HomeMy WebLinkAbout2011-0815 Study Session PACKET CITY OF
ASHLAND
CITY COUNCIL STUDY SESSION
AGENDA
Monday, August 15, 2010 at 5:30 p.m.
Siskiyou Room, 51 Winburn Way
5:30 p.m. Study Session
1. Look Ahead Review
2. Does Council have questions about the use of electronic packets? [30 Minutes]
3. Does Council have questions about the need for electric rate increases, to become
effective November 20, 2011? [45 Minutes]
In compliance with the Americans with Disabilities Act, if you need special assistance to participate in this
meeting, please contact the City Administrator's office at(541) 488-6002(TTY phone number 1-800-735-
2900). Notification 72 hours prior to the meeting will enable the City to make reasonable arrangements to
ensure accessibility to the meeting (28 CFR 35.102-35.104 ADA Title I).
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11 O N 4 O O Q J
CITY OF
ASHLAND
Council Communication
Study Session - Electric Rate Discussion
Meeting Date: August 15, 2011 Primary Staff Contact: Lee Tuneberg
Department: Electric E-Mail: tuneberl @ashland.or.us
Secondary Dept.: Finance Secondary Contact: None
Approval: Martha Bennett Time: 45 minutes
Question:
Does the City Council have questions about the need for electric rate increases, to become effective
November 20, 2011?
Staff Recommendation:
Staff recommends that Council schedule a Public Hearing for September 20, 2011, to discuss what, if
any, rate adjustment is done for electric rates effective November 20, 2011. If Council does not want
to consider a rate adjustment, a public hearing is not needed.
Discussion points:
Staff believes Council will benefit from discussing some operational and policy issues in advance of
holding a public hearing or setting rates, as follows:
1. The wholesale power increase from BPA has been reduced from 13.9% to 11.6%, but is still
estimated at a $605,000 per year increase, which could represent a 5% increase to customers.
What portion should be passed on to our customers?
2. Other cost increases for 2012 and beyond exceed savings from the proposed staffing
reorganization. What range of rates should be anticipated over the next three years to ensure
adequate reserves are met?
3. Purchasing the Mt. Avenue Substation could have a positive (saving) impact on Ashland
customer rates. Does Council want to aggressively pursue the purchase?
4. Does Council want staff to consider customer assistance programs to help customers to pay
electric bills beyond the existing ALIEAP and Senior/Disabled discounts?
Council may have other discussion points, but direction on the above will assist staff in preparing for a
public hearing and "next steps' planning or the upcoming year.
Background:
Staff s goals include generating adequate revenue to pay for operational costs and capital related
expenditures while maintaining sufficient ending fund balances (EFB) to meet future obligations.
Ending fund balances are minimum targets.
The City's recent practice is to consider electric rates in the Fall, in conjunction with changes for
wholesale power costs or transmission rates that become effective October 1 of each year. It is also a
good time to review actual costs from the prior fiscal year along with the current and projected EFB for
the fund. Rates for other enterprise services the city provides are independent of this action but may be
an indirect factor when considering affordability for ratepayers.
Page I of 7
CITY OF
ASHLAND
The Budget Message in the Proposed FY 2011-2012 document included the following table, and 2012
revenue estimates included these rate increases in the 2012 column.
Rate Adjustments in FY 2008 FY 2008-2009 2010 FY 2010-2011 2012 2013 2014
Actual,Proposed&Projected Actual Actual is (4120/0
Transportation Utility Fee 15.0% 3.0% N/A 3.0% 3.0% 0.0% 4.0% 3.0% 3.0%
Storm Drain Utility Fee 50.0% 10.0% N/A 3.0% 5.0% 0.0% 15.0% 4.0% 4.0%
Water Fees 6.0% 4% - 7.8% 10.0% 8.0% 8.0% 10.0% 5.0% 3.0% 3.0%
Wastewater Fees 10.0% 3.0% 20.0% 9.0% 8.0% 6.0% 4.0% 4.0% 4.0%
ElectncRate Increase
00% 0%;Ty
Electric Surcharge •16.6°/ -
As you can see,budgeted rate increases are not automatic. Ashland has a history of evaluating
financial and operational needs to determine what will actually be implemented. Last year no
increases were done for Transportation, Storm Drain and Electric, less was implemented for
Wastewater and more for Water. The "more" was precipitated by cool wet weather that reduced water
sales and minimized revenue needed to pay for overhead.
The Electric increase budgeted for FY 2011-2012 is 6% and was justified by the proposed 13.9%
increase from Bonneville Power Administration (BPA) for wholesale power. The latest numbers are
an 11.6% increase on wholesale rates that would have a "pass through" impact on customers of 5%.
