analysis of demand charge and other natural gas pricing issues

Analysis of Demand Chargeand

Other Natural Gas Pricing Issues

Valerie Wood2386 Dahlk CircleVerona, WI 53593

Tel: (608) 848-6255E-mail: vkwood@energysolutionsinc.com

Demand Charge Proposed Structure

– Daily fixed facilities charge– Daily demand rate (NEW)– Volumetric rate

Impacts– Class 6 (Fg-6, Ig-6, Tf-6) 100,000 dth to 799,999 dth

annually– Class 7 (Fg-7, Ig-7, Tf-7) 800,000 dth to 999,999 dth

annually– Class 8 (Fg-8, Ig-8, Tf-8) 1,000,000 dth or more annually

Class Types– Fg - System supply firm gas supplies– Ig – System supply interruptible gas supplies– Tf - Transportation

Demand Charge Implementation

Maximum demand quantity (MDQ) Phase in starting 1/1/2008

– Month 1: MDQ based on peak day in Jan– Month 2: MDQ based on peak day for Jan-Feb– Month 3: MDQ based on peak day for Jan-Mar– …..– Month 12: MDQ based on peak day for Jan-Dec 2008

New rates effective 1/1/2009– MDQ based on peak day for Jan-Dec 2008

MDQ established annually thereafter based on the last 12 months of usage.

How the Demand Charge Impacts You

(a) (b) (c)

Month YearDays in Month

Peak Day in Month (in

therms)

Monthly Usage

(in therms)Jan 2007 31 5,580 135,990 Feb 2007 28 6,760 136,360 Mar 2007 31 5,250 103,250 Apr 2007 30 4,120 84,270 May 2007 31 2,480 58,290 Jun 2006 30 2,280 52,720 Jul 2006 31 2,080 53,110 Aug 2006 31 2,330 61,280 Sep 2006 30 3,170 66,710 Oct 2006 31 4,230 94,520 Nov 2006 30 5,180 110,190 Dec 2006 31 6,570 132,930

1,089,620

44%MDQ for next year 6,760

Load Factor

Usage History

How the Demand Charge Impacts You

MDQFixed

ChargesDemand Charge Distribution Costs Total

5,580 $2,077.00 $259.47 $5,113.22 $7,449.696,760 $1,876.00 $283.92 $5,127.14 $7,287.066,760 $2,077.00 $314.34 $3,882.20 $6,273.546,760 $2,010.00 $304.20 $3,168.55 $5,482.756,760 $2,077.00 $314.34 $2,191.70 $4,583.046,760 $2,010.00 $304.20 $1,982.27 $4,296.476,760 $2,077.00 $314.34 $1,996.94 $4,388.286,760 $2,077.00 $314.34 $2,304.13 $4,695.476,760 $2,010.00 $304.20 $2,508.30 $4,822.506,760 $2,077.00 $314.34 $3,553.95 $5,945.296,760 $2,010.00 $304.20 $4,143.14 $6,457.346,760 $2,077.00 $314.34 $4,998.17 $7,389.51

$24,455.00 $3,646.23 $40,969.71 $69,070.94

Cost per Therm $0.0634

Proposed 2008 Rates

How the Demand Charge Impacts You

Savings in 2008

Fixed Charges Distribution Costs Total Savings

$4,247.00 $5,167.62 $9,414.62 $1,964.93$3,836.00 $5,181.68 $9,017.68 $1,730.62$4,247.00 $3,923.50 $8,170.50 $1,896.96$4,110.00 $3,202.26 $7,312.26 $1,829.51$4,247.00 $2,215.02 $6,462.02 $1,878.98$4,110.00 $2,003.36 $6,113.36 $1,816.89$4,247.00 $2,018.18 $6,265.18 $1,876.90$4,247.00 $2,328.64 $6,575.64 $1,880.17$4,110.00 $2,534.98 $6,644.98 $1,822.48$4,247.00 $3,591.76 $7,838.76 $1,893.47$4,110.00 $4,187.22 $8,297.22 $1,839.88$4,247.00 $5,051.34 $9,298.34 $1,908.83

$50,005.00 $41,405.56 $91,410.56 $22,339.62

Cost per Therm $0.0839 $0.0205

Current Rates

Demand Quantity Forgiveness Waiver

Ability to waive the calculation of the demand quantity for a period of as long as 10 consecutive days effective annually starting on November 1.– Designed for infrequent, unusual, and short

duration load increases.– Customer must file request for waiver at least

10 days prior to the requested waiver date.– Granting a waiver is at the utility’s discretion.

Elimination of Meter Aggregation

Multiple meters are aggregated for billing.– Currently grand-fathered

Potential impacts to customer if eliminated– The sum of the meter volumes can put a customer

into a higher rate class. By separating the usage by individual meter, each meter will fall into its own rate class.

– Smaller usage meters may no longer find it beneficial to transport.

– The additional meter charge of $.12 per day will be eliminated and the customer will have to pay the applicable facilities charge for the rate class.

Elimination of Meter Aggregation

Same as the utility proposed in Docket 05-UR-102.– PSC indicated that they will consider

eliminating this practice in a future proceeding when there are fewer changes at work.

