The Prime Group LLC
The Prime Group is committed to providing our electric, gas and water utility clients with leading-edge support in the areas of pricing, cost of service studies, customer profitability, financial forecasting, economic analysis, marketing, strategic planning, regulatory support and training that are essential for competitive survival and sustained success.
We have helped electric, gas and water utilities all over the United States and Canada achieve their financial and marketing objectives. Our utility rate consultants have testified before the Federal Energy Regulatory Commission (FERC) and numerous state regulatory commissions. We have submitted expert testimony regarding rate design, cost of service studies, revenue requirements, return on equity, depreciation studies, prudence investigations, territory disputes, affiliate transactions, market power studies, open access transmission tariffs, and reactive power services.
We offer personalized service. The Prime Group expert working on your project will have years of experience and will be a recognized expert in the industry. We will not turn your project over to a junior associate. Additionally, it is our policy to provide our clients with the software that we use to perform the studies. Providing the software to clients allows them to get maximum benefit out of the work product and gives them the ability to perform their own scenario analysis. It also makes it easier for clients to comply with the regulatory requirement in many states to provide softwate and analysis to intervenors.
The Prime Group takes great pride in being easy to work with while providing consulting support that is unsurpassed in the industry. We tailor our models to meet your needs rather than force your needs to meet the requirements of a standard, off the shelf model. We don’t try to be everything to everybody. We stick closely to what we are good at – performing cost of service studies, designing rates, preparing economic evaluations, performing depreciation studies, and addressing complex regulatory issues.
In Memoriam of Steve Seelye
It is with a heavy heart and great sorrow for the members of The Prime Group to report the passing of Steve Seelye on the morning of July 2nd after losing his fight with cancer. He was 66 years old. Steve was not only a colleague and co-worker, but he was also a long-time friend. Steve was one of the founding partners of the Prime Group, which was formed in 1996 alongside Marty Blake. Steve retired full-time from The Prime Group in July 2022 but continued to occasionally assist us with special projects. He was an integral part of the firm's regulated utility practice which saw him testify in front of numerous state and federal regulatory bodies. His curiosity, inquisitiveness, and desire to continuously learn about statistics, engineering, and finance, made him nationally renowned for his innovative approaches to utility ratemaking and regulatory strategy. Each of us here at the Prime Group worked with Steve for years and will miss him dearly.
Rate Design for Time-Based Rates Customer interest in closely managing energy consumption continues to grow. Technologies are emerging that enable customers to manage their usage in an automated fashion. Time-differentiated rates and various forms of Real Time Pricing ("RTP") allow customers to embrace these technologies and will advance the emergence of the "smart grid" in many areas. Additionally, many wholesale suppliers are migrating their rate structure towards TOU rates and RTP; utilities that purchase wholesale power under time-differentiated rates face significant exposure if their retail rate structure is not aligned with those time-based rates. Effective TOU and RTP rate design at both retail and wholesale levels will mitigate that financial exposure while offering customers the opportunity to manage their own energy consumption more closely and effectively. The Prime Group has assisted several utilities with the move to time-based rates and RTP rates. Please contact Larry Feltner at (502) 405-3304 to discuss how The Prime Group can provide assistance in developing time-based and RTP rate designs and performing costs benefit analysis of Smart Grid initiatives. |
Four Part Rate Designs Changing usage patterns by electric consumers can result in fixed costs being unfairly shifted to other customers. For example, the implementation of distributed generation technologies, such as solar panels, by residential customers will often reduce the amount of energy purchased by consumers but may or may not result in a corresponding reduction of consumer demand at the time of the utility's peak. For a utility with a significant amount of fixed costs recovered through an energy charge, the utility will realize a reduction in revenue without a corresponding reduction in costs, which can result in reductions in the utility's margins and a corresponding shift in cost recovery to other customers. Utilities have implemented a number of rate designs and rate mechanisms to address inter- and intra-class subsidies and associated margin erosion resulting from changing usage patterns of consumers. Strategies have included the implementation of decoupling mechanisms, straight fixed variable (SFV) rate designs, three-part rates consisting of a customer charge, energy charge and demand charge, and four-part rate designs. Four-part rate designs will typically consist of a customer charge, energy charge, a peak period or coincident peak (CP) demand charge, and a non-coincident peak (NCP) demand charge. With the emergence of advanced metering technologies, the implementation of four-part rates are now economically feasible. Perhaps more than any other rate design, four part rates more accurately reflect cost causation on a utility's system and thus can address the cost subsidies that are often created by distributed generation technologies. With four-part rate designs, variable costs will typically be recovered through an energy charge, fixed production and transmission costs recovered through a peak demand charge, and fixed distribution costs recovered through a customer charge and NCP demand charge. Therefore, with only short-run avoidable costs recovered through the energy charge, reduction in energy usage by consumers will result in consumers realizing the actual short-run marginal costs avoided from the implementation of distributed generation technologies. With production or purchased power demand costs recovered through a peak demand charge, consumers implementing distributed generation technologies will realize savings if their energy reductions occur during peak periods. The Prime Group has assisted many utilities in developing rate designs that address inter- and intra-class cost subsidies, including the development of four-part rate designs, decoupling mechanisms, and SFV rates. Please contact Jeff Wernert at (502) 409-4059 to discuss how The Prime Group can provide assistance with the implementation of four-part rate designs or other innovative ratemaking mechanisms.
