Addressing Challenges in the Utility Industry: Insights and Solutions

Explore key industry challenges such as declining residential electric usage and the rise of solar energy. Discover how the sector addresses these obstacles through rate structure developments reflective of costs and a focus on identifying fixed and variable costs to offer appropriate rate structures.

• Utility industry
• Challenges
• Rate structures
• Residential consumption
• Solar energy

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1. Mark Beauchamp, CPA, CMA, MBA President Utility Financial Solutions 616-393-9722 1

2. Metering Today In 2017 - 52% of residential customers have AMI metering: Residential Meters in US (EIA 2017 Data) Total Meters Meters with AMI Percent AMI 133,151,163 69,474,626 52% Utilities have ability to charge accurate rate structures, but change can be difficult Education staff, education management, education governing body, education intervenors, education customers

3. Industry Challenges Intervenors Solar Customers Solar Installers Environmental groups Customers Low income impacts Often valid arguments - Not always based on utility costs Need to maintain bond ratings - evaluation criteria

4. Industry Challenges Average residential electric usage declining Change in Residential Consumption Average Residential Consumption - 2010 Average Residential Consumption - 2017 Reduction 952 856 10.0% Installation of Roof Top Solar EIA 2017 Customers - Storage mWh Sold Back 430,481 98,134 Capacity MW Customers 1,626,283 785,215 Residential Customers on Net Metering Residential Customers in California California as Percent of Total 9,487 4,129 44% 2,316 1,729 75% 48% 23%

5. Market Share - Electric Vehicles

6. How is the Industry Addressing the Challenges Development of rates reflective of our costs Fixed costs to service a meter recovered in the customer charge (controversial) Fixed costs of distribution infrastructure recovered in demand charges (education)(Marginal or Embedded) Energy rates reflective of costs during on-peak, off peak (critical peak) time periods (Tends to include Power Supply and Transmission Costs) In other words; identifying fixed costs and variable costs of providing service and offering rate structures reflective of our costs

7. Ideal Cost Based Residential Rate Structure Option One Option Two Billing Unit Cost Based Rate Design Production Demand Coincident with System Peak Distribution Demand Based on Customers Maximum Demand $14.12 kW 2.19 $ 2.19 kW Energy Charge - Critical Peak Energy Charge - On-Peak Energy Charge - Off-Peak 0.165 0.112 0.048 0.061 0.061 0.048 kWh kWh kWh Customer Charge $ 21.44 $ 21.44 Monthly If this is ideal, how do we get there?

8. Industry Rate Trends & Rate Transition Plans Demand Charges AMI required Time of Use Rates AMI required Cost Based Customer charges Inverted block rate structure differentials are being minimized Customer Charges based on size of service Grid access fees Movement away from net metering for customer installed renewables Low Income assistance programs

9. PGE Rate Transition Plan https://www.pge.com/en_US/residential/rate-plans/how-rates-work/rate-changes/residential-rate-changes/residential-rate- changes.page FERA Family Electric Rate Assistance Qualified low income program

10. 10

11. Discussion Review Financial Projections & Targets Debt Coverage Ratio Minimum Cash Target Operating Income Review Cost of Service Results Cost to service each class of customers Monthly Customer Charges Condo/Apartment Alternatives 11

12. Assumptions Annual Inflation 2.5% Annual Civilian Growth: 2020 0.5% 2021 -0.1% 2022 -0.2% 2023 1.1% 2024 0.6% Navy Growth: 2021 4.4% 2022 1.3% 2023 5.1% 2024 2% Fuel Supply Change 2020 2.7% 2021 17.4% 2022 5.2% 2023 -12.3% 2024 0.5% Capital Improvements 2020 $71.5M 2021 $25.5M 2022 $26.25M 2023 $22M 2024 $22.75M 12

