D R I V E R S A N D I S S U E S

NATURAL GAS EXPANSION

NASUCA, June 8, 2015Rebecca BachelderPresident, Blueflame Consulting, LLC

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NATURAL GAS EXPANSION DISCUSSION

• Fuel switching to natural gas is increasing due to price and environmental benefits

• There are market pressures to expand access to natural gas for consumers where gas is not currently available due to price differentials between gas and alternate fuels

• Legislative and/or Regulatory Policy needs to define who will pay

• Ratemaking modifications need to be made to accommodate policy

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NATURAL GAS RESERVES HAVE BECOME PLENTIFUL

1.Marcellus (PA, WV)

2.Barnett (TX)

3.Fayetteville (AR)

4.San Juan Basin (CO, NM)

5.Haynesville (LA)

As of 2013: 354 Tcf proved reserves

Source: EIA

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NATURAL GAS HOLDS A DISTINCT PRICE ADVANTAGE OVER ALTERNATE FUELS

1999 October

2000 May

2000 December

2001 July

2002 February

2002 September

2003 April

2003 November

2004 June

2005 January

2005 August

2006 March

2006 October

2007 May

2007 December

2008 July

2009 February

2009 September

2010 April

2010 November

2011 June

2012 January

2012 August

2013 March

2013 October

2014 May

2014 December

$0.00

$2.00

$4.00

$6.00

$8.00

$10.00

$12.00

$14.00

$16.00

$18.00

Cost of Fuels to End Users in Real (1982-1984) Dollars

$ per MMBtu

Cost of Residen-tial Heating Oil

Cost of Residen-tial Natural Gas

Cost of Residen-tial Electricity

Source: EIA

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NATURAL GAS ACCESS TO RESIDENTIAL CONSUMERS

Total Homes

Primary Homes w/

Natural Gas

% Homes w/ Natural

GasHomes w/ Fuel Oil

% Homes w/ Fuel

Oil

Homes heating

w/ Electricity

%Homes heating

w/ Electricity

Homes Heating

w/ Propane

Homes w/ Propane

Total U.S.1 (millions)   113.6 69.2 60.9% 7.3 6.4% 58.0 51.1% 8.0 7.0%Total Northeast   20.8 13.8 66.3% 6.0 28.8% 6.3 30.3% 1.1 5.3%

CT, ME, NH, RI, VT   3.0 1.1 36.7% 1.7 56.7% 0.9 30.0% 0.2 6.7%PA   4.9 2.3 46.9% 1.0 20.4% 2.6 53.1% 0.6 12.2%

Total Midwest   25.9 19.4 74.9% 0.5 1.9% 10.8 41.7% 2.5 9.7%MO   2.3 1.3 56.5%   N/A 1.4 60.9% 0.3 N/A

Total South   42.1 17.7 42.0% 0.6 1.4% 29.7 70.5% 3.3 7.8%FL   7.0 1.0 14.3%   N/A 5.8 82.9% 0.2 2.9%

NC, SC   5.4 1.8 33.3%   N/A 4.1 75.9% 0.7 13.0%AL, KY, MS, TN   7.0 2.8 40.0%   N/A 5.0 71.4% 1.0 14.3%

DC, DE, MD, VA, WV   6.4 2.9 45.3% 0.5 7.8% 4.6 71.9% 0.6 9.4%AR, LA, OK, GA, TX   16.2 9.1 56.2%   N/A 10.2 63.0% 0.6 3.7%

Total West   24.8 18.3 73.8% 0.2 0.8% 11.1 44.8% 1.1 4.4%AZ   2.3 1.2 52.2%   N/A 1.4 60.9%   N/A

AK, HI, OR, WA   4.7 1.9 40.4% 0.1 2.1% 2.9 61.7% 0.1 2.1%Total Less Than National Avg 59.2 25.4 42.9% 3.3 5.6% 38.9 65.7% 4.3 7.3% 1Total U.S. includes all primary occupied housing units in the 50 States and the District of Columbia. Vacant housing units, seasonal units, second homes, military housing, and group quarters are excluded. Some homes reported more than one fuel source for heating.

Only 61 Percent of homes in the U.S. have access to Natural Gas

Source: EIA

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BALANCING COSTS AND BENEFITS

• What are the costs and benefits of line extensions from perspectives of: • Utility• Existing Customers• New Customers• Local Economy• Environment

• Who will be funding the expansion:• Shareholders• Existing Customers• New Customers• State or Local Governments (Tax Payers)

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TRADITIONAL APPROACH TO NEW CUSTOMER ADDITIONS

• New Customers pay entire cost of connection

- Or -

• Use an economic analysis to determine new customer contribution to construction costs• Utilize IRR or NPV analysis• Assume number of years to allow for return• Timing and level of revenues• Costs• New customers that fail the hurdle rate test must pay a

Contribution in Aid of Construction, CIAC

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COSTS TO INCLUDE TO EVALUATE NEW CUSTOMERS

• Capital costs of the main and service• Labor & Materials• Construction Overheads• Carrying charges

• Incremental or Long Run Marginal Costs• Increased Property Taxes• Billing and Payment Costs• Incremental Operations & Maintenance Expense• Incremental Administrative and General Expense• Working Capital• Depreciation

• Taxes

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REVENUES HAVE BECOME MORE COMPLICATED

• Unbundled Base Rates• LDC Distribution Costs• Return on Rate Base

Rate Trackers Collect Costs Dollar for Dollar• Cast Iron & Bare Steel Pipe Replacement Programs• Post Retirement Benefits• Bad Debt Cost Recovery• On-System Production & Storage

Gas Costs• Pipeline Demand Charges• Delivered Gas

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WHAT REVENUES SHOULD BE INCLUDED IN THE NEW CUSTOMER EVALUATION ?

Gross Margin Revenues• Base Revenues• Tracker Revenues for costs that the utility

would normally include in Cost of Service• Pension and PBOPS• GSEP – System Replacement Costs• Bad Debt• On-System Production and Storage facilities• Other Distribution Service related costs that would

normally be included in Cost of Service

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BARRIERS TO CUSTOMER CONVERSION

Equipment Cost

Installation Cost

Line Extension

Policies

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MECHANISMS THAT COULD BE USED TO FACILITATE CUSTOMER ADDITIONS

• Economic Analysis• Include Tracker revenues that provide contributions

to costs paid by existing customers• Expand the period over which the upfront capital

costs are collected in revenues • Allow LDC to group new customer projects together• Allow LDC to estimate the number of conversions a

project will yield over a defined number of years

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NON-TRADITIONAL MECHANISMS

• On-Bill Financing of Capital Additions• Through Rate Mechanism• 3rd Party

• Utilize opportunistic funds to finance uneconomic expansion• Non-Firm Margins• Pipeline Refunds

• Existing customers contribute to new customer additions • New rate mechanism• Cost recovery rolled into base rates

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CAUTIONS

• Alternate Fuel price spreads may not hold vs. alternate fuel

• Larger LDC rate increases may make gas prices less competitive.• Increased capital replacement - GSEP• Increased labor costs due to more rapid replacement and

expansion activity for all LDCs and a diminishing labor pool.

• LDC’s ability to estimate Capital Costs accurately

• LDC’s ability to forecast timing of new additions• Additional regulatory oversight required

• More reporting• More review required by regulators

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QUESTIONS?

Thank you!

Rebecca Bachelder, PresidentBlueflame Consulting, LLCrbachelder@bflame.com

Office: 781-662-8584

Rebecca Bachelder, PresidentBlueflame Consulting, LLCrbachelder@bflame.comOffice: 781-662-8584