HomeMy WebLinkAbout2016-1031 Study Session MIN
City Council Study Session
October 31, 2016
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MINUTES FOR THE STUDY SESSION
ASHLAND CITY COUNCIL
Monday October 31, 2016
Siskiyou Room, 51 Winburn Way
Mayor Stromberg called the meeting to order at 5:34 p.m. in the Siskiyou Room.
Councilor Lemhouse, Seffinger, Marsh, Morris, and Voisin were present. Councilor Rosenthal was
absent.
1. Public Input
Huelz Gutcheon/2253 Highway 99/Explained the utility in the future could acquire, finance, install, and
maintain solar panels. He recommended hiring two experts that he would choose or appointing him as the
planning director to meet the 10% use of clean energy by 2020.
Doug Smith/60 Granite Street/Shared his preference on either replacing or rebuilding City Hall. He
suggested building City Hall at the East Main Street yards instead and explained why the other options
were not feasible.
2. Look Ahead review
City Administrator Dave Kanner reviewed items on the Look Ahead.
3. Presentation on Electric Cost of Service study
Electric/IT Director Mark Holden recommended adopting the Cost of Service (COS) model then moving
forward with rate building based on the COS. The COS model provided rational, justifiable reasons for
setting rates. It showed cost, identified who was responsible for the cost and assigned those costs to
customer classes.
Dawn Lund, vice president of Utility Financial Solutions (USF) explained there were essentially three
studies. One was a Five-year Financial Projection with a focus on operating income and minimum cash
balance. The second was the COS study that looked at all the City's costs, key cost drivers based on
customer classes, and who was driving those costs that resulted in a "perfect rate structure." The third
study was a Rate Design that would come back to Council if they moved forward with the COS study.
The COS study was a fair and defendable document. t SF looked at the infrastructure investment by
class, how those classes used energy, and customer service, then combined it to determine what to charge
by class. At that point, they could incorporate other Council objectives into the rate design phase.
The customer charge was one of the most important pieces in the COS study. Typically, customer
charges were low and many utilities across the nation Nvere moving it up to where it should be. The
customer charge used a methodical way of looking at the infrastructure investment the City had and other
fixed costs of the system. Having that set properly helped stabilize revenue during periods of flat or
declining sales and conservation.
Low-income customers were not the same as low use customers. Councils tended to have concern on
raising rates for low-income customers. It depended on the housing mix and community. In general,
low-income customers tended to use more energy than the average user. Often they did not have low
energy appliances and did not live in energy efficient homes. If fixed cost recovery was in the variable
component and low-income customers were using more than average, it actually harmed them by not
having that customer charge set properly and pushing fixed cost recovery into the variable component.
Setting the customer charge appropriately provided revenue stability, a fair pricing signal, and helped
City Council Study Session
October 31, 2016
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both low-income and seasonal customers. USF recommended increasing the customer charge slowly in
the rate design to avoid rate shock.
The Bonneville Power Administration (BPA) power supply charge would increase 6% in 2018, 1% in
2020, and potentially 3% in 2021 and 2022. BPA transmission charges assumed a 4% increase for 2018,
1% in 2020, and 3% for 2021 and 2022. USF based annual inflation at 2.5%. Staff provided information
on the annual growth of 1% for 2017 and .25% from 2018 to 2022 and the five-year Capital Plan yearly
allocations.
Ms. Lund addressed a summary table without rate changes and explained it focused on target operating
income and recommended minimum cash. The City needed a minimum of $514,397 for target operating
income in the utility. The City was projected to operate at loses over the next five years without rate
changes and incorporating the 6% increase from BPA. She recommended a minimum cash balance of
$3,037,822 in the utility. Without rate changes, the projected cash balances would go negative after 2018
with only $162,000 for the next year.
Target operating income was a break-even rate of return that recouped two things, interest expense on
debt, and the inflationary increase on the assets the City invested in the system. For Ashland, it was
approximately $500,000 or a 7% rate of return.
To determine the Minimum Cash Reserve calculation, USF looked at five risk areas specific to Ashland's
utility, operating and maintenance expenses, the power supply expense, the historical rate base, the debt
payment, and the 5-year capital improvement plan (CIP). The City should have a minimum cash reserve
of $3,000,000 that equated to only 70 days of cash on hand. In general, USF liked to see a minimum cash
reserve that could last 90-plus days.
Improving and maintaining the Target Operating Income and Minimum Cash Reserve would require rate
increases. Ms. Lund explained a recommended rate track of adjustments. If the City mirrored the rate
adjustments and passed them on to customers, it would turn the adjusted operating income from a
negative to working towards meeting the minimum cash balance requirement by 2022. Projected rate
adjustments for 2018 was 6.9%, then 2.75% from 2019 to 2022 to achieve an adjusted operating income
of $593,801 and projected cash balance of $1,658,269 providing approximately 30 days of cash on hand.
If the City were to meet the cost of service to customers today, it would require a 9.5% increase. UFS
recommended a 6.9% adjustment instead. Cost of service results did not show anything out of the
ordinary in any of the customer classes. For the rate design, Ms. LLmd would make smaller adjustments
over time and mirror the power supply pass through.
Currently, the City charged $9.62 for the residential single-phase customer. The COS study indicated the
charge should be $14.09. The first rate design would add approximately $1.50 to $9.62 in order to avoid
negatively affecting the low use customers. The rate design would include any objectives Council might
have.
USF would mirror the rate increase from BPA and pass it on to the customer. In theory the City should
have a 9.5% increase but USF recommended 6.9% rate increase with a 2% bandwidth. That way no
customer would see a rate increase over 8.9% and customer class average would not see a rate change
under 4.9%. This was how the City would be able to work close to cost of service. The City could meet
their revenue returns without the cost of service rate design but USF strongly suggested moving towards a
COS rate structure. It will take approximately three plus years to go from $9.62 to $14.09. It would most
likely take another three years of rate adjustments to reach the minimum cash reserve requirement.
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October 31, 2016
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It was not a true one-for-one fixed cost but they were defendable rates and considered a minimum system
analysis for a fixed cost infrastructure. Mr. Holden added the model was based on projected
consumption. City Administrator Dave Kanner would propose a fixed cost for the implementation of the
Climate Energy Action Plan. Mr. Holden further explained the COS model provided flexibility. Staff
could identify an objective, like a CEAP charge or solar and assign it easily.
Individuals investing in their own solar panel system would bear their fair and equitable share of the
system since they would rely on it when solar was unavailable. The City could lay a solar study over its
data to determine avoided cost recovery.
Next steps involved Council approving using a cost of service model and authorizing Ms. Lund to
develop a rate design with a 6.9% increase with 2% bandwidth.
Councilor Lemhouse left the meeting at 6:59 p.m.
Ms. Lund would revise the tables, provide examples of customer classes, and come back to Council with
suggestions for review and approval. Council supported moving forward with the cost of service model.
Meeting adjourned at 7:02 p.m.
Respectfully submitted,
Dana Smith
Assistant to the City Recorder