Customer impact– If you currently have meter aggregation

Impact: Increased costs (?)

– If you don’t have meter aggregationImpact: Benefit is built into rates as this subsidy is

eliminated.

Pulse Signal Device Tariff Allows customers and/or marketers to monitor

natural gas usage real-time using the existing telemeter.– Installation fee for pulse equipment

Existing telemeter: One-time fee of $400New telemeter: One-time fee of $1,650

– Ongoing maintenance fee$.10 per dayNo charges for service calls in the first 180 days of

installationAfter 180 days, customer is charged for all service calls

(diagnostic and corrective) Cannot use data to dispute bill Optional service

Annual Rate Audit

Each year, customer’s usage is evaluated to determine which rate class it falls within. – New language: We Energies reserves the right to

assign that meter to a rate class that it would have been assigned to had the customer actually consumed the gas in the annual rate audit period for which the company built sufficient facilities to serve.

Reclassification from Class 5 to Class 6– If no prior communication from utility of this change,

the reclassification to Class 6 is waived for 6 months.

Natural Gas Price Update

Why are prices so much higher this year than in 2006?

Natural Gas Price Update:CSU Hurricane Forecasts

05/31/05 5/31/06 5/31/07 Avg.

Named Tropical Storms 15 17 17 9.6

Hurricanes 8 9 9 5.9

Intense Hurricanes 4 5 5 2.3

NOTE: 2006 & 2007 aren’t typos. The forecasts were identical.

2007 NOTES: Subtropical storm Andrea was not classified as a tropical storm by the National Hurricane Center, so it won’t be counted as a “named” tropical storm. Tropical Storm Barry will

count as the first storm of the 2007 season.

Natural Gas Price Update CSU Hurricane Forecasts

Probabilities for at least one major (category 3-4-5) hurricane landfall on each of the coastal areas:

Entire U.S. Coastline– 5/31/06 (82%) vs. 5/31/07 (74%)

U.S. East Coast incl. Peninsula Florida– 5/31/06 (69%) vs. 5/31/07 (50%)

Gulf Coast from the Florida Panhandle westward to Brownsville– 5/31/06 (38%) vs. 5/31/07 (30%)

Natural Gas Price Drivers: Storage Inventories

First week of June 2005 1,890 BcfFirst week of June 2006 2,320 BcfFirst week of June 2007 2,163 Bcf First week of June 5-year avg. 1,890 Bcf

10/31/07 Projections 3,400-3,500 Bcf

June: 90-Day Weather Forecasts

Jul 06 – Sep 06

Jul 07 – Aug 07

June: Winter Forecasts

Dec 06 – Feb 07

Dec 06 – Feb 07

NYMEX Price Comparison as of June 1

$6.000

$6.500

$7.000

$7.500

$8.000

$8.500

$9.000

$9.500

$10.000

$10.500

$11.000

Jul

Aug

Sep Oct

Nov

Dec Jan

Feb

Mar

Apr

May

Jun

Jul

Aug

Sep Oct

Nov

Dec Jan

Feb

Mar

Apr

May

Jun

$ / M

MB

tu

6/1/2005

6/1/2006

7/1/2007

6/1/06 Futures Versus Actual NYMEX Expiration

$3.000

$4.000

$5.000

$6.000

$7.000

$8.000

$9.000

$10.000

$11.000

Jul-06 Aug-06 Sep-06 Oct-06 Nov-06 Dec-06 Jan-07 Feb-07 Mar-07 Apr-07 May-07 Jun-07

$ / M

MB

tu

Prices as of 6/1/06

Actual Expirations

Futures Prices as of6/11/07

NYMEX Prices as of 6/12/07

One Change from Last Year:Water Temperatures

El Niño Conditions: Above-normal sea surface temperatures in the eastern Atlantic. These conditions tend to decrease Atlantic hurricane activity by increasing vertical wind shear across the area where Atlantic tropical cyclones develop.– CSU forecast indicated that they did not expect El Niño

conditions to develop in 2006. La Niña Conditions: Below-normal sea surface

temperatures in the eastern Atlantic. These conditions tend to facilitate tropical storm formation because of reduced vertical wind shear and weaker trade winds.– CSU forecasts indicate a gradual cooling and they expect La

Niña conditions to form by summer/fall.

What the Future Holds Hedge funds (speculators) are protecting the $7.50 level.

The question is whether or not they will able to continue to do that without support from Mother Nature.

If weather is moderate, expect a gradual decline into July that will come to an end with the first hurricane activity.

Hurricane-related rallies aren’t expected to be sustainable given the current supply situation.– Record level LNG imports– Gulf facilities have been reinforced– Exception – several hits like 2005

Winter premiums are likely to remain in tact until closer to November 2007.

One Suggestion. Evaluate basis for winter (when commodity prices are the highest, it tends to be a good time to lock in basis).

Thank You !!

If you would like a copy of our Excel spreadsheet to compare your costs under the proposed demand charge, we’ll be happy to e-mail you

a copy of the spreadsheet.

Just give us a call or send us an e-mail with your request.

Once you receive the spreadsheet, just input your usage data and the benefit or loss will automatically calculate for both 2008 and 2009.

vkwood@energysolutionsinc.com(608) 848-6255