#1SEAL OF THE Presentation to Representatives of the Electricity Regulatory Authority of Albania Ratemaking in Indiana Jerry Webb Director Gas, Water and Sewer Division Indiana Utility Regulatory Commission October, 2005 STATE OF INDI#2SEAL OF THE 2 STATE 1816 OF INDI#3OF THE STATE Electric Utilities 5 Investor owned SEAL 1816 79 Municipals, 25 under IURC jurisdiction 43 Rural Electrical Member Cooperatives, 4 under IURC jurisdiction 9 Independent Power Producers OF INDI 3#4A Checkerboard of Deregulation Restructuring Delays Implemented Restructuring Legislation Rescinded Restructuring Legislation Enacted Comprehensive Regulatory Order Issued Commission or Legislation Investigation Ongoing No Ongoing Significant Activity Source: Cambridge Energy Research Associates SEAL OF THE 4 STATE 1816 OF INDI#5Vertically Integrated Utility Generation (Power Plants) Transmission Networks (Grid) Local Distribution System 日 Final Customers (Retail Sales)#6Generation by Fuel Type In Indiana Coal 94.5% SEAL OF THE STATE 1816 OF INDI Petroleum 0.7% Natural Gas 4.3 % Hydro 0.5 % 48 generation stations = 20,470 MW#7Main IURC Role Utilities SEAL OF THE STATE 1816 Consumers Represented by the Utility Consumer Counselor OF INDI#8OF INDI Office Of Utility Consumer Counselor SEAL OF THE THE Utility Consumer Counselor must be an Attorney Is appointed by Governor and serves at the pleasure of the Governor ⚫ About 65 Total Employees STATE 1816 8#9OF THE STATE PSI Energy Rate Case • PSI Energy is subsidiary of Cinergy, which also owns Cincinnati Gas and Electric in Ohio SEAL 740,000 customers in 69 of 92 counties • 11 generating stations totaling 6800 MW, mostly coal fired 5800 circuit miles of transmission line 20,500 miles of distribution line 1816 OF INDI 9#10Increase requested • 11.2 % increase in revenues or $178,303,000 SEAL OF THE 10 STATE 1816 OF INDI#11OF INDI Minimum Standard Filing Requirements SEAL OF THE STATE 1816 PSI Energy filed for its rate increase under this optional system The basic idea is that by filing large amounts of detailed information in a uniform manner ahead of time, the participants will be better informed and the Commission will be able to make a better decision in a shorter amount of time. 11#12OF INDI Minimum Standard Filing Requirements SEAL OF THE The standards themselves are very detailed and prescriptive See handout STATE 1816 If this procedure is not used, the Commission usually has lots unanswered questions which tend to cause confusion and slow down the decision making process. 12#13The Participants • PSI Energy Office Of Utility Consumer Counselor Citizens Action Coalition Indiana and Purdue Universities Industrial Customer Group IBEW (union) Kroger (grocery store) SDI (steel company) • NUCOR (steel company) SEAL OF THE 13 STATE 1816 OF INDI#14OF THE STATE Time and logistics ● Petition filed December 30, 2002 SEAL Prehearing Conference February 11, 2003 Test Year is year ending September 30, 2002 with adjustments that are fixed, known and measurable up to one year beyond end of test year PSI Energy pre-files its case-in-chief April 11, 2003 with hearings starting on June 9, 2003 1816 OF INDI 14#15OF THE STATE Time and Logistics SEAL 1816 All other participants pre-file their cases in chief on August 19, 2003 PSI Energy pre-files rebuttal on October 6, 2003 Field Hearings in cities around the state held on October 22 and 27, 2003 • Hearing on all other participants case in chief followed by PSI rebuttal hearing starts on November 3, 2003 OF INDI 15#16Time and Logistics SEAL OF THE Proposed Orders and briefs and counter proposals filed after close of last hearing 16 STATE 1816 OF INDI#17OF THE STATE Communication within the IURG 1816 NOTE: Either as this part of the presentation is being made or at its conclusion, Mr. Sutherland, Mr. Storms, and Mr. Webb will discuss this in more detail. Participation from ERE is welcome. OF INDI 17#18OF THE STATE OF INDI Communications within the I · No formal rule prescribing the process of internal communication during a rate case 1816 Communications process varies considerably depending on size of case and the team members The Administrative Law Judge and a Commissioner are assigned to the case by the Commissioners Technical staff are assigned to the case by Division Directors and sometimes by or with the advice of the Chief Operating Officer All of the employees of the IURC assigned to a case are collectively referred to as the team; the administrative law judge is the overall team leader for the case as a whole and there is also a technical staff team leader 18#19OF THE STATE Communications within the IRE Communications during a large case consists of the following: ✓ Meetings ✓ E-mails ✓ Staff Reports 1816 OF INDI 19#20OF