HomeMy WebLinkAboutAgenda Report - March 16, 2011 I-02OLAGENDA ITEM J:*'
4% CITY OF LODI
COUNCIL COMMUNICATION
Im
AGENDA TITLE: Adopt Resolution Rescinding Resolution No. 2007-13 and Approving the Revised
Electric Reserve Policy
MEETING DATE: March 16,2011
PREPARED BY: Electric Utility Director
RECOMMENDEDACTION: Adopt a resolution rescinding Resolution No. 2007-13 and
approving the Revised Electric Reserve Policy.
BACKGROUND INFORMATION: On January 17,2007, the City Council adopted Resolution No.
2007-13, establishing an Electric Reserve Fund Policy. The Policy
set an initial Electric Reserve Target Level of $12.9 million as
follows:
Operating Reserves: $8.2 million, equal to 45 days of budgeted operating costs
Capital Reserve: $500,000, equal to the cost of largest distribution system contingency
Rate Stabilization Fund: $4.2 million, equal to 20 percent of annual market power costs
The Electric Utility Department's available cash reserves as of June 30, 2010 were $12.1 million
compared to the $3.6 million cash reserves available June 30, 2006. The Policy also provided for an
updated assessment of the Target every three years with a report to the City Council.
The attached report provides the City Council with an updated assessment of prudent cash reserve
levels for Lodi Electric Utility. Staff recommendsthe City Council rescind the current resolution and
adopt a resolution revising the Electric Reserve Policy as follows:
Fund Designation
Basis
Operating Reserve
90 days cash on hand
Capital Reserve
Largest distribution system
contingency
NCPA- General Operating
As identified by NCPA plus
Reserve
I allowancefor unanticipated studies
Konradt Bartlam, City Manager
For FY 2011
$18,900,000
$ 500,000
$ 9,300,000
Adopt Resolution Rescinding Resolution No. 2007-13 and Approving the Revised Electric Reserve Policy March 16, 2011
Page 2 of 2
FISCAL IMPACT: No immediatefiscal impact is projected by the adoption of the Revised Electric
Reserve Policy.
FUNDING: None at this time.
E eth A. Kirkley
Electric Utility Director
PREPARED BY: Matt Foskett, Rates and Resources Manager
EK/MF/Ist
UPDATED ASSESSMENT OF PRUDENT
CASH RESERVE LEVELS FOR LODI ELECTRIC UTILITY
OCTOBER 2010
PURPOSE
To report to the City Council an updated assessment of prudent cash reserve levels that should
be maintained by Lodi Electric Utility.
BACKGROUND
A November 2006 study by Navigant, Inc., commissioned by the City of Lodi recommended that
the City's Electric Fund maintain cash reserves as follows:
Fund Designation
Recommended
Basis
Minimum Balances
as of 2007
Operating Reserve
$ 8,200,000
45 days of budgeted operating costs
Capital Reserve
$ 500,000
largest distribution system
contingency (replace a substation
Rate Stabilization Reserve
$ 4,200,000
transformer
Rate Stabilization Reserve
$ 4,200,000
10% of all annual power costs
Total Cash on hand
$ 12,900,000
On January 17, 2007, the City Council adopted Resolution No. 2007-13, Establishing an Electric
Reserve Fund Policy ("Policy"). The Policy set an initial Electric Reserve Target Level ("Target"):
Fund Designation
Recommended
Basis
Minimum Balances
as of 2007
Operating Reserve
$ 8,200,000
45 days of budgeted operating costs
Capital Reserve
$ 500,000
largest distribution system
contingency
Rate Stabilization Reserve
$ 4,200,000
20% of annual spot market power
costs
Total Target
$ 12,900,000
The Policy included City Council endorsement of a program to increase cash reserves to the
Target by June 2010. The Policy also provided for an updated assessment of the Target every
third year.
This report is the updated assessment.
DISCUSSION
A. Status of Original Target: The Target was reached by June 2010. As of June 30, 2010,
Electric Fund Cash Reserves stood at (unaudited):
Location Balance
Lodi $ 12,125,835
NCPA General Operating Reserve $ 11,011,668
Total Cash on hand $23,137,503
B. Updating the Target: In updating recommendations for the prudent cash reserve levels, the
following information is taken into consideration:
1. In its annual budget, NCPA lists a number of contingent liabilities for Lodi to address by
maintaining funds in its account in the NCPA General Operating Reserve (rounded here):
a. Hydro Plant & Western Dry Year: Lodi's share of replacement power cost difference between
average and dry year generation in NCPA's Hydro Project and Lodi's allocation of Western Area
Power Administration Base Resource for a single year.
b. Self-insured Loss on Plants: Lodi's participant share of insurance deductibles, self-insured
retentions, or uninsured risk in the event of the "highest probable", "not worst case scenario",
property loss.
c. Unfunded Geo Decommissioning: Lodi's participant share of estimated decommissioning
cost of NCPA Geothermal Projects, less funding and interest to date.
d. Market Volatility Cost Reserve: Difference between high and median average annual electric
market prices ($/MWh) times estimated Lodi spot market purchases.
e. Other: Levelization of Lodi's share of future NCPA staff benefits costs and NCPA general loss
liability insurance deductible.