13. Coverage Ratios (Current Rates) Description Projected 2020 Projected 2021 Projected 2022 Projected 2023 Projected 2024 Debt Coverage Ratio Earnings from Operations Add Depreciation/Amortization Expense Add Interest Income (Net of Const. Fund Interest) $ $ $ 34,058,490 42,518,005 1,414,897 77,991,391 47,205,713 $ $ $ 38,457,749 43,025,516 1,429,153 82,912,418 47,708,036 $ $ $ 36,379,702 41,589,086 1,440,000 79,408,788 48,821,833 $ $ $ 36,183,938 40,135,509 1,340,000 77,659,447 28,511,500 $ $ $ 44,279,572 40,614,583 1,360,000 86,254,155 28,506,500 Cash Generated from Operations Debt Service after IPP Debt Service and Aggreko Lease Projected Debt Coverage Ratio (Covenants) Minimum Debt Coverage Ratio 1.65 1.40 1.74 1.40 1.63 1.40 2.72 1.40 3.03 1.40 Description Projected 2020 Projected 2021 Projected 2022 Projected 2023 Projected 2024 Fixed Cost Coverage Ratio Cash Available for Debt Service Off System Debt $ 77,991,391 $ 56,135,105 $ 77,991,391 $ 82,912,418 $ 49,952,884 $ 82,912,418 $ 79,408,788 $ 48,821,833 $ 79,408,788 $ 77,659,447 $ 65,003,952 $ 77,659,447 $ 86,254,155 $ 68,316,448 $ 86,254,155 - - - - - Total Available Debt Service Including Off System Debt Fixed Costs Coverage Ratio Minimum Fixed Costs Coverage Ratio 1.39 1.30 1.66 1.30 1.63 1.30 1.19 1.30 1.26 1.30 13

14. Minimum Cash Recommendation Description Projected 2020 Projected 2021 Projected 2022 Projected 2023 Projected 2024 Minimum Cash Reserve Allocation Operation & Maintenance Less Depreciation Expense Historical Rate Base Current Portion of Debt Service Payment Paid Monthly Five Year Capital Improvements - Net of bond proceeds Calculated Minimum Cash Level Operation & Maintenance Less Depreciation Expense Historical Rate Base Current Portion of Debt Service Payment Five Year Capital Improvements - Net of bond proceeds 12.3% 12.3% 12.3% 12.3% 12.3% 1% 1% 1% 1% 1% 8.33% 20% 8.33% 20% 8.33% 20% 8.33% 20% 8.33% 20% $ $ $ 41,826,426 12,024,385 4,162,740 24,290,027 82,303,579 70,442,695 $ $ $ 46,961,509 12,279,697 4,068,486 24,290,027 87,599,718 74,370,471 $ $ $ 49,279,582 12,542,667 5,416,996 24,290,027 91,529,272 74,866,152 $ $ $ 45,735,082 12,763,527 5,693,037 24,290,027 88,481,673 61,640,706 $ $ $ 45,302,830 12,991,012 5,699,016 24,290,027 88,282,885 55,543,461 Minimum Cash Reserve Levels Projected Cash Reserves 14

15. Summary Projection without Rate Change Debt Coverage Ratio Fixed Coverage Ratio Adjusted Operating Income 34,058,490 $ 38,457,749 $ 36,379,702 $ 36,183,938 $ 44,279,572 $ Fiscal Year 2020 2021 2022 2023 2024 Base Rate Adjustment 0.0% 0.0% 0.0% 0.0% 0.0% Projected Cash Balances 70,442,695 $ 74,370,471 $ 74,866,152 $ 61,640,706 $ 55,543,461 $ Recommended Minimum Cash 82,303,579 $ 87,599,718 91,529,272 88,481,673 88,282,885 1.65 1.74 1.63 2.72 3.03 1.39 1.66 1.63 1.19 1.26 15

16. Summary Projection with Rate Change Debt Coverage Ratio Fixed Coverage Ratio Adjusted Operating Income 34,058,490 $ 38,457,749 $ 36,379,702 $ 64,015,256 $ 72,275,136 $ Fiscal Year 2020 2021 2022 2023 2024 Base Rate Adjustment 0.0% 0.0% 0.0% 8.4% 0.0% Projected Cash Balances 70,442,695 $ 74,370,471 $ 74,866,152 $ 89,472,024 $ 111,370,342 $ Recommended Minimum Cash 82,303,579 $ 87,599,718 91,529,272 88,481,673 88,282,885 1.65 1.74 1.63 3.70 4.01 1.39 1.66 1.63 1.62 1.67 16

