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HomeMy WebLinkAbout1998-0506.SS.MINMINUTES FOR THE STUDY SESSION ASHLAND CITY COUNCIL May 6, 1998 CALL TO ORDER Mayor Shaw called the meeting to order at 1:08 p.m., Civic Center Council Chambers IN ATTENDANCE: Councilors Laws, Reid, Hauck, Hagen, Wheeldon and DeBoer were present. Staff present included: City Administrator Mike Freeman, Assistant City Administrator Greg Scoles, City Recorder Barbara Christensen, City Attorney Paul Nolte, Director of Electrical Utilities Pete Lovrovich, Director of Community Development John McLaughlin, Public Works Director Paula Brown, Fire Chief Keith Woodley, Director of Finance Jill Turner, Supervising Accountant Karen Huckins, Account Representative Russ Chadick, Account Clerk Pat Woods and Assistant to the City Recorder Derek Severson. Cost-of-Service and Rate Design Study Presentation Director of Electric Utilities Pete Lovrovich presented Kevin Harper and Barbara Sands, of R.W. Beck, Inc., and explained that they would be presenting the possible scenarios to reduce electric rates for each customer class and providing their recommendations for reductions in each class based on the study performed. Kevin Harper briefly summarized the information that was presented at the study session held March 18, 1998. Noted that overall, rates could be reduced by 7.4%, and the Department of Electric Utilities would still be able to cover all costs of doing business. Explained that today's presentation would show how that a 7.4% reduction would be spread over the various customer classes. Gave an overview of today's presentation, noting that following his brief summarization of previously presented information he would review the City's current rates, present the results of the cost-of-service study and discuss R.W. Beck's rate design recommendations. Harper noted that the rate study's objectives had been to prepare the Department of Electric Utilities for a competitive environment; to develop rates that send appropriate price signals to customers while fostering conservation efforts; to ensure the flexibility to offer additional products and services in the future; to eliminate the problem of cross subsidization; to provide a cost-of-service model for the utility; and to identify longer-term rate design issues. Presemed a breakdown detailing revenue uses for the 1996-'97 fiscal year, noting that the Electric User Tax adds $1.6 million to the General Fund. Explained the purposes typically involved in doing a cost-of-service analysis: financial stability; ensuring that revenues are sufficient to meet costs for the projected period; prepare for competition; cost-of-service equity among the various customer classes; equity among customers within each class; encouraging conservation through incentives built into the rate schedule; and simplicity, so that customers are able to understand the billing structure. Noted that in terms of cost-of-service equity, it would be wise to bring customer charges up to ensure that actual costs are being recovered. Briefly discussed an overview of the electric ratemaking process and cited the various customer classes and rate schedules currently in use. Noted that currently, existing residential rates are on schedules 4 and 10, which include a two-tiered energy charge. This tiered system means a higher per unit cost for usage over 300 Kwh to encourage conservation. Ashland City Council Study Session Minutes 05-06-98 Discussed the existing commercial rates, governed by schedule 25, which are more complex than the residential rate schedules. Customers are charged rates based on whether they have a single-phase or three-phase meter, and charges include tiered basic customer charges, incremental charges, demand charges and energy charges. Noted that existing commercial rates are not structured to encourage conservation. Explained that institutional rates, under schedule 30, primarily apply to government agencies and are similar in complexity to the tiered commercial rate schedules. Noted additional "Time-of-Use" Rate Schedules 48 and 50 which cover Croman Corporation and Southern Oregon University respectively and are less complex as they were developed to reflect the specific needs of those customers. Lovrovich clarified that these customers require power to be delivered in voltages that differ from standard commercial users. Harper provided a rate comparison with other utilities in the region, noting that without the user tax the City's rates are reasonably competitive with investor-owned utilities and less so with municipal power providers. With the user tax, the City's rates do not compare as well, especially on the commercial side. Briefly discussed the issues of uncertainty around eventual competition that will come with deregulation of the industry. Barbara Sands discussed the results of the cost-of-service study. Sands began by listing the key input assumptions: that the study would look at a three year horizon and then at the two years beyond that to ensure rate stability for five years; that regulation will continue; that the hydroelectric facility will begin