2. The Rate Stabilization Reserve is redundant with the NCPA Market Volatility, Western, and
Hydro Plant contingencies, as well as the working of the Lodi EUD Energy Cost Adjustment
(ECA) that works to pass through normal volatility to customers.
3. Fitch Ratings, in its June 2010 U.S. Public Power Peer Study Addendum finds that the public
power retail utilities it rates "A" average 107 days of cash on hand. Public power retail utilities
rated AA by Fitch average approximately 121 days of cash on hand. Lodi's rating affects the
interest paid on future Lodi financings and refinancings as well as those of NCPA Plants from
which we take cost -based output. The proposed Westside Substation, White Slough Substation,
and 60 kV power line to White Slough will require financing as may some green energy projects
under study.
Contingent Liability
Required Funding for
FY 2011
a
Hydro Plant & Western Dry Year
$ 2,800,000
b
Self-insured Loss on Plants
$ 2,700,000
c
Unfunded Geo Decommissioning
$ 2,600,000
d
Market Volatility Cost Reserve
$ 700,000
e
Other combined
$ 200,000
Total Cash Target in GOR
$ 9,000,000
a. Hydro Plant & Western Dry Year: Lodi's share of replacement power cost difference between
average and dry year generation in NCPA's Hydro Project and Lodi's allocation of Western Area
Power Administration Base Resource for a single year.
b. Self-insured Loss on Plants: Lodi's participant share of insurance deductibles, self-insured
retentions, or uninsured risk in the event of the "highest probable", "not worst case scenario",
property loss.
c. Unfunded Geo Decommissioning: Lodi's participant share of estimated decommissioning
cost of NCPA Geothermal Projects, less funding and interest to date.
d. Market Volatility Cost Reserve: Difference between high and median average annual electric
market prices ($/MWh) times estimated Lodi spot market purchases.
e. Other: Levelization of Lodi's share of future NCPA staff benefits costs and NCPA general loss
liability insurance deductible.
2. The Rate Stabilization Reserve is redundant with the NCPA Market Volatility, Western, and
Hydro Plant contingencies, as well as the working of the Lodi EUD Energy Cost Adjustment
(ECA) that works to pass through normal volatility to customers.
3. Fitch Ratings, in its June 2010 U.S. Public Power Peer Study Addendum finds that the public
power retail utilities it rates "A" average 107 days of cash on hand. Public power retail utilities
rated AA by Fitch average approximately 121 days of cash on hand. Lodi's rating affects the
interest paid on future Lodi financings and refinancings as well as those of NCPA Plants from
which we take cost -based output. The proposed Westside Substation, White Slough Substation,
and 60 kV power line to White Slough will require financing as may some green energy projects
under study.
4. In a recent survey of NCPA Members, Members specified Operating Reserves policies with
minimum days' cash of: 145, 146, 90, 55, 110, 61, 91, and 150.
This averages to 106 days' cash, in addition to any reserves for Capital, Rate Stabilization, or
NCPA-identified issues.
5. In many years, significant studies are undertaken that are not anticipated at budget time. For
example, NCPA is now studying three proposals for renewable, non -Greenhouse Gas energy
supplies. Lodi's participant share of such studies could exceed $300,000 in a year.
RECOMMENDATION
It is recommended that:
1. the City Council revise the next interim Electric Reserve Target Level to:
Fund Designation
Basis
For FY 2011
Operating Reserve
90 days cash on hand
$ 18,900,000
Capital Reserve
Largest distribution system
contingency
$ 500,000
NCPA - General Operating
Reserve
As identified by NCPA plus
allowance for unanticipated studies
1
$ 9,300,000
1
Total Target
$ 28,700,000
2. in the event that the ECA is modified or smoothed from a month-to-month matching of costs
and revenues, that reconsideration be given to adding an allowance to the Target;
3. budgeting and rate -making consider progress toward the Target over the next three years
and other issues important to financial ratings, such as debt -service coverage;
4. the assessment and its bases continue to be reviewed at intervals of three years.
DETERMINATION OF PRUDENT AND APPROPRIATE
CASH RESERVE LEVELS FOR
LODI ELECTRIC UTILITY
NOVEMBER 2006
PURPOSE
To determine prudent and appropriate levels of cash reserves that should be maintained
by Lodi Electric Utility.