THE STATE Communications within the I 1816 Internal meeting may be held prior to the prehearing conference/preliminary hearing to see if there are any outstanding issues or problems with test year This case is bifurcated-meaning we have one prefiling and hearing date for Utility and another prefiling and hearing date for all other parties OF INDI 20#21OF THE STATE OF INDI Communications within the IRE 1816 ⚫ Staff report will be issued a few days prior to the utility's hearing A meeting likely will be held to discuss the issues in the case prior to the hearing and to see if there are any bench questions that need to be asked. • During the hearing at breaks, there are frequently meetings among the team members to discuss issues 21#22OF THE STATE OF INDI Communications within the IRE 1816 Same process repeated for the second hearing and pre-filed testimony of all other parties 22 22#23OF THE STATE Communications within the IRE Deciding the case 1816 ✓ IURC gets “help” from parties by having the parties submit proposed orders and exceptions to proposed orders and briefs for any legal issues ✓ After all the proposed orders have been submitted, there usually will be a team meeting to discuss issues, decide which issues are uncontested and make preliminary decisions as to contested issues OF INDI 23#24OF THE STATE Communications within the IRE ✓ At the meeting just discussed, the administrative law judge may ask for help from tech staff in writing parts of the order or may decide to write a draft order himself ✓ The draft order is circulated among team members and this may be an iterative process ✓ Intermediate input and feedback from other Commissioners may be sought on important issues and to develop consensus ✓ Once the team has a good proposed order it is circulated to the other Commissioners ✓ The proposed order is presented for official approval at a normal weekly public meeting of Commissioners OF INDI 24#25The Issues Rate base and used and useful • Uncontested and found to be $3,662,350,000 SEAL OF THE 25 STATE 1816 OF INDI#26The Issues Two disputed revenue adjustments Off-system sales adjustment • Rate Migration SEAL OF THE 26 STATE 1816 OF INDI#27OF THE The issues Long list (14) of disputed expense adjustments • Examples are: SEAL Depreciation Expense---proposed an increase of $79,088,000 based upon a depreciation study • Public Safety advertising-proposed an increase of $619,000 STATE 1816 OF INDI 27#28The Issues Expense adjustments continued Taxes property, state and federal income tax SEAL OF THE 28 STATE 1816 OF INDI#29The Issues Return, return, return SEAL OF THE 29 STATE 1816 OF INDI#30OF INDI Witness/Party Morin/PSI CAPM 10.20-10.70% Summary of ROE Estimates and Areas of Disagreement Inman/IURC 9.21% Gorman / PSI- Kaufman/OUCC IG Original Updated DCF 10.70-13.60% 10.42 -13.52% 7.98-8.59% 7.94-10..12% 9.50 -9.80% 10.10% RP 10.90-12.30% 9.69 - 11.02% NA NA ARP 11.30-11.40% 11.30-11.40% NA 9.40 10.90% Recommendation 11.50% 10.25 -10.50% 9.15% 10.00% CAPM 10.90 - [1.40% NA 8.48-9.09% NA DCF 10.30-12.10% NA 8.02-9.67% NA RP 10.90 -12.50% NA NA NA ARP 11.30-11.40% NA NA NA Recommendation 11.20% 10.35-10.55% 9.25% NA Major Areas of Disagreement - All Models All Floatation costs Adjustment 0.30% 0.15% 0.05 -0.10% 0.00% Beta 0.72 0.72 0.65 -0.70 0.64 CAPM Market Risk Premium Mean "Arithmetic vs. Geometric" Arithmetic Both Both ECAPM Accept Reject Reject Arithmetic Reject Half vs. Full-Year Div. Growth Full-Year Half-Year Half-Year Full-Year DCF RP Quarterly Compounding Adj. Risk Premium Mean "Arithmetic vs. Geometric" 0.20% 0.20% 0.00% 0.00% Arithmetic Both NA NA 30#31The Issues • Return SEAL The decision is: 10.5% return on equity How did we get there? OF THE 31 STATE 1816 OF INDI#32OF THE Decision on Rate Increase SEAL Granted 8.36 % increase in revenues or $107,344,000 Results in $1,406,596,000 in total operating revenues STATE 1816 OF INDI 32#33OF THE STATE Cost of service/rate design Inter class subsidies How the issue is addressed: SEAL 1816 Each class allocated costs and plant as if it were a company An income statement is prepared for each class A rate of return and dollar return is derived for each class OF INDI 33#34Cost of Service/rate design SEAL OF THE STATE 1816 The general concept is that if each class is earning the same return, that is the overall return for the company, no subsidies exist. What to do if the returns are unequal The concept of gradualism. 34 OF INDI#35Rate design issues Real Time Pricing Power Share Trackers SEAL OF THE 35 STATE 1816 OF INDI#36Conclusion SEAL Commission issues Order on May 18, 2004 • Start to finish about 16.5 months • Order is 145 pages of which about 40 pages are devoted to the issue of return OF THE 36 STATE 1816 OF INDI