Assuring Cost Recovery and Customer Affordability

Claudia J. Earls, Chief Counsel, Northern Indiana Public Service Company

NATIONAL ASSOCIATION OF STATE UTILITY CONSUMER ADVOCATES

NOVEMBER 10, 2015

Customer Affordability

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Regulatory Compact

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Regulatory Compact & Public Interest

Utility Benefits

• Cost of service pricing

• Regulated return

• Timely cost recovery

Customer Benefits

• Safe & Reliable Service

• Just & Reasonable Rates

• Adequate Resources deployed

• Transparent process with Adequate oversight

Transparency in Electric Rates

• In general, residential customers see a customer charge and an energy charge.

• They don’t understand that the energy charge recovers both fixed and variable costs.

• They believe that if their consumption decreases, their utility’s costs should also decrease in a linear fashion.

• That assumption is false but is caused by the method by which electric rates are established.

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Example of Typical Bill

The following chart illustrates a breakdown of a typical NIPSCO residential customer

Unit Rate Charge % of Bill

Customer Charge

1 $11.00 $11.00 12.1

Energy 688 kwh $0.033554 $23.09 25.3

Gross Margin 688 Kwh $0.069107 $47.55 52.1

Incremental Environmental Charge

688 kwh $0.005679 $3.91 4.3

Misc. Charges 688 kwh $0.00818 $5.63 6.2

$91.18 100.0

Customer Charge

Energy

Gas margin

Incremental Environmental Charge

Misc. Charges

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Breakdown of Fixed and Variable Costs

fixed Costs vs. variable Costs

Fixed Cost Recovery

Customer Charge $11.00

Gross Margins $47.55

Incremental Environmental Charge

$3.91

Misc. Charges $5.63

$68.09

Fixed Costs 75%

Variable

Energy $23.09

$23.90

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Residential Customer Usage Distribution

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25100

200300

400500

600700

800900

10001100

12001300

14001500

16001700

18001900

20002100

22002300

24002500

26002700

28002900

30000%

2%

4%

6%

8%

10%

12%

14%

16%

18%

20%

$0

$0

$0

$0

$0

$0

$0

$0

$0

$0

$0

% of Customers % of Low IncomekWh/month

Residential Customers Average Monthly Usage 679 kWh≤ 679 kWh = 178,913 customers (54%)≥ 680 kWh = 152,151 customers (46%)

Low Income Customers Average Monthly Usage 726 kWh≤ 726 kWh = 9,202 customers

≤ 679 kWh = 8,505 customers (56%)≥ 680 kWh = 6,706 customers (44%)

TRACKERS DO NOT CAUSE COST INCREASESINCREASING COSTS CAUSE RATE INCREASES

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Examples of Costs That Have Increased• Labor Costs - Predominantly Union work force -

contracts contain escalation clause• Pension costs - still offer defined benefits

pension plans - as interest rates remain low and return on equities remain volatile - pensions must still be funded

• Environmental compliance - NIPSCO has invested $800 million in environmental scrubber projects - rates must provide a return of and on these investments and O&M expenses to operate and fuel for the parasitic load

Customer Affordability

As we look at the breakdown of costs – what would we have the utility not

perform:

• Procure fuel

• Maintain generation, transmission and distribution assets

• Ensure environmental compliance

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Pros and Cons of Frequent Rate Cases

Pros•Frequent rate cases allow for the re-setting of Return on equity and cost of service allocation.•Allow for review of all of utility’s expenses and sources of revenues

Cons•Costly and time consuming •Utility’s customers pay the cost incurred by the utility for preparation and litigation of a rate case as well as any representative that they chose to retain to protect their interests

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One Alternative: Formulaic Rates

• FERC has used Formulaic Rates for Decades• A few states have begun to experiment • You have annual updates to rate base, expenses

and volumes – recognizing any cost savings from any reduction in volumes.

• Projected expenses are reconciled in a subsequent period

• Issues such as ROE and cost allocation are reserved for rate cases

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Questions?

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NIPSCO Chief Counsel

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EMPLOYMENT•Claudia Earls joined NiSource in June of 2010 as Assistant General Counsel in its Indianapolis office. She currently serves as Chief Counsel for Northern Indiana Public Service Company. She manages complex, high risk matters, working with clients to develop strategies to effectuate business plan goals and to reduce potential areas of risk.•Prior to working for NiSource she was a member of the Energy, Telecommunications and Utilities Department for Barnes & Thornburg LLP, Indianapolis, where her concentration was on the energy industry.•Claudia is a former administrative law judge with the Indiana Utility Regulatory Commission (“IURC”). She presided over cases involving ratemaking, financing, mergers and acquisitions, the Telecommunications Act of 1996, fuel and gas cost adjustments, inter-connection agreements, and the appointment of receivers for troubled utilities. She is the former chair of the National Association of Regulatory Utility Commission’s Administrative Law Judge Section. She also is the former editor of Indiana Utility Reports, a weekly newsletter, which reports on the orders issued by the IURC.

PRESENTATIONS AND PROGRAMS•Rate Case 101 – Utility Law Section, Indiana State Bar Association, 2010•Pipeline Safety and Underground Facilities, National Conference of Regulatory Attorneys, 2012•Graduate Harvard Executive Program on Negotiation, 2012•Recovery of Investments in Infrastructure, Southern Gas Association, 2014

EDUCATION•J.D., Indiana University of Law•M.B.A. and B.A. in Economics, Indiana University

MEMBERSHIPS/LICENSES •Former President, Utility Law Section of the Indiana State Bar Association

Based in Indianapolis