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HomeMy WebLinkAboutAgenda Report - January 21, 2009 K-04AGENDA ITEM K9*4 00 CITY OF LODI COUNCIL COMMUNICATION TM AGENDA TITLE: Directthe City Managerto Researchand Recommenda Leveling Mechanismfor the Energy Cost Adjustment (ECA) and, in the Interim, to Implement a Maximum Levelforthe ECAof $0.025 per Kilowatt-hour Beginning in February2009, (EUD) MEETING DATE: January 21,2009 PREPARED BY Electric Utility Director RECOMMENDED ACTION: Direct the City Managerto research and recommend a leveling mechanism for the Energy Cost Adjustment (ECA) and, i n the interim, to implement a maximum "cap" for the ECA of $0.025 per kilowatt-hour beginning in February2009. BACKGROUND INFORMATION: In August 2007, the Electric Utility Department began implementation of a monthly Energy Cost Adjustment to ensure that the utility neither under- or over -collected power costs on a current basis. Each month, EUD's power costs are compared with the amount of power costs included in base electric rates ($0.0831 per kilowatt-hour)—the difference becomes the ECA for that month. In the eighteen months that the ECA has been in effect, the monthly ECA level has ranged from a negative $0.0125 (credit) to a positive $0.0464 (charge). The average has been $0.0157. When the ECA was formulated, it was anticipated that its range would be relatively small with the highest level being in winter months (when overall electric bills are relatively low) of perhaps $0.030 per kilowatt-hour. For the first sixteen months, the peak ECA level was $0.028 however the ECA has exceeded $0.045 for the past two months (December2008 and January 2009) in large part due to overall budgeted power costs being higherthis fiscal year ($46.7 million) as compared to the priorfiscal year ($42.3 million). Consequently, it is recommended that a "cap" be implementedfor the ECA of $0.025 per kilowatt-hour beginning in February 2009. Power Supply costs that are not recovered in any particular month because of the cap will be rolled over to the next month for inclusion in the ECA calculation. Staff will continue its review of smoothing mechanisms for the ECA for future presentation to the City Council by the City Manager. From a typical electric customer standpoint, the proposed ECA cap will move the recovery of a portion of power supply costs from higher cost winter/summer months into lower bill months in the spring and fall. FISCAL IMPACT: The recommended ECA cap is expected to have a relatively nominal (and short term) impact on the utility's cash flow and reserve levelal FUNDING: Not applicable r1ae F_ IlMmmw Electric Utility Director APPROVED: Blair King<9"anager Energy Cost Adjustment "ECA" City Council January 21, 2009 City of Lodi, California What'is an ECA? • An ECA is a mechanism to collect/credit purchase power and/or fuel costs on a regular basis • "ECA"s are called a variety of different names across the country (i.e. FCA, PCA, etc.) • Timeframes of adjustment run from monthly to quarterly to semi-annually to annually The types of charges included in an ECA run the gamut from all power supply costs, variable costs only, fuel only, purchased power only, etc. K Credit Effect Fitch Report "Excerpt' I I Positive Neutral/ Weak Liquidity Factor Considerations Quick Liquidity Access ll Slow A B Best Good oo Unrestricted cash. oo Automatic adjustment rate oo Cash informally pledged. (semi annual or longer). oo Automatic rate adjustment oo Cash formally pledged. (monthly preferred). oo Margins substantially above rate oo No automatic rate adjustment (but covenant. good dialogue with board). oo Surplus fuel reserves. C D Less Favorable Least Favorable oo Low fuel reserves. oo Operating margins narrowly oo Use of existing commercial paper meeting rate covenant. program. oo No automatic rate adjustment. oo Drawdown of bank facility. oo New long-term deficit financing. oo Asset sale. Quick Liquidity Access ll Slow California Public Power Credits Are Adapting To An Evolving Market Publication date: December 18, 2006 "On the financial side, many utilities that lacked fuel or power cost adjustments five or 10 years ago have now established them. These adjustments allow for quicker and more complete recovery of variable power and fuel supply costs, while at the same time reducing some of the politics that can limit or delay cost recovery. We believe utilities that have yet to implement some version of a variable cost recovery mechanism in their rate structures should certainly consider them, especially those that are gas -dependent, as these mechanisms can help to stabilize financial performance and debt service coverage ratios --two key factors in our credit analysis." Excerpt CI Lodi ECA • Equals amount of power supply cost different from 8.31 0/kwh • Energy Cost Adjustment (ECA) updated monthly to reflect actual EUD costs • Adjustment for variations in actual vs. projected sales on a two month lag • ECA could reflect a char a during periods where costs are higher than "base" level ora credit when costs are lower than base level • ECA identical for all rate classes • Simple and transparent • Readily trackable/auditable 9 0 Lb I) Simplified Formula ECA* PowerCosts - 8.310/kwh Sales *Plus adjustment for over/under collection two months prior. ECA Variability Generally market power prices higher in summer and winter (hence higher ECA) Seattle City Light Exchange — Reduces power cost in summer months — Increases power cost in winter months N Issue • The ECA has exceeded the upper end of the range we anticipated. • Winter months of December through February the ECA will exceed 30/kwh. • Primary reasons include: — Seattle energy payback — Increased fixed NCPA plant expenses — Higher open market power costs than prior year ;l Actual ECA to date u ne 2008 0.0060 FJ May 0.0097 Apr 0.0055 Mar 0.0224 Feb 0.0253 Jan 2008 0.0177 Dec 0.0280 Nov 0.0148 Oct 0.0055 Sep -0.0125 Aug 2007 0.0027 ($/kwh) 9 J u 12008 0.0121 Aug 0.0262 Sept 0.0119 Oct 0.0066 Nov 0.0119 Dec 0.0460 Jan 2009 0.0464 Actual Estimated ECA Levels J u 12008 0.0121 Aug 0.0262 Sept 0.0119 Oct 0.0066 Nov 0.0119 Dec 0.0460 Jan 2009 0.0464 Feb 0.0474 Mar 0.0343 Apr 0.0129 May 0.0050 June -0.0068 Average 0.0170 10 Recommendation • Limit ECA to a level of 2.5¢ per kwh • Roll any "excess" power costs to subsequent month(s) • Continue exploring other practical ECA smoothing scenarios • Return to City Council with a report and recommendations 11 Questions/Comments?