The Electric's financial condition is relatively positive, and the increase in power costs will not start
until October 1. These two conditions provide an opportunity(option) to reduce budgeted rate
increases.
Staff has modeled costs based on 2011 preliminary numbers and known cost increases for FY 2012, to
identify a range of potential increases spread over the next three years.
Financial projections and impact on rates-The Electric Fund operations are expected to finish
$700,000 better than budgeted for FY 2011. This is due to total revenue being close (98%) to budget
and expenses ending at 92%. Of the 8% "savings" in expenses, less than 3% is unused Contingency.
The other 5%below budget is due to unfilled positions and undone projects. This reduced level of
expenditures helped the bottom line, but also means work was not done. Also, these reduced costs
may not recur.
Staff modeled costs based on projected revenues and expenses for 2011, adjusted for filled positions
and savings from the reorganization (half of the cost of the Assistant City Administrator charged to
electric), increased wholesale power costs effective October 1, 2011, and increased internal charges.
Page 2 of 7
C I T Y OF
-ASHLAND
The following presentation includes:
• Actual for 2010 is audited information
• Projected for 2011 is an estimate
• Projected 2012 is 2011 with known or expected changes
• Budget 2012 is for reference (the substation purchase and Contingency have been removed)
• Projected for 2013 and 2014 are extrapolations from 2012 Projected using one of the following:
actual from 2011, budgeted amount as a default or estimated where change is expected like
wholesale power
• No added revenue from a rate increase is included
% Projected - Projected Projected
Operating Revenue: 2010 2011 Factor 2012 r 2013 2014
Charges for Services 11,931,379 $12,126,401 100.00% $12,126,401 $12,126,401 $12,126,401
Fees 212,900 112,315 100.00% 112,315 tr t 112,315 112,315
Operating Revenue 12,144,279 12,238,716 12,238,716 12,238,716 12,238,716
Power Costs
Supply (4,873,111) (5,192,326) 109.02% (5,660,711) r ttt (5,934,267) (5,934,267)
Transmission (866,133) (818,221) 100.00% (818,221) trr (953,000) (953,000)
Power Costs (5,739,244) (6,010,547) (6,478,932) ttr (6,887,267) (6,887,267)
Gross Profit 6,405,035 6,228,169 5,759,784 rrr 5,351,449 5,351,449
Operating Expenses
Personal Services (1,872,383) (1,782,175) 100.00% (1,982,175) r•r : (2,081,284) (2,185,348)
Materials&Services (522,522) (548,498) 100.00% (548,498) t t t (561,000) (561,000)
Operating Expenses (2,394,905) (2,330,673) (2,530,673) (2,642,284) (2,746,348)
Overhead
Internal Charges (1,390,205) (1,390,205) 102.63% (1,426,800) • :tt (1,426,800) (1,426,800)
Technology Debt (252,300) (252,300) 214.55% (541,300) r t (541,300) (541,300)
Franchise tax (1,230,743) (1,227,662) 10.03% (1,227,662) 1t r,tt (1,227,662) (1,227,662)
Overhead (2,873,248) (2,870,167) (3,195,762) tt (3,195,762) (3,195,762)
Operating Net Income 1,136,882 1,027,329 $33,349 t ($486,596) ($590,660)
Non Operating Income(expenses)
Intergovernmental-Grants $ 267,850 $161,119 90.00% $145,000 • ttt $145,000 $145,000
Interest on Investments 11,320 10,818 180.26% 19,500 t t 19,500 19,500
Miscellaneous Revenues 275,988 154,965 93.89% 145,500 t t 145,500 145,500
Financing Proceeds - - 100.00% - - -
Conservation (714,891) (546,776) 93.24% (509,841) r' :• (509,841) (509,841)
Capital Outlay (539,852) (362,586) 151.69% (550,000) ••s ttr (550,000) (550,000)
Debt Service (25,107) (24,837) 98.90% (24,565) (24,293) (24,022)
(724,692) (607,297) (774,406) •t. (774,134) (773,863)
Net Income(Loss) $412,190 $420,032 ($741,057) ($1,260,730) ($1,364,523)
Working Capital Carryover 2,458,741 •r 1,717,684 456,954
Operating Ending Fund Balance $ 1,717,684 $ 456,954 $ (907,570)
No contingencies.constant Kwh purchase 8 sold 12% 12% 12%
No substation purchase,borrowing,or debt service EFB Target $1,469,000 $1,469,000 $1,469,000
In addition to the wholesale power increase in 2012 and scheduled transmission increase in 2013, the
assumptions include minimal adjustments in Personal Services, Debt Service and conservative
estimates for Capital Outlay. This model takes advantage of the reduced position costs from the
reorganization. It does not incorporate potential savings from the substation purchase.
