Q & A

1. Why is the company raising customer rates in Nebraska?
2. How much will customer bills increase?
3. Why will the typical residential customers' bill go up more than the typical commercial customers' bill?
4. What are the new rates, and how do they compare to current rates?
5. What is the customer charge?
6. Why is the proposed commercial customer charge higher than the residential customer charge?
7. Why aren't large-volume customers included in the rate increase?
8. What is the base / block rate?
9. What unit of measure is used to calculate natural gas rates?
10. Why is Black Hills Energy going from "flat rates" to "block rates?"
11. Will this rate increase affect Annual Price Option customers?
12. When will this rate increase be effective?
13. What are interim rates?
14. How do Black Hills Energy's rates compare with other natural gas companies?
15. What can I do to control my energy costs?
16. What can I do if I need help paying my utility bill?
17. When was Black Hills Energy's last rate increase in Nebraska?
18. If Black Hills Energy filed for a rate increase in November 2006 and implemented new, higher rates in February 2007 for Nebraska customers, why is another rate increase needed so soon?
19. What investments has Black Hills Energy made in the Nebraska natural gas systems?
20. What is Black Hills Energy doing to control costs?
21. What will Black Hills Energy do if the Nebraska Public Service Commission doesn't approve the full amount being requested? Will safety or reliability be compromised?
22. Who regulates natural gas rates in Nebraska?
23. What does the term "rate base" mean?
24. What is a "rate case?"
25. What are rate areas?
26. Will this requested increase be all profit to Black Hills?
27. Are profits guaranteed for Black Hills Energy if the requested increase is approved?
28. Will rates affect the franchises Black Hills Energy has with the communities it serves?
29. What happens to the franchise fee or occupation tax if rates are increased?

1. Why is the company raising customer rates in Nebraska?

Black Hills Energy is requesting recovery of costs associated with $28.8 million of investments in the company's Nebraska natural gas distribution systems since July 1, 2006, and increased operating expenses during the same time period.

2. How much will customer bills increase?

The overall requested increase equates to $5.48 a month for the typical residential customer and $2.65 a month for the typical commercial customer. 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.

3. Why will the typical residential customers' bill go up more than the typical commercial customers' bill?

The rate increase is based on the cost of service to the different classes of customers plus the current rate for each customer class. The current commercial rate is closer to the actual cost of service than the residential; hence the difference in the increases.

4. What are the new rates, and how do they compare to current rates?

	Current Rates		Proposed Rates
	Residential	Commercial	Residential	Commercial
Customer Charge	$12	$17	$15	$20
Base Rate (per therm)	$0.15406	$0.17561	---	---
Base Rate Block 1 (per therm): First 20 therms per month for residential customers. First 40 therms per month for commercial customers.	---	---	$0.2820	$0.2820
Base Rate Block 2 (per therm): For residential customers, the month's remaining usage above 20 therms. For commercial customers, the month's remaining usage above 40 therms.	---	---	$0.1629	$0.1629

5. What is the customer charge?

The customer charge is a set monthly fee every customer pays to have natural gas service lines and the natural gas ready to use at their home or place of business. In addition, it covers a portion of the fixed costs of providing service, such as meter reading, system maintenance and monthly billing. These are costs the company has regardless of the amount of natural gas customers use or whether they use any at all. Black Hills Energy is proposing to increase the residential customer charge from $12 per month to $15 per month and the commercial firm customer charge from $17 per month to $20 per month.

6. Why is the proposed commercial customer charge higher than the residential customer charge?

Black Hills is proposing the same delivery charge, or declining block rates, for commercial customers that it is proposing for residential customers. However the fixed cost of serving commercial customers is usually more than that to serve residential customers (commercial buildings are generally larger than residences, so larger natural gas equipment, such as meters, for example, is required), so in this case the fixed cost and subsequently the customer charge for commercial customers is slightly higher than the residential fixed cost/customer charge.

