[Council Communication]  [Attachments]

Council Communication

Title:	Electric Rate Discussion
Dept:	Electric & Telecommunication & Finance
Date:	May 5, 2004 (Study Session)
Submitted By:	Dick Wanderscheid, Lee Tuneberg
Approved By:	Gino Grimaldi, City Administrator

Synopsis:	The FY04-05 budget is proposing a 6% increase in electric rates and a change in commercial and governmental seasonal rates, while holding the BPA surcharge fixed at its current rate of 20.8%. This rate increase is necessary to cover increased personnel expenses, higher BPA Power costs, greater operating expenses and to meet the target electric fund balance.
Recommendation:	This study session's purpose is to gather input from the Mayor and Council concerning electric rates and electric fund issues. An electric rate resolution would be presented to the Council in the future to implement this increase.
Fiscal Impact:	The proposed increase of 6% would generate an additional $706,800 annually for the City's Electric Utility. The Franchise fee would increase by $70,938 and general fund revenue from the user's tax would increase by $147,039.
Background:	BPA History

The City of Ashland has a 10-year power sales contract with the Bonneville Power Administration that runs from 2001-2011. The first rate period of that contract is a 5 year period that runs from 2001 through 2006. Previous to this rate period BPA had utilized 2 year rate periods but they proposed a 5 year rate period to try and give utilities a more stable planning period. Instead of raising their rate for the entire 5 year period, utilities urged BPA to set their rates at the lowest possible level and then adjust them as conditions warranted. To accomplish this BPA developed in our Power Sales Contract, the Cost Recovery Adjustment Clause (CRAC) that could be implemented if the need for more revenue were to arise. There are 3 CRAC's that can be instituted by BPA as conditions warrant. They are the Load Based, the Financial Based, and the Safety Net CRAC's.

When the rate period started in October 2001, the city was immediately hit with a BPA Load Based Cost Recovery Adjustment Clause (LBCRAC) that added a 46% wholesale increase to the first six months of the federal fiscal year (Oct.1 to Mar. 30). This increase was caused because BPA had requests for more power than was available from the NW Hydro System. Therefore, they had to make market purchases to acquire enough energy to meet their commitments. This caused severe financial strain on BPA. Part of problem was caused by the drought encountered in 2001, which severely limited the amount of power available from the federal hydro system, and this was compounded by having to purchase power during a period of the highest market prices ever recorded because of the California/West Coast Energy Crisis.

Cost Recovery Adjustment Clauses have been triggered in every rate period of the current 5 year rate period. They have ranged from a low of 40.8% to a high of a 56.4% CRAC projected for April 2005. We have included a BPA graph that shows the historical and projected CRAC's with the communication for your information.

When it became clear that the City's wholesale power bills were going to increase because of the CRAC's. The City decided that merely adding the cost to our electric rates was not the best option. Therefore, the BPA surcharge concept was developed to deal specifically with this issue. The surcharge is added to the customer's bills independent from our other rates and therefore this amount is not subject to the 25% Electric User Tax which goes directly into the City's General Fund.

The BPA surcharge began on July 1, 2001 and started at 10% or $.00385/kWh. It has been increased twice since then and currently sits at 20.8% or $.00801/kWh.

The Current Situation

Currently BPA is proposing a settlement with the IOU's which would remove $200 million from the next two years of the rate case. If this occurs the total CRAC's would remain at about current level for the first six months of the rate period. This action would equate to about a $300,000 reduction in wholesale power costs for Ashland in each of the next 2 federal fiscal years (Oct. 1, 2004 to Sept. 30, 2006). Therefore, staff is proposing to leave the BPA surcharge at its current level. If this settlement were to fail or other variables change this situation; there may be a need to adjust our BPA surcharge in October to reflect changing future circumstances. Even with this reduction, our power costs will still increase by about $410,547 over our FY 2003-04 costs. Transmission costs are projected to decline by $33,497. This means our net cost increase to BPA will be $377,050 or 6.8% higher than FY 03-04 costs.

This increase, coupled with rising health care costs, higher PERS costs, cost of living increases in salaries, the increasing costs of electric supplies, and a need to meet the electric fund target balance means the City needs to increase our electric rates to cover these higher expenses.

Staff is proposing a general 6% rate increase in the proposed FY04-05 budget and would implement this increase via a resolution that would make the rates effective in July 2004. The proposed new rates would compare to the old rates as illustrated in the following table:

	0	CURRENT RATES	0	PROPOSED RATES
Residential
Basic Charge		$ 7.02/Month		$ 7.44/Month
User Charge-
00First 500kwh		$ .04390/ kWh		$ .04565/kWh
00Balance		$ .05400/ kWh		$ .05720/kWh
0
Bed & Breakfast
Basic Charge		$ 7.02/Month		$ 7.44/Month
User Charge
00First 600kwh		$ .04876/kWh		$ .05170/kWh
00Balance		$ .05390/kWh		$ .05710/kWh

All of these costs would also be subject to a 25% Electric User Tax which goes directly into the City General Fund.