Page 3 of 7
P`,
CITY OF
ASHLAND
The above assumptions translate into a decline trend of approximately $740,000 in the current year,
$1.2 million in 2012, and over$1.3 million in the last year - all things being equal and with no
increase.
Staff modeled the above spreadsheet to gain a feeling for the fund's financial condition and to
demonstrate the impact of no electric rate increases on the status quo. In order to look at rates fairly,
some other assumptions must be incorporated, such as inflation and personnel costs. Subsequent
modeling uses 3% for these areas.
Staff looked at a range of increases from I% to 6% in the first year (FY 2011-2012 effective this
October). The result of rate increases and impact on the following two years, while meeting the
minimum (target) EFB at the end of FY 2013-2014, is reflected in the table and chart below.
Percentages of Electric Rate Increases to Reach Target Ending Fund Balances
FY 2011- FY 2012- FY 2013- Impact of 3 year
Options 2012 2013 2014 Sum compounding
1 1.0% 8.88% 8.88% 18.76% 19.56%
2 2.0% 7.72% 7.72% 17.44% 18.36%
3 3.0% 6.58% 6.58% 16.16% 17.00%
4 4.0% 1 5.45% 5.45% 14.90% 15.64%
5 5.0% 4.34% 4.34% 13.68% 14.31%
6 6.0% 3.24% 3.24% 12.48% 12.98%
Percentage of Electric Rate Increases to Reach Target
Ending Fund Balances
i
9.0%
8.88%
8.0%
7.72% —*—Option 1
7.0% .
IL 6.58% —E Option 2
6.0%
6.0% X 5.45%
5.0% * Option 3
5.0% 4.34%
4.0% �-O lon
4.0 t 4
% p .
3.0% — % 3.24%
3.0% —# Option 5
2.0% -
2.0%
1,00/. - +Option 6
1.0%
0.0% T
FY 2011-2012 FY 2012-2013 FY 2013-2014
Page 4 of 7
OW
II,
CITY OF
ASHLAND
Staff's opinion is that a 4% increase in this fiscal year is the best compromise. This would provide
adequate revenue(combined with above target reserves) to minimize the immediate impact on the
customers.
Staff also suggests averaging increases in the second and third years to avoid dramatic spikes and
continuing to mitigate impacts on customers. Staff proposes a 4% increase in FY 2011-2012, followed
by a budgeted 5.45% increase in FY 2012-2013 and in FY 2013-2014. The higher percentages in the
last two years are due to the elevated EFB being used in year one. Once reduced by employing only a
4% increase in FY 2011-2012, subsequent rates must be higher until a new surplus is realized.
The 5.45% increases are estimates, and the city would be able to adjust each year's rates based upon
how well the fund did with revenue generation and cost containment. Each year's changes in rates
would still require a public hearing and Council's approval to.implement.
The impact on the bottom line of a 4.0%/5.45%/5.45% approach is as follows:
% Projected % Projected % Projected
Operating Revenue: 2010 2011 Factor 2012 Factor 2013 Factor 2014
Charges for Services 11,867,837 $12,126,401 104.00% $12,407,222 105.45% $13,066,979 105.45% $13,778,497
Fees 276,442 112,315 100.00% 112,315 art 112,315 112,315
Operating Revenue 12,144,279 12,238,716 12,519,537 13,178,694 13,890,812
Power Costs
Supply (4,873,111) (5,192,326) 109.02% (5,660,711) a aaa 104.83% (5,934,267) 100.00% (5,934,267)
Transmission (866,133) (818,221) 100.00% (818,221) aar 116.47% (953,000) 100.00% (953,000)
Power Costs (5,739,244) (6,010,547) (6,478,932) aaa (6,887,267) (6,887,267)
Gross Profit 6,405,035 6,228,169 6,040,605 tar 6,291,428 7,003,545
Operating Expenses
Personal Services (1,872,383) _ (1,782,175) 100.00% (1,982,175) a•a : 10100% (2,041,640) 103.00% (2,102,889)
Materials&Services (522,522) (548,498) 100.00% (548,498) ara 103.00% (564,953) 103.00% (581,902)
Operating Expenses (2,394,905) (2,330,673) (2,530,673) (2,606,593) (2,684,791)
Overhead
Internal Charges (1,390,205) (1,390,205) 102.63% (1,426,800) • :aa 100.00% (1,426,800) 100.00% (1,426,800)
Technology Debt (252,300) (252,300) 214.55% (541,300) as 100.00% (541,300) 100.00% (541,300)
Franchise tax (1,230,743) (1,227,662) 10.30% (1,289,512) ar rra 105.27% (1,357,406) 105.40% (1,430,754)
Overhead (2,873,248) (2,870,167) (3,257,612) as (3,325,506) (3,398,854)
Operating Net Income 1,136,882 $1,027,329 $252,320 a $359,329 $919,901
Non Operating Income(expenses)
Intergovernmental-Grants $ 267,850 $161,119 90.00% $ 145,000 aaa 100.00% $145,000 100.00% $145,000
Interest on Investments 11,320 10,818 180.26% 19,500 a a 10(F00% 19,500 100.00% 19,500
Miscellaneous Revenues 275,988 154,965 93.89% 145,500 a a 100.00% 145,500 100.00% 145,500
