Council Communication

Electric Rate Increase
Meeting Date:	July 19, 2005		Primary Staff Contact:	Dick Wanderscheid, 552-2061 wandersd@ashland.or.us
Department:	Electric		Secondary Staff Contact:	Lee Tuneberg, 552-2003 tuneberl@ashland.or.us
Contributing Departments:	Finance, Administration
Approval:	Gino Grimaldi

Statement: This is a Council Communication requesting Council direction on Electric rates.
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Background: The City of Ashland has a 10-year Power Sales contract with the Bonneville Power Administration (BPA). This contract runs from October 1, 2001 through September 30, 2011. The first 5 years of the contract included a 5-year rate period of which the final year commences on October 1, 2005. The current 5-year rate period allows BPA to use 3 different Cost Recovery Adjustment Clauses (CRAC's) to adjust its wholesale power rates for each 6-month period. The total CRAC amounts have varied from a high of 49% in April-September 2003, to a low of 32.8% in October-April 2005. The rate for the current period is 36.93%. In December 2004, BPA predicted that the CRAC for the final year of the rate period would average 39.25%. However, after reviewing the 2nd quarter results of the current Federal Fiscal Year, BPA has indicated that the rates will be higher than predicted last December. This is primarily a result of a low water year that will impact stream flows in the Columbia River Basin. Also the recent Federal court ruling which overturned the Biological Opinion and required increased spilling of water will have additional impact on BPA's rates. Early estimates indicated this decision could increase their costs by as much as an additional $100 million per year. Included in the budget, we used a 3.3% increase on wholesale power costs for FY05-06. The increase of capital expenses, higher personnel and benefit costs, and a 12% increase in Transmission will support an electric rate increase. It has been the City's goal to move away from the BPA surcharge concept because in October 2006, the City will be entering a new 3-year rate period that will run through September, 2009. While this rate case won't begin until Fall, 2005 and will probably take at least 6-9 months to complete, the belief now is that CRAC's will not be utilized by BPA in the next 3-year rate period. Therefore, the City will not need the BPA surcharge mechanism to adjust for changing rates, because the rate should be fixed for the entire 3-year period. Our plan would be to eliminate the BPA surcharge in July, 2006, and set our rates based on BPA costs established as a part of the rate getting process. The projected increase in costs is contained in our FY 05-06 approved Budget as follows: 0 FY 2005   FY 2006  Difference Conservation 411,410 441,621 30,211 BPA Power 5,899,475 6,095,000 195,525 Supply 261,240 321,741 60,501 Distribution 4,470,973 4,743,209 272,236 Transmission 935,443 1,048,600 113,157 TOTAL $11,978,541 $12,650.171 $671,630 In addition, a $200,000 subsidy to AFN was paid in FY 04-05. On account of the drought and the uncertainty about fish costs because of the recent court rejection of the Biological Opinion, the CRAC's for 2005 -06 could be much higher than BPA had previously indicated. Since our fund balance is nearly a quarter of a million dollars above our target, we hope to be able to absorb possible higher costs without having to increase the BPA surcharge. If however, this increase exceeds projections, we may have to request an increase in the surcharge in October. The CRAC numbers for FY 2006 will be finalized in late August and staff will update the Council in September about this issue. This issue was initially discussed with the Mayor and Council on June 7, 2005 when a 5% electric rate increase and a reduction of the BPA surcharge from 18.45% to 16.6% was proposed. That proposal included a $500,000 subsidy from Electric to AFN. At that time the Council indicated a desire to explore a separate AFN surcharge not subject to the electric users tax as a better way of providing support for AFN. Therefore this analysis assumes that no direct electric revenue would be provided for AFN. The Future As mentioned earlier, BPA will begin a rate case in the fall of 2005 for the 3-year period of October 1, 2006 through September 30, 2009. The average cost that BPA projected for the price of wholesale power in December 2004 for the period FY05-06(Oct 2005-Sept 2006) the final year of this 5 year rate period was $31.09/mWh. This compares to the rate of $30.12/mWh for FY05-06(Oct 04- Sept 05). They have now stated that because of the drought and potential higher fish costs it will no doubt be higher then this earlier projection. How much higher won't be known until August, however. Preliminary discussions between Public Power representatives and BPA about possible rates in October 2006, the new 3 year rate period, indicates that BPA feels rates will be lower than they currently are. Public Power is reviewing all of BPA costs and hopes to get rates in the $27/mWh range but BPA has not committed to any number at this point, other than their stated desire to reduce rates below current levels. The other unknown factors are weather conditions, stream flow and fish and wildlife costs which can have a large impact on BPA costs and their wholesale power rates. If the results of this process result in a reduction in wholesale rates, the City may be able to eliminate the BPA surcharge and leave overall rates at or near current levels in July 2006.
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Related City Policies: Not applicable.
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Council Options: 1) Leave rates at the current level-This option would create a situation where the current rates would continue and the city would continue to collect the BPA surcharge at existing levels. This issue could then be analyzed again when the CRAC levels are set for October 2005 to see if revenue is adequate for the remainder of the City's FY05-06 budget period. If this analysis shows a shortfall staff would return to the Council this fall requesting a rate adjustment to remedy the situation. This option is administratively much easier to implement for staff, but would result in a reduction of general fund revenue by about $90,000 below the adopted budget amount for the remainder of the budget year. 2) Approve a rate increase of electric rates by 3 % and reducing the BPA surcharge from 18.45% to 16.6%. This helps the City in our efforts to begin removing the BPA surcharge with a goal of doing away with it in July 2006. The general fund would receive an additional $40,000 by increasing base rates but still would fall about $50,000 below the amount included in the adopted FY 05-06 Budget.
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Staff Recommendation: Because it is very difficult for staff to amend rates, causes confusion to citizens and achieves almost the same electric revenue goals as increasing base rates and reducing the BPA surcharge, staff recommends that electric rates and the BPA surcharge remain at current levels until BPA determines CRAC levels for October 2005. If the increase is significantly higher than current estimates, staff will analyze the situation and request a rate change at that time if warranted. This approach requires at most only one rate adjustment this fall but no change at the current time.
Potential Motions: Take no action at the current time, or Move to request staff to bring back an Electric Rate Resolution to increase Electric Rates by 3 % and reduce the BPA surcharge from 18.45% to 16.6%.
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Attachments: Click on the PDF file link below to view the following attachments:    • BPA Actual & Project PF-02 Adjusted Rate Graph

6-1-05 Rate Chart_1.pdf (54.9KB)

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