7. Why aren't large-volume customers included in the rate increase?

By state law, any customer that uses 50 mcf of natural gas per day is not subject to the Nebraska Natural Gas Regulation Act of 2003, the law that gave the Nebraska Public Service Commission the authority to regulate rates charged to residential and commercial customers served by an investor-owned utility.

8. What is the base / block rate?

The base rate is the charge to deliver the natural gas to customers. It covers the other costs of providing service not covered by the customer charge. Black Hills Energy is proposing a new rate design in which the company will move from a single delivery charge to a two-tier declining block delivery charge. The delivery charge is $0.2820 per therm for the first tier and $0.1629 per therm for the second tier.

• For residential customers, the first tier, or block, consists of the first 20 therms of natural gas used per month while any remaining usage that month above 20 therms goes into the second tier.
• For commercial customers, the first tier, or block, consists of the first 40 therms of natural gas used per month while any remaining usage that month above 40 therms goes into the second tier.

9. What unit of measure is used to calculate natural gas rates?

Black Hills Energy's standard billing unit is therms and will not change as a result of the rate increase. One therm equals 100,000 BTUs (British Thermal Unit) equals 1 ccf (hundred cubic feet).

10. Why is Black Hills Energy going from "flat rates" to "block rates?"

Declining block rates will level Black Hills Energy's revenue collection resulting in customer bills being less affected by extremes in weather. This type of rate design is fairly common in the natural gas industry and with natural gas utilities in Nebraska.

11. Will this rate increase affect Annual Price Option customers?

If approved, yes. Customer bills are comprised of three unique components, the customer charge, base rate and the natural gas commodity charge, which is shown on the bill as "PGA" (purchased gas adjustment). The Annual Price Option locks in the customer's price for the natural gas commodity for one year, meaning the customer is billed the same price for natural gas used throughout the contract period regardless of changes in the market price of natural gas. But this rate increase request covers only the customer charge and base rate.

12. When will this rate increase be effective?

The Nebraska Public Service Commission has 210 days to review and analyze our request. In Nebraska, while the NPSC is considering the request, the utility can begin charging interim rates that are in line with the rate request filing that has been made. Black Hills Energy will begin billing Nebraska customers the new interim rates March 1, 2010. This means the increase will not affect customer bills for most of this winter's heating season. If final rates approved by the NPSC, once it considers the Black Hills Energy rate request, are lower than the interim rates the utility began charging customers March 1, 2010, customers will receive a refund with interest.

13. What are interim rates?

Interim rates are the amount of the increase that goes into effect prior to final approval by the Nebraska Public Service Commission. In Nebraska, 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 NPSC 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.

14. How do Black Hills Energy's rates compare with other natural gas companies?

Even with the proposed increase, Black Hills Energy's rates are comparable to rates charged by other Nebraska natural gas utilities.

Nebraska Natural Gas Residential Utility Rate Comparison
Utility	Annual Bill*
Proposed SourceGas Central (Fixed)	$1094
Proposed SourceGas Central (NYMEX)	$ 989
Proposed SourceGas Panhandle (Fixed)	$ 912
City of Alma (Muni)	$ 860
City of Fremont (Muni)	$ 819
Proposed Black Hills Energy (Rate Area 2)	$ 743
MUD (Muni)	$ 674
City of Nebraska City (Muni)	$ 614
NorthWestern Energy (Grand Island)	$ 613

* Based on Nov. 1, 2009, rates and annual consumption of 800 therms

15. What can I do to control my energy costs?

Black Hills Energy offers energy efficiency tips at www.bhehowto.com that can help customers use energy wisely. In this rate case, Black Hills Energy is also proposing a rate design that is fairly common in the natural gas industry and with natural gas utilities in Nebraska. Called declining block rates, they result in customer bills being less affected by extremes in weather.