Financing Proceeds - - 100.00% - - -
Conservation (714,891) (546,776) 93.24% (509,841) a• .• 100.00% (509,841) 100.00% (509,841)
Capital Outlay (539,852) (362,586) 151.69% (550,000) ..a aar 100.00% (550,000) 100.00% (550,000)
Debt service (25,107) (24,837) 98.90% (24,565) 98.89% (24,293) 98.88% (24,022)
(724,692) (607,297) (774,406) 1. (774,134) (773,863)
Net Income(Loss) $412,190 $420,032 (5522,086) ($414,805) r $146,038
Working Capital Carryover 2,458,741 'r 1,936,655 1,521,850
Operating Ending Fund Balance $ 1,936,655 $ 1,521,850 $ 1,667,887
Assume 100%ol AWn,pdatims spent exceptrw contingency used. 12% 12% 12%
EFB Target 1,502,000 1,581,000 1,667,000
Target Variance $ 434,655 $ (59,150) $ 887
Page 5 of 7
�r,
CITY OF
ASHLAND
The proposed approach provides adequate short-term funding and allows the City make appropriate
annual adjustments. In the first year the elevated EFB is "spent down"but is still $484.655 above the
minimum target. In the second year, it drops further to $59,150 under the minimum, and in the third
year, it rebounds to less than $1000 off.
Substation
Purchasing Mt Avenue Substation is one way to improve Ashland's control of the infrastructure and to
save money. Actual savings is dependent upon the purchase price and the amount BPA will charge the
City for future power deliveries, AKA "transmission."
The math: The City pays over $125,000 per year for this service at that site, and it is expected to rise
significantly. Using-a simple math approach, the debt service on a $1.4 million loan is estimated at a
constant $112,000 per year. BPA contracts call for potential increases every other year. If the delivery
costs'only increase one time at 10% ($125,000 + $12,500 = $137,500) it results in savings of over
$25,500/year. The estimate for maintenance is approximately that much thus the City would save on
any increases over the one 10% boost. Extrapolations show annual delivery costs going over $200,000
during the next 20 years.The substation is expected to have a 30 year life. Part of the savings could be
set aside in the Equipment Fund for future replacement of this facility.
Discount programs
Through the ALIEAP and the Senior/Disabled discount program, the City assists customers who have
difficulty in paying their utilities. The ALIEAP program is focused on winter electric heating, while
the Senior/Disabled program offers year-round assistance on all utilities. Both programs only apply to
those who qualify as a low income customer. The Parks Senior program takes the lead on "qualifying"
customers fo" all programs and the UB Customer Service Division assists while also managing the
Utility Bill Round Up program.
Of the 8,500 electric services,.we assisted 427 customers with $91,651 in ALIEAP dollars and 122
customers with $30,496 in Senior/Disabled dollars during FY 2010-2011. Please note that assistance
in paying utility bills is also indirectly provided via grant programs like St Vincent De Paul, and
reduced utility costs are accomplished via the various conservation programs.
Future issue:
The Electric Fund and rates have not had an in depth review for a decade. Ashland's residential rates
are competitive with Pacific Corp., even though our commercial customer base appears quite different
(manufacturing as opposed to tourist and service industry) and it is hard to do a fair comparison.
There is the potential that some customer classes are subsidizing others and that the amount charged
for basic power utilized for residential health and welfare is not acceptable. Additionally, the impact
of conservation and potential major changes in power use by large customers will affect the amount
Ashland pays for a KWh and these impacts should be modeled. Therefore, staff recommends
budgeting for a formal rate study, to be performed in FY 2012-2013, to address these and any other
issues identified by Council.
Related City Policies:
None
Page 6 of 7
�r,
CITY OF
-ASHLAND
Council Options:
1) Schedule a hearing to consider an electric rate increase.
2) Schedule a hearing to consider increases in electric rates and/or other utility fees.
3) Leave rates at current level, schedule no hearing.
Potential Motions:
Move to approve scheduling a public hearing to consider rate adjustments.
Attachments:
None
Page 7 of 7