MINUTES FOR THE STUDY SESSION
ASHLAND CITY COUNCIL
Monday, March 31, 2014
Siskiyou Room, 51 Winburn Way
Mayor Stromberg called the meeting to order at 5:34 p.m. in the Siskiyou Room.
Councilor Voisin, Rosenthal, Morris, Slattery, Marsh, and Lemhouse were present.
1. Look Ahead review
City Administrator Dave Kanner reviewed items on the Look Ahead.
2. Response to Council follow-up questions regarding Cost of Service and Rate Design Study for Electric Utility
Electric/IT Director Mark Holden, Electric Distribution System Manager Warren DiNapoli, and Mark Beauchamp president of Utility Financial Solutions provided a presentation that reviewed the Five Year Financial Projection and Cost of Service Results:
Projection Summary - No Rate Changes
The study focused on three targets, one was the Debt Coverage Ratio. The City needed to maintain 1.20 coverage and generate 20% more in cash than the debt service payment. Electric sales were weather dependent so the consultant added a safety factor that increased it from 1.20 to 1.40. The City needed to stay above that minimal level. Without a rate adjustment, the debt coverage ratio would go negative by 2016. The second target was the Projected Cash Balances currently at $1,920,118 with a minimum target in 2014 at approximately $2,150,511. The projected cash balance would turn negative by 2017 without rate adjustments.
The third target was Adjusted Operating Income. The City needed an adjusted operating income of $530,000 and the table showed the City operated in the negative every year without a rate adjustment. In the Adjusted Operating Income, the City would try to recover an inflationary increase in the assets replacement cost so current ratepayers paid for the infrastructure they used and consumed. The depreciation expense and a rate of return would become the break-even target. The City’s rate of return was 5%-6%. The adjusted operating income for industrial utilities was set up differently with a 10%-10.5% rate of return target and a certain amount of dividends that went back to the shareholders. The City needed funds to cover the time when bills were paid and customers made payments, to ensure there was enough cash in reserve to fund capital improvement programs and if a catastrophic event occurred, there was enough in reserves to start the replace and repair process until adequate financing became available. Industrial utilities built up cash for reinvesting. Mr. Beauchamp clarified the comparison between industrial and municipally owned utilities answered question #2 on the City Council Follow-Up Questions.
Projection Summary - Proposed Rate Changes
The City’s utility was relatively debt free and the debt ratio exceeded minimum targets. Projected Cash Balances would maintain minimum levels for cash through 2016 build slightly in 2017 and reach $3,000,000 in 2018. The Adjusted Operating Income worked towards achieving the $530,000 that would happen by 2018 with annually adjusted rates. Mr. Beauchamp clarified the 3.5% rate increase would go towards stabilizing cash reserves. The recommended target for 2014 was $2,150,511. Subsequent rate adjustments would address maintaining and improving cash reserves and move towards the operating income targets. The debt coverage ratio was not an issue unless it failed.
The 1.40 calculation added the net income of the electric utility, the depreciation expense, and the interest expense to get the cash generated from operations. They divided that amount by the debt service payment to achieve the coverage ratio in the bond ordinance.
COS Results by Rate Class
The COS study was completed prior to the 5.3% rate adjustment for 2014. The table showed the difference of revenue projected by each rate class and costs to provide service to each class after the rate adjustment. Most of the rates were close. The COS study identified the cost of providing the service by rate class, achieved the 3.5% rate increase overall, and applied different rate increases to rate classes.
Revenue requirements established how customers used different classes and power from Bonneville Power Administration (BPA) and who contributed to peak demands. This data was used to allocate BPA costs to customer classes. The distribution system was built to handle peak demand created by customer classes. Overall, the study established 40 allocation factors that included items like how long it took to read a meter.
Council could choose to raise the base rates to cover the difference. The declining block charge for municipal and an inclining for residential was unusual. Typically, there was a flat rate for commercial.
Councilor Voisin left the meeting at 7:03 p.m.
Council wanted more information on the rate structure, impact on conservation and the methodology to construct the conservation charge, subsidies and whether some cross subsidies were legitimate, the amount government would pay to make up for EUT, and information on the projected cash balance. Council requested a review of the original rates and the reasoning behind each one as well as a review of various cost factors. Council also wanted information to establish a demand charge for solar.
Mr. Holden would provide an analysis of current rates and the COS study rates. The analysis would include subsidies in the current rates and the rationale behind each one and compare them to the COS study. Staff would work on a rate structure that provided the aggregate overall rate increase needed to stay healthy as well as provide information on the basic components of what went into the rate increase. Council would use that information to adjust various rates and structural elements if needed and ensure they maintained the 3%-3.5% revenue increase.
Meeting adjourned at 7:44 p.m.
Assistant to the City Recorder