operation in June of 1998 to provide a small percentage of the City's power; that the average growth rate of the customer base will be 1.5%; that conservation funding will continue at reduced levels; and that power supply unit rates will continue at the current level. Presented a summary of the proposed overall rate decrease. Explained that beginning with fiscal year 1998-'99, the proposed decrease would result in a slight overbalance for the first two years, but after that revenues would equal annual costs. Noted that greater rate reductions could be made up front but this would require increases soon after the reductions. Stated that after the initial five year period, the issues of competition, deregulation, and capital outlay will need to be revisited, and that in light of these uncertainties there isn't enough budget information available to look beyond 2002-'03 at this point in time. Explained the study had determined actual costs of service, identifying each type of cost in terms of demand charges, energy charges, and customer charges and then looking at each customer class in terms of what percentage that class's usage represents of the overall usage to determine allocation percentages. Allocated costs were then compared to the current rates to determine by what amount the rates needed to be adjusted. Current residential rates are being over collected by 4.7%; seasonal residential rates were where they should be, and commercial/institutional rates were over collected by anywhere from 5.7 % to 29.4 %, depending on the schedule used. Sands continued to explain that unit costs had also been determined to serve as a guide in developing new rate schedules. Emphasized that customer charges need to be brought more in line with allocated costs of service as the city prepares for competition, as the customer charges meeting costs allows competitive rates for usage. Sands then presented the study's rate design recommendations, noting that they had taken into consideration the size of the overall decrease and the need to apply decreases equally for all customer classes, in order to move toward true cost-of-service rates as an interim step in preparing for competition. Explained that for each schedule, four options would be presented. The first would reduce all existing structures by the same percentage, the second would include increases in the customer charges to cost-of-service levels while trying to simplify rate structures, and attempting to achieve an overall reduction based on the cost-of-service. The third and fourth options would vary by rate class. Ashland City Council Study Session Minutes 05-06-98 Sands then presented each of the existing rate schedules with the possible options for rate reduction, and discussed the possible options for reduction in terms of their cost-of-service equity, equity among customers, conservation effect, and simplicity for customer understanding. For Residential Schedule 04, option one would reduce all existing rates by 7.8 %, option two would increase customer charges and remove the tiered structure, and option three would increase the customer charges by only one dollar and retain a tiered structure with reduced rates for usage. Sands noted that increasing the customer charge could mean an increase in overall bills for smaller users as the customer charge represents a greater proportion of their bills. Also noted that the second option here would not serve to encourage conservation. Explained that the third option was tiered to encourage conservation and only increased customer charges by one dollar to begin moving toward cost-of-service, making it the more preferable option. Discussed Residential Schedule 10, which applies to customers who fall between residential and commercial usage patterns such as bed and breakfast operators. Noted that cost-of-service was determined through the allocation process in this category, pointing out that demand requirements were higher at their peak than residential customers, and that the customer charge was set between residential and commercial. Explained that as all customers cannot be evaluated on an individual basis, they had to look at customer classes, averages and patterns of usage that are known based on experiences elsewhere. As the owner of a seasonal lodging business, Councilor Reid concurred that these methods were reasonable. Sands noted that the first option was a percentage reduction from existing rates, option two went to single block rates with customer charges increased to cost-of-service levels, and the third option had a smaller increase in the customer charge, with incremental blocks to encourage conservation and adjusted rates. Again, Sands stated that option three was recommended as it had less negative effects to smaller customers while reducing rates and encouraging conservation. For Commercial Schedule 25 (single phase and three phase), the first option would be to reduce current structures by a set amount across the board, the second option would have a tiered customer charge for usage with 30 kilowatts of usage as the breakpoint, the third option would set the customer charge