Question

A regulated utility is going to add generating capacity to their system and file a rate case to recover the costs. The utility has the following initial conditions, prior to the rate case: • Rate Base has been established at $4.5Billion. Of this, 51% is debt at 5% interest and 49% is equity with a return of 11% • Sales are 9.8MMWhr • Operating Costs, excluding fuel are $800M. Fuel is handled as a separate rider. The utility proposes to add a combined cycle gas turbine with the following characteristics: • 702Mwe F-Class System; Heat Rate @ 6600 Btu/kw; CO2 @ 117lb/MMBtu • Overnight capital cost of $687M • Gas Pipeline overnight capital cost of $30M • Fixed O&M cost of $11/kw-yr • Variable O&M cost of $3.50/MWhr • Fuel costs are $25/MWhr • The assumed capacity factor is 87% • All added capital and operating costs are proposed to be recovered in rates Assume all dollars are in the test year; no inflation adjustment. Using the simplified formula for ratemaking from the lectures to answer the following: 1. For the initial condition, what is the average customer rate in cents/KWhr? 2. What is the new rate when the gas plant is added, assuming the same capital structure and no increase in sales? 3. What is the rate if there is no separate fuel rider, i.e. fuel is considered an operating cost? 4. If the utility decided to enter into a Purchase Power Agreement for the same output @$40/MWhr, would the customer be better off or not? Assume the purchase power agreement would be considered an operating cost.

How should i Calculate number 4?

Answer 1