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Common rate case terminology
FAQ
Customer comment meetings
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Common rate case terminology

Rate case: A rate case is an application to change rates filed by the utility. Black Hills Energy has filed a rate case request with the Iowa Utilities Board. The application includes proposed rate schedules (“tariffs”) and information and documentation supporting the need for the proposed rates.

Interim rates: Interim rates are the amount of the increase that goes into effect prior to final approval by state regulators. In Iowa, state law allows for interim rates since the rate case process, as set by statute, can extend over several months or longer from the time of filing to settlement of the case. If the rate request process and final determination by the IUB results in customer rates that are lower than the interim rates being charged by Black Hills Energy, any amount that has been collected from customers that’s more than the approved final rates is refunded, with interest, to customers.

Base rate and customer charge: The base rate and customer charge are included in this rate case. The monthly customer charge is a flat fee for natural gas service that stays the same each month. The base rate is a fixed per-therm rate for the natural gas consumed by customers that causes the monthly bill to go up or down depending on usage. Together, the base rate and customer charge typically account for 35 percent of the total residential bill. These rates cannot change without approval of the Iowa Utilities Board. This portion of the bill covers the company’s operating costs, system maintenance and improvements, and 24-hour customer service support.

Natural gas commodity: The cost for the natural gas commodity is not included in this rate case. The natural gas commodity typically accounts for 65 percent of the total residential bill. We do not earn a profit on the natural gas commodity and therefore it is not part of this rate case. It is a pass-through cost we pay to our natural gas suppliers. This portion of the bill appears as “PGA” on the natural gas bill.

FAQ

What is the impact to customers?
Why will the average residential customers' bill go up more than the average commercial customers' bill?
Will this rate increase affect customers on the Budget Billing level payment plan?
When was Black Hills Energy's last rate increase in Iowa?
Why is another rate increase needed so soon?
What is Black Hills Energy doing to control costs?
How does Black Hills Energy compare to other natural gas utilities?
What is Black Hills Energy doing to keep the cost of natural gas low?
Will this requested increase be all profit to Black Hills?
Are profits guaranteed for Black Hills Energy if the requested increase is approved?

1. What is the impact to customers?

   Changes in customer rates will occur in two phases; interim rates and final rates. The actual change in a customer’s bill will vary based on how much natural gas is used and the price of natural gas, which is not part of this rate case.

   Interim rates
   As allowed by Iowa law, the 1.6 percent interim increase will go into effect June 18, 2010, while the rate case is being reviewed. Once in effect, the average monthly change for the general service class, which includes residential1 and commercial² customers, will be $1.46. The average monthly bill of small volume³ customers will increase $51.27. If final rates approved by the IUB are lower than interim rates, customers will receive a refund with interest.

   Proposed rates
   The IUB has 10 months to review and analyze Black Hills Energy’s request. If approved, final rates would become effective around April 9, 2011. The average monthly bill would increase by approximately $2.26 for residential¹ customers if the proposed rates are approved, and $3.65 for commercial² customers. The average small volume³ and large volume⁴ customers would experience $64.93 and $69.04 monthly increases, respectively. The actual change in a customer’s bill will vary based on how much natural gas is used and the price of natural gas, which is not part of this rate case.

2. Why will the average residential customers' bill go up more than the average commercial customers' bill?
   

   Rates are based on the cost to serve the different customer classes - residential and non-residential. Residential customers make up approximately 89 percent of our customer base in Iowa. Therefore, the majority of the investments we've made in our Iowa system have gone towards maintaining and improving the portions of our system that serves residential customers.

3. Will this rate increase affect customers on the Budget Billing level payment plan?
   

   No. Our Budget Billing level payment plan is a payment option that takes seasonal peaks out of the customer natural gas bill for a more even monthly payment. The customer monthly balance is calculated based on the average of the previous 12 months' actual bills - this only includes the natural gas commodity portion of the bill, which is not controlled by Black Hills Energy and therefore is not included in this rate case.

4. When was Black Hills Energy's last rate increase in Iowa?
   

   Black Hills Energy's last rate increase of 5.8 percent was filed in June 2008, and became effective July 27, 2009.

5. Why is another rate increase needed so soon?
   

   $17.2 million worth of capital has been invested in the utility's natural gas distribution systems in Iowa since December 2008, and these investments are not reflected in our current rates. Ongoing system investments are required to maintain a safe, reliable natural gas distribution system.