lower than the second option to accommodate smaller customers while setting demand charges at cost-of-service levels, and option four would modify the third option by decreasing the customer charge at lower usage levels so there would be no negative effect on smaller customers. Emphasized that the fourth option is recommended here for both the single and three phase schedules. Discussed the fact that meeting customer costs through the customer charge allows a utility to offer competitive rates, which is the primary area looked at by customers in choosing a utility. Noted that this will be more of a factor when competition comes into play, contracts are renegotiated, and the Department of Electrical Utilities considers unbundling of services. For Institutional Schedule 30 (single phase and three phase), which applies primarily to governmental customers, the first option would reduce charges to cost-of-service levels with existing structures, while the second option would have a simplified tiered customer charge, the third option would have reductions in the demand charge to cost-of-service levels and the fourth option would reduce both the customer and demand charges toward cost-of-service levels. Sands noted that both the single phase and three phase elements of Schedule 30 were looked at along with Schedule 50 to ensure equitable reductions. Otherwise, Schedule 50 would have increased as the others decreased. Discussion of whether there were small users within this class who would be affected by customer charge increases. Mayor Shaw explained that there was no need to dwell on this issue for institutional users, and that negative impacts to smaller customers were more of a concern when considering small residential customers. Ashland City Council Study Session Minutes 05-06-98 For Institutional Schedule 50 (time-of-use), the options were much the same, but the first option's adjustment of current structures by cost-of-service percentages would result in a 61/2 % increase in the monthly bill. The second option would adjust the customer charge to cost-of-service levels, the third would set demand charges at cost-of-service and include the user tax in the rate, and the fourth option would set demand charges at cost-of- service levels while adjusting customer charges towards cost-of-service to keep the rates low. The second, third and fourth options all result in a 2 % decrease in the total bill for Schedule 50 customers. Sands concluded by discussing the general philosophy behind the recommended rates, noting that the full reduction is based on overall cost-of-service results, and is designed to prepare for competition and move towards cost-of-service in terms of both class-specific and rate elements, to simplify structures and maintain conservation inducements for residential customer classes. Noted that Schedule 48, which previously applied only to Croman Corporation, should be retained but that Croman should be moved to Commercial Schedule 25 as their usage patterns have changed. Noted that language should be included in this schedule to allow for rate negotiation. Discussed the overall impact of a cost-of-service rate reduction on the general fund, noting that user tax revenues would increase $107,754 while revenues from the franchise fee would decrease $56,657 for a total increase in the General Fund of $51,097. Kevin Harper noted issues that would need to be addressed in the future as competition in the industry becomes a factor. Noted that the rate study had been drawn from the strategic plan, and explained that this linkage would be discussed in more detail in the final report. Cited issues to address in the future as including the unbundling of services, negotiated rates for larger customers, restructuring of the BPA contract, looking into the continued ability to charge the users tax and the need to increase community understanding of the users tax, the need for additional revenue sources and the need to secure alternative funding for conservation programs. Also noted that the Department of Electrical Utilities would need to complete a marginal cost-of-service study before the next rate study, develop inventory and characteristics of unbundled products and services, assess the competitiveness of existing products and services relative to expected competitors, identify customer loads at risk, and establish information system requirements to track and allocate revenues and costs by product, service, and customers. City Administrator Mike Freeman noted that this study session had provided council with a summary of the results of the Cost-of-Service Study. Stated that the next step should be to look at issues and scenarios for each customer class and discuss some legal issues at the study session to be held Wednesday, May 20. Once council has had the opportunity to look at issues raised by this study, the ordinances and resolutions setting electric rates would need to be modified based on the council's decision. ADJOURNED The meeting was adjourned at 2:55 p.m. Submitted by Derek Severson, Assistant to the City Recorder Ashland City Council Study Session Minutes 05-06-98 4