16. What can I do if I need help paying my utility bill?

Contact Black Hills Energy Customer Service 24 hours a day, seven days a week at 888-890-5554. Black Hills works in conjunction with local agencies such as the Low Income Home Energy Assistance Program (LIHEAP), which provides assistance to low-income Nebraska residents to help them pay their home heating bills. Black Hills Energy has its own energy assistance program, Black Hills Cares, in which the company matches customer and employee contributions dollar-for-dollar. Black Hills also offers Budget Billing, a budget billing payment option that takes seasonal peaks out of the bill for a more even monthly payment. Budget Billing helps customers budget their energy bill by spreading out seasonal price spikes over the whole year, leveling out monthly energy payments. The initial budget amount is determined by a customer's previous usage and energy costs. After that, monthly balances will be calculated based on the average of the previous 12 months' actual bills. However, the monthly amount due only is adjusted if the monthly calculation is at least 10 percent greater than or less than the current budget amount.

17. When was Black Hills Energy's last rate increase in Nebraska?

Black Hills Energy's last rate increase of 4.36 percent was based on costs through June 30, 2006, and became effective Feb. 15, 2007.

18. If Black Hills Energy filed for a rate increase in November 2006 and implemented new, higher rates in February 2007 for Nebraska customers, why is another rate increase needed so soon?

$28.8 million worth of capital has been invested in the utility's natural gas distribution systems in Nebraska since July 1, 2006, and this is not reflected in our current rates. Also, operating expenses have increased since the last case.

19. What investments has Black Hills Energy made in the Nebraska natural gas systems?

Since the last rate case in 2006, the company has invested more than $28.8 million in its Nebraska natural gas distribution systems to ensure safe and reliable service. Upgrades since July 1, 2006, include:

• 2007

1. North 56th Street - Lincoln system capacity integrity project - $862,000
2. High pressure Waverly pipeline - improve capacity in SW Waverly - $584,000
3. Upgrade Lincoln AMR system - $1,988,000
4. TBS 1B Control Run upgrades (Lincoln) - $441,000
5. Service Line Replacement project (Lincoln) - $957,000
6. Cast iron main replacement (Columbus) - $192,000
7. Phase 3 - Auburn Uprate - $178,000
8. Large Volume Meter replacements (statewide) - $326,000

• 2008

1. AMR Implementation/Meter Upgrade - 25 communities in Lincoln and South Regions - $1,993,230
2. Bare Steel service line replacement project (Lincoln) - $1,150,182
3. Northwest Lincoln system 12" integrity project - $882,000
4. 12" Bare Steel Main Replacement (Lincoln) - $204,000
5. Bare Steel Main replacement 48th St-C St to J St (Lincoln) - $161,000
6. New DRS at TBS #2 (Norfolk) - $311,380
7. Large Volume Meter replacements (statewide) - $357,725

• 2009 - Current forecast (not all projects are completed)

1. South St-42nd St to 51st St, Bare Steel Main replacement (Lincoln) - $122,000
2. Northwest Lincoln system 12" integrity project - $1,214,748
3. Cast Iron replacement 18th St-C St to J St (Lincoln) - $213,190
4. AMR Expansion to commercial/small industrial customers (Lincoln) - $818,500
5. Bare Steel Service Line Replacement (Lincoln) - $1,128,102
6. Replace 23 service/operations vehicles (statewide) - $570,000
7. City of Wayne Upgrade - Phase 4 - $237, 000
8. Large Volume Meter replacements (statewide) - $425,546

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

Black Hills Energy manages its assets to minimize expenses in the 110 communities the utility serves in Nebraska. It has been three years since the last rate increase request and we've worked to keep the amount of the increase down through proactive company actions.

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, reducing travel expenses and implementing process improvements.

Process improvements include installing automatic meter reading devices in our Nebraska service territory, saving more than $100,000 in operating costs, and additional meter reading process improvements, saving $500,000 annually in working capital (the cash needed on hand to pay daily operations expenses). Black Hills has also implemented new construction processes that will reduce construction costs approximately $206,000 per year.

We operate efficiently to keep costs low and delay rate increases. We've delayed asking for this increase as long as we can. The primary reason for this case now is to recover the investments and related operating costs that are critical to maintaining a safe and reliable system.