17. Electric Cost of Service Results Projected Rate Revenue 48,257,671 $ 6,028,481 6,142,248 1,114,738 1,132,261 20,056,660 31,131,633 12,626,883 9,297,553 19,905,605 2,654,392 164,340,467 $ Projected LEAC Revenue 77,953,487 $ 6,460,535 7,348,304 1,242,041 1,373,753 26,102,741 47,077,759 14,486,586 11,361,256 50,544,393 3,676,318 250,403,058 $ Projected Revenues 126,211,158 $ 12,489,016 13,490,552 1,825,923 2,356,779 2,506,014 46,159,401 78,209,392 668,092 27,113,468 20,658,809 70,449,997 113,968 6,330,710 414,743,525 $ Customer Class Residential (R) Small General (G 1 ) Small General (G 3 ) Small Govt. (S 1 ) Small Govt. (S 3 ) General Service (J 1 ) General Service (J 3 ) Large Power (P) Small Govt. (K 1 ) Small Govt. (K 3 ) Large Govt. (L) Navy (N) IPP (I) Condos Total Cost of Service 148,939,030 $ 11,339,693 12,457,385 1,643,672 2,066,786 2,359,078 41,580,441 71,804,117 22,386,975 17,503,306 70,040,361 5,777,881 414,743,525 $ % Change 18.0% -9.2% -7.7% -10.0% -12.3% -5.9% -9.9% -8.2% -12.5% -17.4% -15.3% -0.6% 71.0% -8.7% 0.0% 959,180 866,744 584,731 347,143 320,950 194,910 48,891 65,077 17

18. Customer Charges (Base Charges) Cost Component Recovery Meter operation, maintenance and replacement costs Meter reading costs or AMR installation costs Billing Costs Customer Service Department Service into customers facilities Portion of Distribution System based on minimum system Recovers cost for connection to Grid at zero kWh consumption 18

19. Customer Charges Cost Component Recovery Increasing customer charges helps stabilize revenue recovery for utility Reduces subsidy between year-round customers and seasonal customers Will impact low use customers Low income compared with low use Low income customers are not always low use customers 19

20. Monthly Charge COS Customer Charge $ 32.36 $ 15.00 32.36 14.16 63.28 14.16 32.36 14.16 63.28 14.16 157.18 38.33 157.64 38.33 310.62 59.25 157.18 38.33 157.64 38.33 310.62 59.25 714.70 610.56 145.64 59.25 214.54 45.61 Current Average Customer Charge Customer Class Residential (R) Small General (G 1 ) Small General (G 3 ) Small Govt. (S 1 ) Small Govt. (S 3 ) General Service (J 1 ) General Service (J 3 ) Large Power (P) Small Govt. (K 1 ) Small Govt. (K 3 ) Large Govt. (L) Navy (N) IPP (I) Condos 20

21. Distribution Charges Monthly Customer Charge $ Customer Class Distribution Rate $ Billing Basis kWh kWh kWh kWh kWh kWh kWh kW kW kW kW kW kW kW kW kW Residential (R) Small General (G 1 ) Small General (G 3 ) Small Govt. (S 1 ) Small Govt. (S 3 ) Private Outdoor Lighting (H) Public Street Lights (F) General Service (J 1 ) General Service (J 3 ) Large Power (P) Small Govt. (K 1 ) Small Govt. (K 3 ) Large Govt. (L) Navy (N) IPP (I) Condos 32.36 32.36 63.28 32.36 63.28 39.61 237.65 157.18 157.64 310.62 157.18 157.64 310.62 714.70 145.64 214.54 0.0354 0.0320 0.0270 0.0348 0.0290 0.0274 0.2586 8.62 8.40 10.08 8.99 8.96 10.65 8.36 9.79 12.00 21

