RATE SETTING DONE THE RIGHT WAY North Alabama Public Power Association

1. RATE SETTING DONE THE RIGHT WAY North Alabama Public Power Association Terry Mitchell | Jackson Thornton

3. REGULATION OF PUBLIC POWER UTILITIES • MUNIS • COOPERATIVES 3

4. MUNIS • BOARDS ARE EITHER ELECTED OR APPROVED BY ELECTED OFFICIALS 4

5. COOPERATIVES • BOARDS ARE ELECTED ON ROTATING TERMS USUALLY BY DISTRICT 5

6. GOOD OR BAD? • POLITICS COME INTO PLAY WHEN SETTING RATES 6

7. BOARDS SERVE DIFFERENT STAKEHOLDERS Regulatory Agencies Community BOARD Lenders City Government Employees Customer Utility 7

8. BOARD MEMBERS SERVE A FIDUCIARY ROLE • MUST SERVE THE ROLE OF MANAGING RATES FOR CUSTOMERS • MUST SERVE THE ROLE OF KEEPING UTILITY FINANCIALLY SELF-SUSTAINABLE 8

9. BOARD’S ROLE IN RATE SETTING Customer Needs Financial Needs for Utility 9

10. Mission Statement “Our Utility’s mission is to provide the safest, most reliable and dependable source of energy to our customers at the lowest cost” 10

11. BOARD’S ROLE IN RATE SETTING Customer Needs Financial Needs for Utility 11

12. Financial needs of the Utility must be driven by financial policies and goals 12

13. Annual Revenue Requirements • O & M (Budget) • Power Cost (Financial/Power Requirements Forecast) • Debt Service (Loan Covenants) • Pilot/Capital Credits (Defined) • CIP (Work Plan) **At Least Annual Depreciation Must develop financial goals and policies 13

14. Financial Policies and Goals • Set guidelines that help determine revenue needs to make Utility financially self-sustainable (Take emotions out of Process) • Provide Board and management with boundaries on important issues 14

15. Cont’d • Helps to minimize politics on setting rates • Reflects financial stability to lenders/bond holders • Increase credit value • Strengthens role as a valuable asset to your city/community 15

16. Financial Policies to Consider • Rate Policies • Financial Planning Policies • Debt/Margin Policies • Capital Funding Policies • Reserve Funding Policies • Financial Forecasting 16

17. Rate Policies • Are rates set based on costs-to-serve? • Do you have plans for annual inflationary increases? • Try to avoid “Rate Shock” • Time-sensitive rates • Economic development rates • Line extension policy 17

18. Financial Planning Policies • Budgeting Policies • Debt Coverage Requirements • Margin/Equity Requirements • Capital Project Funding • Reserve Requirements • Financial Forecasting • Rate Stability 18

19. Use annual flow of funds to help guide financial policies 19

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21. Why financial goals and policies are required/important Rate Agency Guidelines • Very strong DSC (Avg. 5 yrs 5.2 times) • Strong cash position • History of taking rate action to meet financial needs 21

22. Steps To Take • Meet with Board to assist in understanding and setting financial goals and policies • Set periodic dates to examine goals and policies to determine their effectiveness • Review your flow of funds statement to see if the financial goals and policies are meeting the financial needs of your Utility 22

23. Financial goals and policies can: • Provide guides to set the financial needs (Annual Revenue Requirements) of your Utility • Minimize the impact of politics on rates • Make your Utility financially self-sustainable • *Increase credit value Note: Most important to memorialize the financial goals and policies 23

24. QUESTIONS ??? W. Terry Mitchell, Principal Jackson Thornton Utilities Consultants Montgomery, Alabama 334.240.3647

25. Which is not a major component of the annual cash flow statement? Text a KEYWORD to 22333 or Submit responses at PollEv.com

26. How often should rates be adjusted? Text a KEYWORD to 22333 or Submit responses at PollEv.com