21. What will Black Hills Energy do if the Nebraska Public Service Commission doesn't approve the full amount being requested? Will safety or reliability be compromised?

No. Safety and reliability are Black Hills Energy's top priorities and we'll always maintain a safe, reliable system. However, if the NPSC doesn't approve the full requested amount, we will have to balance other costs and may have to ask for another increase sooner than we expect.

22. Who regulates natural gas rates in Nebraska?

The Nebraska Public Service Commission regulates rates for investor-owned natural gas utilities in Nebraska such as Black Hills Energy. Municipal natural gas providers are not required to file with the NPSC in order to change rates.

23. What does the term "rate base" mean?

Rate base is the total amount a utility invests in its "plant," or system, and other assets that are dedicated to public service minus customer-contributed capital. Rate base is the investment that we are allowed to earn a return on when setting base rates.

24. What is a "rate case?"

A rate case is an application to change rates filed by the utility either with a municipality that it serves or with the Nebraska Public Service Commission. Black Hills Energy has chosen to file a rate case with the commission. The application includes proposed rate schedules ("tariffs") and information and documentation supporting the need for the proposed rates.

25. What are rate areas?

Nebraska statute requires the grouping of cities with similar costs to serve into a rate area. Rate areas result in the same rate within a given rate area. Black Hills Energy serves 110 communities in Nebraska, and the customers in these communities have been organized into three rate areas:

• Rate Area 1 consists of 43,103 customers in 10 communities: Bellevue, Blair, Elkhorn, Gretna, La Vista, Papillion, Plattsmouth, Ralston, Valley and Waterloo.
• Rate Area 2 consists of 93,203 customers in three communities: Cheney, Lincoln and Walton.
• Rate Area 3 consists of 59,421 customers in 97 communities including: Adams, Arlington, Ashland, Auburn, Aurora, Avoca, Bancroft, Battle Creek, Beatrice, Bee, Beemer, Bennet, Blue Springs, Bradshaw, Clatonia, Columbus, Cortland, Craig, Crete, David City, DeWitt, Dorchester, Eagle, Elmwood, Emerson, Endicott, Exeter, Fairbury, Fairmont, Firth, Fontenelle, Friend, Garrison, Geneva, Grafton, Greenwood, Hallam, Hampton, Hickman, Holland, Homer, Hooper, Humboldt, Humphrey, Jackson, Johnson, LaPlatte, Lindsay, Louisville, Madison, Manley, Mead, Meadow Grove, Milford, Murdock, Murray, Mynard, Newman Grove, Nickerson, Norfolk, North Bend, Oakland, Odell, Osceola, Palmyra, Panama, Pawnee City, Peru, Pierce, Pilger, Plymouth, Rising City, Rosalie, Schuyler, Seward, Shelby, Stanton, Staplehurst, Sterling, Table Rock, Tecumseh, Tekamah, Thurston, Tilden, Uehling, Ulysses, Waverly, Wakefield, Walthill, Wayne, Weeping Water, West Point, Wilber, Winnebago, Wymore and York.

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

No. This request is to increase revenues by $12.1 million to reflect the $28.8 million of capital investment the company has made in the natural gas distribution systems and for higher operating costs since the last rate increase. The Nebraska Public Service Commission determines Black Hills Energy's rate of return on the investment that has been made by the utility to serve customers.

27. 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.

28. Will rates affect the franchises Black Hills Energy has with the communities it serves?

No. A franchise ordinance is separate authority from the city allowing Black Hills Energy to place its facilities in public right-of-way within a community.

29. What happens to the franchise fee or occupation tax if rates are increased?

The franchise fee or occupation tax rate, which some cities have, will not change due to the Black Hills Energy rate request. However, because the natural gas bill will be higher, the amount of tax calculated will be higher if the proposed rates are approved. Accordingly, the tax dollars paid to the city that has a franchise fee or occupation tax will be higher. Black Hills Energy collects this fee or tax for the municipality and pays it directly to the municipality in its entirety with no mark-up or profit.

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