22. Power Supply Charges Customer Class Demand 0.0653 $ 0.0503 0.0477 0.0575 0.0485 0.0016 0.0016 Billing Basis kWh kWh kWh kWh kWh kWh kWh KW KW KW KW KW KW KW KW KW Energy Billing Basis kWh kWh kWh kWh kWh kWh kWh kWh kWh kWh kWh kWh kWh kWh kWh kWh Residential (R) Small General (G 1 ) Small General (G 3 ) Small Govt. (S 1 ) Small Govt. (S 3 ) Private Outdoor Lighting (H) Public Street Lights (F) General Service (J 1 ) General Service (J 3 ) Large Power (P) Small Govt. (K 1 ) Small Govt. (K 3 ) Large Govt. (L) Navy (N) IPP (I) Condos $ 0.1626 0.1626 0.1626 0.1626 0.1626 0.1626 0.1626 0.1626 0.1626 0.1626 0.1626 0.1626 0.1626 0.1552 0.1552 0.1626 18.19 16.61 22.58 11.18 16.91 16.64 28.85 8.55 25.34 22

23. Cost of Service Charges COS Customer Charge $ Customer Class Demand $ Energy Residential (R) Small General (G 1 ) Small General (G 3 ) Small Govt. (S 1 ) Small Govt. (S 3 ) Private Outdoor Lighting (H) Public Street Lights (F) General Service (J 1 ) General Service (J 3 ) Large Power (P) Small Govt. (K 1 ) Small Govt. (K 3 ) Large Govt. (L) Navy (N) IPP (I) Condos 32.36 32.36 63.28 32.36 63.28 39.61 237.65 157.18 157.64 310.62 157.18 157.64 310.62 714.70 145.64 214.54 - - - - - - - $ 0.2633 0.2448 0.2372 0.2548 0.2401 0.1915 0.4228 0.1626 0.1626 0.1626 0.1626 0.1626 0.1626 0.1552 0.1552 0.1626 26.81 25.01 32.66 20.17 25.88 27.29 37.21 18.34 37.34 23

24. Load Research Data Load Factors for NCP Winter 69% 64% 75% 70% 76% 45% 45% 46% 45% 60% 29% 48% 49% 85% 8% 65% System Coincidence Factors Winter 95% 69% 79% 87% 82% 0% 0% 85% 77% 88% 58% 76% 62% 89% 0% 99% Customer Class Type Residential (R) Small General (G 1 ) Small General (G 3 ) Small Govt. (S 1 ) Small Govt. (S 3 ) Private Outdoor Lighting (H) Public Street Lights (F) General Service (J 1 ) General Service (J 3 ) Large Power (P) Small Govt. (K 1 ) Small Govt. (K 3 ) Large Govt. (L) Navy (N) IPP (I) Condos Summer Inter-2 Inter-4 Summer Inter-2 Inter-4 64% 61% 73% 62% 71% 45% 45% 50% 47% 62% 29% 50% 50% 86% 3% 66% 63% 61% 73% 64% 74% 45% 45% 47% 46% 63% 32% 52% 52% 83% 7% 56% 70% 66% 76% 72% 77% 45% 45% 47% 47% 61% 31% 52% 50% 85% 17% 67% 100% 70% 76% 85% 78% 0% 0% 87% 77% 86% 70% 81% 66% 92% 0% 97% 95% 69% 75% 86% 85% 0% 0% 86% 75% 88% 75% 81% 66% 88% 0% 98% 99% 72% 77% 86% 76% 0% 0% 88% 79% 88% 55% 77% 62% 90% 0% 95% 24

25. Condo/Apartments Current billed in three rate classes: Option: Movement to Cost of Service Based Rates would lower the charges by 8.7% and reduce GPA s revenue recovery by $553,000 25

26. Revenue Recovery Options: Increase all rate classes (Except Navy) by 0.4% Residential Impact $0.35/Month Apply increase only to residential class: Residential Impact $1.05/Month Postpone adjustment until 2023: Base rate adjustment of 8.4% is anticipated Fuel costs are projected to decline 13.1% Anticipated overall residential rate reduction of 8.1% 26

27. Questions 27