Staff is also proposing a 6% rate increase for all other customer classes. However, there is also a need to do some rate redesign on our commercial and governmental rates to reflect seasonal wholesale billing changes from BPA. Currently we have seasonal rates for commercial and governmental customers that are actually higher in the winter period (Nov 1-April 30) and lower in the summer period (May 1 to October 30). These rates reflected our BPA wholesale power rates prior to 2001, and BPA has revamped those rates significantly since 2000.

The City now incurs high load and low load hour energy charges, that vary every month and also a different demand charge for every month of the year.

Finance has calculated the actual wholesale cost of melded kWh rate including demand and energy on aggregate for our entire wholesale power purchases and now the most expensive month of the year is August with melded costs of $.05kWh.

September is second, followed by November and December and then followed closely by July. A graph of these costs have been included for your information. Therefore, the old seasonal rates of lower rates in the summer no longer reflect the actual cost of service we incur in providing electricity to these customers. Because of this as a part of the rate adjustment in July, we would propose to change commercial and governmental rates by eliminating seasonality and making them uniform year around as follows:

		CURRENT RATE		PROPOSED RATE
COMMERCIAL
0
Basic Charge		Single Phase0003 Phase		Single Phase0003 Phase
30kW or less		$12.53/Mth000$25.07/Mth		$13.28/Mth000$26.57/Mth
Over 30 kW		$47.01/Mth000$81.47/Mth		$49.83/Mth000$86.36/Mth
0
Energy Charge (Winter)
First 3,000kWh		$.05366/kWh000$.04870/kWh		$.05532/kWh000$.05065/kWh
Next 17,000kWh		$.05380/kWh000$.04881/kWh		$.05550/kWh000$.05100/kWh
Balance		$.05407/kWh000$.04891/kWh		$.05576/kWh000$.05113/kWh
0
Energy Charge (Summer)
First 3,000kWh		$.05072/kWh000$.04687/kWh		$.05532/kWh000$.05065/kWh
Next 17,000		$.05083/kWh000$.04742/kWh		$.05550/kWh000$.05100/kWh
Balance		$.05114/kWh000$.04757/kWh		$.05576/kWh000$.05113/kWh

Demand Charges for commercial customers larger than 15kW would increase from $2.76/kW by 6% to $2.92/kW.

Governmental rates would also be amended to remove the seasonality as follows:

		CURRENT RATE		PROPOSED RATE
GOVERNMENTAL
0
Basic Charge		Single Phase0003 Phase		Single Phase0003 Phase
0030 kW or less		$12.53/Mth000$25.07/Mth		$13.28/Mth000$26.57/Mth
00over 30 kW		$47.01/Mth000$81.47/Mth		$49.82/Mth000$86.36/Mth
0
Energy Change (Winter)		$ .06480/kWh0$.07000/kWh		$.06564/kWh0$.07091/kWh
Next 17,000kWh		$ .04643/kWh0$.05015/kWh		$.04921/kWh0$.05316/kWh
Balance		$ .04325/kWh0$.04702/kWh		$.04613/kWh0$.04984/kWh
0
Energy Change (Summer)		$ .05905/kWh0$.06380/kWh		$.06564/kWh0$.07091/kWh
Next 17,000kWh		$ .04643/kWh0$.05015/kWh		$ 04921/kWh0$.05316/kWh
Balance		$ .04325/kWh0$.04702/kWh		$.04613/kWh0$.05316/kWh

The demand charge would also increase from $2.76/kW to $2.92/kW

The intended impact on commercial and governmental customers with the above changes is an annual revenue increase of 6% from those classes similar to other customers. However, the change from seasonal rates will cause bills for summer use to be higher than would have been reflected under the prior system. Additionally, winter use will billed at a lower amount than would have been billed with seasonal rates. These changes could cause a variance in the total amount paid by any single customer depending on seasonal use and if the customer closes for any period of time.

With higher BPA power bills and a change in the seasonality of our BPA wholesale costs, we have encountered some cash flow issues in meeting our BPA payment schedule. This rate increase and also the change in commercial and governmental seasonality will help to alleviate this problem.

The Electric fund's ending fund balance is also of concern. Our ending fund balance in 2001 was $1,249,047. This declined to $1,069,861 in 2002 and was $1,497,827 at the end of FY 2003. The estimated fund balance for June 30, 2004 is $1,191,384. This is below the minimum fund balance target of $1,397,268. The target for FY04-05 is calculated to be $1,530,576. The proposed rate increase is projected to create a fund balance of $1,997,186, which includes a 3% unspent contingency of $380,000. This will insure a healthy cash flow situation and also allow for a contingency that could be used if a severe storm or other natural event creates unexpected expenses for the City.

Attachments:   •  BPA Charts

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