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| Individual Customer Profitability The Prime Group has developed techniques for calculating the individual profitability of every customer that a utility serves, even customers who are not demand metered. Individual customer profitability analysis picks up where cost of service leaves off and allocates costs down to the individual customer level using the same cost of service principles that are widely accepted in the utility industry. Combined with the revenue received from each customer, it is possible to calculate the margin and the rate of return received from each customer. The results of this analysis have been surprising for many utilities. It is often assumed that if a class of customers has a given rate of return, say 8%, then all of the customers in the class are contributing equally and have the same 8% rate of return. Our analysis shows that nothing could be further from the truth. The rate of return on individual customers in residential classes frequently ranges from -10% on the low end to about 30% on the high end. For commercial and industrial customers the range is usually even wider, typically ranging from a low of 20% to a high of 50% or more. These differences in rates of return among customers within a class usually result from rates that do not accurately reflect cost causation. Thus, individual customer profitability data can be used to illustrate the impacts of rates that do not accurately reflect cost causation to decision makers, such as utility regulators, cooperative boards of directors and city councils. Until rate design is adjusted to better reflect cost causation, the individual customer profitability data also provides information that is useful in targeting a utility's marketing efforts. Marketing staffs of utilities need to focus on customers with high rates of return and work on customer retention efforts with these customers. They also need to focus on customers with negative rates of return and work on improving the profitability of these customers with negative margins. The customer profitability data can also be used to segment customer classes with respect to profitability and provide a solid, defensible basis for market segmentation. With advanced meter-reading equipment in place, The Prime Group’s profitability studies will provide extremely accurate assessments of individual customer profitability. Even without data obtained from advanced meter-reading equipment, our clients have found our profitability studies to be invaluable for demonstrating the need to move utility service rates in the direction of cost of service and for identifying the utility’s most profitable and least profitable customers. |
Line Extension Policies Does your utility fully recover the cost of adding a new customer? We have found that inadequate line extension policies harm utility financial performance, create pressure for rate increases, and result in new customers being subsidized by existing customers. Good line extension policies are a challenge because they require a balance between the interests of new customers and those of existing customers. If the credit allowed for a line extension to a new customer is too high, the new customer receives a subsidy that paid by existing customers. If the credit allowed for a line extension to a new customer is too low, it is the new customer who is paying more than his fair share of the utilities costs. A line extension policy can be stated as a flat dollar amount, stated in terms of feet of line that are provided for free by the utility or stated in terms of a multiple of net revenue that the utility expects to receive from the new customer. We have extensive experience in discussing the different approaches with decision makers and in helping them to select the approaches that make the most sense for their particular application. In developing line and facilities extension policies, it is important to balance the interests of new and existing customers an to ensure economic development is not deterred. Cost of Service Studies A cost of service study is an important ratemaking tool. It is generally recognized that a utility's rates should reflect the cost of providing service. A cost of service study helps to determine what it costs to provide service to a class of customers so that the utility can have assurance its rates are properly designed. The Prime Group provides unbundled cost of service studies for investor-owned utilities, generation and transmission cooperatives, distribution cooperatives, gas utilities, and water and sewer utilities. Please contact Larry Feltner at (502) 405-3304 to discuss the data requirements necessary for The Prime Group to prepare a cost of service study for your utility.
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| Net Metering Electric service provided by utilities is composed of three major elements: 1) generation, 2) transmission and 3) distribution facilities. Generation facilities generate electric energy from fuel. Transmission facilities transmit electric energy at high voltages from where it is generated to local distribution systems. Distribution facilities are composed of the distribution substations, poles, wires, transformers, service drops, and meters necessary to take electric energy from the transmission lines and deliver it to customers. When a customer purchases electric energy from a utility, it is receiving the use of all three types of facilities, and the cost of these facilities is reflected in the retail rate. When the customer sells excess generation to the utility, the customer can only sell and properly charge for generation, as the customer does not own transmission and distribution assets. Thus, a net metering arrangement that pays customers at full retail rates for the excess energy that they generate represents a significant subsidy. The Prime Group can provide assistance in developing net metering programs that ensure that this subsidy will not adversely impact the utility’s financial performance. |
Utility Rate Case Consulting Increased costs have made it necessary for electric, gas and water utilities to consider rate increases in order to protect their financial integrity. No one benefits from a financially weak utility. The Prime Group can assist utilities with these initiatives. The Prime Group has years of experience testifying before regulatory commissions in support of proposed rate structures, cost of service studies, revenue requirements, cost of capital, lead/lag studies and depreciation studies. In addition to providing expert testimony in rate case proceedings, The Prime Group's team of accountants, economists, and engineers can also assist your organization in preparing a rate case management plan and serve as a technical resource to your legal staff. Please contact Larry Feltner at (502) 405-3304 to discuss how The Prime Group can assist your organization in preparing for a rate case or other regulatory filing, developing pre-filed testimony, providing technical assistance in developing responses to data requests, and providing technical assistance to your attorneys |