6. What is Black Hills Energy doing to control costs?

   The company's operating and maintenance costs have increased less than the rate of inflation since our last rate change request.
   
   We have efficiencies in place to keep our operating costs low. We keep administrative, operating and overhead costs low by creating efficiencies and achieving economies of scale through a centralized service model, including purchasing supplies and inventory management, customer service and utility work dispatch, delaying hiring and eliminating open positions, reducing travel expenses and implementing process improvements.
   
   Since our last rate increase request, we have implemented various process improvements, which include consolidating financial and human resource systems, and refining billing and payment processes.
   
   Reducing costs on such things as operations, maintenance and capital projects can produce savings in the short term. It's critical, though, to sustain existing facilities and invest in necessary new facilities to maintain long-term safe and reliable service for our customers. The primary reason for this filing now is to recover the investments and related operating costs critical to maintaining a safe, reliable system.

7. How does Black Hills Energy compare to other natural gas utilities?

   Black Hills Energy natural gas service is a good value. The most recent statistics provided in January 2010 by the American Gas Association show that Black Hills Energy’s Iowa operations are efficient, with most cost categories rated highly in the AGA survey (AGA ranked various costs on a per therm basis in order to allow comparison between natural gas utilities):

   • Firm sales as percent of total sales are significantly below average, indicating most small volume and large volume customers transport at a low margin
   • Operating revenue per mile of distribution main is lower than average
   • Total operating and maintenance costs per customer and per mile of main is lower than average
   • Net margin per customer (revenue less O&M) is below average
   • Our customers per employee ratio is above average, indicating efficiency

8. What is Black Hills Energy doing to keep the cost of natural gas low?

   The cost for the natural gas commodity typically accounts for 65 percent of the total residential bill. We do not earn a profit on the natural gas commodity and therefore it is not included in this rate case. It is a pass-through cost that we pay to our natural gas suppliers. We use a portfolio purchasing strategy (blend of several different purchases) to get the best natural gas price possible, and pass that price to customers without markup. Our purchasing strategy is designed to decrease volatility in price swings to benefit our customers. Our strategy typically has at least two of the three parts of the portfolio working favorably for customers in any market condition, which allows us to deliver more stable, competitively priced natural gas to our customers.

9. Will this requested increase be all profit to Black Hills?

   No. This request is to increase annual revenues by $4.7 million to reflect the $17.2 million of capital investment the company has made in the natural gas distribution systems.

10. Are profits guaranteed for Black Hills Energy if the requested increase is approved?
    

    No. Regulations only provide the utility an opportunity to earn the approved rate of return. In Iowa, Black Hills Energy is allowed by the Iowa Utilities Board the opportunity to make up to 10.1 percent return on equity, or an 8.9 percent return on capital. However, achieving the allowed return is uncertain because there are several external factors at play – such as weather, and declining use due to advanced weatherization techniques and high-efficiency equipment and appliances. These external factors often stunt Iowa natural gas operations from attaining its allowable rate of return. On average, over the last 10 years, Black Hills Energy in Iowa has had a 2.7 percent return on equity.

Customer comment meetings

The IUB encourages customers of Black Hills Energy to attend any in a series of public comment meetings scheduled regarding the request to increase natural gas rates. Customer comment meetings are the best opportunity to provide verbal comments directly to the Board and other parties in a rate case, and are one of the ways the IUB receives information on customer impacts and concerns.

Customer comment meetings currently scheduled across the state are:

• Newton: Tuesday, June 29, 2010, at 6:30 p.m. at DMACC Auditorium, 600 North 2nd Avenue, Newton, Iowa
• Dubuque: Wednesday, June 30, 2010, at 6:30 p.m. at the City Council Chambers, 2nd floor, Federal Building, 350 West 6th Street, Dubuque, Iowa
• Council Bluffs: Thursday, July 1, 2010, at 6:30 p.m. at the Public Library, 400 Willow Avenue, Council Bluffs, Iowa

¹ Based on an average residential customer using 789 therms annually
² Based on an average commercial/industrial customer using 3,569 therms annually
³Based on an average small volume sales customer using 53,043 therms annually
⁴Based on an average large volume sales customer using 731,815 therms annually

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