Policies Consideration when developing a line extension policy Risk of investments How much is a new customer worth?

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Contributions In Aid of Construction

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  1. Contributions In Aid of Construction Mark BeauchampBusiness & Finance Workshop Utility Financial Solutions 616-393-9722

  2. 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

  3. 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

  4. 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

  5. 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

  6. Utility Investment per kWh by Load Factor

  7. 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

  8. 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

  9. 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

  10. Determination of Contribution Margin by Class

  11. Determination of Contribution Margin on a billable basis

  12. 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

  13. Present Value Contribution Margin

  14. Present Value Contribution Margin

  15. Present Value Contribution Margin

  16. 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 Key Assumptions

  17. Perceived Risks • Company going out of business • Facility burning down • Co-Generation • Wind Mills/Solar/Fuel Cells • Alternative fuels

  18. 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

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