EECS4460.38.15.191.pptx
Power System Management
EECS 4460/5460-901
Lecture #3
Utility Business Structures and Economics
1
Financial Basics…
Owning stuff
Owing money
Making money
Measuring profitability
Rewarding owners
2
Equity is an ownership interest in property or a company
Equity is the difference between the value of the assets and the amount of liabilities owed on the assets
For a publicly-traded company, equity is the capital contributed by the owners…in the form of shares (vs. “private equity”). Owners are called “shareholders”.
Share price is the price of one share of stock.
Equity
3
Debt is the obligation to pay money under an agreement.
Debt Rating = evaluation of relative safety of borrowing
S&P Moody’s Fitch
AAA...AA...BBB+...B...C...D (default)
Debt Ratio = Total Debt / Total Assets
...Measure of “Leverage”
Debt
4
“Gross Income” is the total income (revenues) of a company
Net Income = Gross Income – All Expenses
Also called “earnings” or “profits”
Expenses include costs of doing business, taxes, interest, depreciation : both cash and non-cash items
Net Income
5
EPS = Net Income / Shares Outstanding
Earnings Per Share
The Company’s Profits allocated to each share of stock
“Shares Outstanding” is the weighted average of the total number of common stock shares owned over the reporting period.
You may see “diluted shares,” which is the total number of shares outstanding plus any warrants or guarantees that could be converted to shares, for example: stock options or restricted shares for executive compensation
6
A Dividend is the portion of the company’s earnings distributed to shareholders
Typically paid out quarterly
“Dividend Payout Ratio”:
Dividends Paid / Net Income
“Dividend Yield”:
Dividend Paid per share/ Share price
Dividends
7
“Earnings Before Interest and Taxes
EBIT = Revenue – Operating Costs
“EBIT”
“EBITDA”
“Earnings Before Interest, Taxes, Depreciation and Amortization
…Basic Measure of Profitability
8
Structural Overview (2016 Data) REPEAT
| IOU’s | Public Power* | Co-Op’s | Total | |
| Organizations (no.) | 200 | 2000 | 900 | 3100 |
| Assets ($B) | $1025 | $280 | $169 | $1474 |
| Total Revenue ($B) | $284 | $60 | $45 | $389 |
| Customers (million) | 107 | 22 | 19 | 148 |
| Sales (B Kwhr) | 2700 | 574 | 432 | 3706 |
| Market Share (%) | 73 | 15 | 12 | 100 |
| Distribution Miles (%) | 50 | 7 | 42 | 100 |
| Density (cust/mi) | 34 | 48 | 7.4 | - |
* Excluding Federal Agencies
9
State Governments have jurisdiction over establishing electric utility prices (“rates”)
Began in 1907 with NY and WI…43 states by 1914
Typically a “Public Utilities Commission”
Often appointed by the Governor
Commission has a full-time staff
Staff typically long –service employees
Ohio: Five Commissioners, Five Year Terms, Senate confirms
Capital Intensive Business
Viewed as most efficient approach:
“ Spend it and try to get it back in rates”
“Because it’s a Natural Monopoly”
Utility Regulation Fundamentals
10
Franchised service territory
Obligation to serve
Reliability “regulated”
Capacity, Transmission, Distribution
Profits set by state commissions
No “customer choice”
The “Natural Monopoly”
11
For most states, Electric Certified Territories (ECTs) are geographic regions where the distribution utility has the obligation and exclusive right to provide electricity
Called “service territory”
Ohio (and other states) have laws that require the distribution companies to be the “Provider of Last Resort” (POLR) if other suppliers fail.
There are “overlap areas” and service can be reallocated
“Obligation to Serve”
12
Ohio Utility Territories
Established by Law
13
Load Forecast (“Sales”)
Projection of customer requirements
Rate Base
Investments made to serve the customers
Operating Costs
Costs of operating and maintaining the system
Cost of Capital
Cost of Debt
Cost of Equity
Over a “Test Year” or agreed period
Elements of a “Rate Case” A Process for Establishing Utility Prices
14
Concept:
Establish agreed upon total (kwhr )sales for the test year
Methods:
Traditionally GDP, moving away from this in recent years
Regional Growth, Local Economics
Specific customers
Impact of energy efficiency programs
Weather normalization
Growth by sector and customer classes
Ohio: Long Term Energy Forecast
Load Forecast (Sales)
15
Concept:
Investment made to provide service to customers
Methods:
Net Original Cost – cost minus depreciation
Fair Value – cost adjusted to reflect today’s value
Average Rate Base – investments averaged over “test period”
End of Period Rate Base – investments at end of test period
“Rate Base”
16
Adjustments:
“Used and Useful” Test”
CWIP (Construction work in Progress)
Prudency of decisions
Other Disallowances
“Rate Base”
Also :
“AFUDC” (Allowance for Funds Used during Construction) is a credit to INCOME
17
Concept:
Recover through rates the costs of doing business
Methods:
Operation and Maintenance at facilities and in the field
Customer Service: Billing, Metering, Vehicles, Staff
Office Expenses: Staff and other costs
Taxes – may be separately identified on bill
Concept of “Riders” vs. Base Rates – Fuel, Storms
Operating Costs
18
Concept:
Recover through rates the costs of obtaining money
Cost of Debt – Borrowing costs, including interest
Cost of Equity – Cost of issuing shares
Cost of Capital
The dollar
amount of equity
x
The assumed
Return on Equity
19
Revenue Requirements =
Operating Costs + Rate Base (x Rate of Return)
Rate of Return = Cost of Debt + Cost of Equity
Ratemaking Basics
Rates
=
Revenue Requirements
Sales
20