BACKGROUND
In Lodi, the cost of operating and maintaining its electrical system is supported
primarily by retail rates. Historically, these costs have had some degree of
predictability, however, in recent times price volatility as a result of power scarcity,
natural gas price increases and environmental compliance issues have created periods of
price instability. Such effects have been most notable in energy markets over the past
few years as city councils and utility boards have struggled with rate setting decisions
that relate to maintaining the financial health of their utilities. Unlike those utilities that
have strong cash positions, Lodi Electric Utility finds itself in a cash poor position as a
result of some past decisions relating to fuel markets, purchased power and rates.
Lodi Electric Utility recognizes that maintaining adequate cash reserves is an operational
need as well as a primary determinate of its bond ratings. Since Lodi Electric Utility is a
member of the Northern California Power Agency (NCPA), it is faced with the
additional consideration that its financial situation also has an effect upon NCPA's
future financings, bond ratings and costs.
Since the establishment of reserves is often viewed as a policy issue, the determination
of appropriate reserve levels is best decided by the City Council. For that reason, Lodi
Electric Utility has undertaken this study to develop a criteria and recommendations to
advise the City Council on the level of reserves needed to maintain the fiscal health of its
electric system.
STUDY APPROACH
The process used to develop the recommendations found in this report included:
• Consideration of the contingencies and probabilities of Lodi Electric Utility
encountering those contingencies
• A review of reserves levels in the electric utility industry
• A limited survey of the practices employed by comparably sized California
municipal utilities
• Discussions with Lodi Electric staff.
The focus of this study is not on those reserve balances associated with the issuance of
bonds, but rather on those more commonly set-aside by businesses for general,
particular or contingency purposes. It is also important to note that this study is not
designed to determine the adequacy of revenues generated from utility billings to
support reserve funds. It is presented on a revenue -neutral basis and does not address
utility rates or revenues.
ANALYSIS
Cash reserves are highly liquid assets that are set aside by business organizations to
provide funds to address operational contingencies. Factors that guide the types and
sizes of reserves vary from organization to organization and business to business. Both
business and governmental organizations that are well managed generally maintain
cash reserves in amounts appropriate for the risks associated with their line of work. The
size of the reserve is generally based upon an assessment of specific contingencies that
might require the use of fund reserves and the probability of such events occurring.
Reserves are often classified in the following manner:
Operating Reserves
Most utilities maintain Operating Reserves in one form or another. The amount or level
of reserves is generally based upon providing "coverage" of expenses over a number of
days. Typically, Operating Reserves are sized to cover 30-60 days' expenses. Operating
Reserves represent the most common form of cash reserves in place in the utility
industry.
Capital Reserves
A second type of reserve that is often encountered among capital intensive businesses is
Capital Reserves. Irrespective of whether they are governmental or investor-owned,
utilities by their very nature are highly capital intensive. That is, a lot of high cost
infrastructure is necessary for a utility to function properly. As a result, utilities often
issue bonds to finance a "plant" that will last for many years. As well, Capital Reserve
Funds are often set up to fund the emergency replacement of expensive capital
equipment. For example, an electric utility may establish a capital reserve fund at an
amount sufficient to fund the replacement of a failure of a turbine -generator, its largest
system contingency. Capital Reserves that are called upon to fund capital projects are
generally replenished from subsequent bond issues or rate revenue.
General Reserves
General Reserves are often established as a "catch all" to address either a wide range of
typically unspecified/ undefined contingencies. Because they are not created with
specific intent, they are often subject to criticism particularly when funded with
ratepayer dollars. It is not recommended that Lodi Electric Utility consider establishing
General Reserves at this time.
2
SpeciaVSpecific Reserves
Reserves are often created and designated for specific purposes. For example, in the last
decade many California municipal electric utilities established temporary reserves to
help ensure their competitiveness in the volatile restructured electric utility
environment. These reserves were often labeled "Stranded Investment Funds,"
"Competitiveness Funds," "Rate Stabilization Reserves," or other similar titles which are
somewhat descriptive of their purpose.
Debt Service or Bond Reserves
Issuers of debt sometimes maintain a debt reserve fund equal to some multiple of the
average periodic debt service payment. This requirement could even be formalized in
the form of a bond resolution associated with the borrowing. Utility debt service
payments generally become due twice a year. The existence of a debt service reserve
policy and associated funding could also send a favorable signal to investors and rating
agencies. If Operating Reserves take debt service obligations into account, the
establishment of a debt service reserve is generally not warranted.
DISCUSSION
Operating Reserves, sometimes referred to as working capital are well suited for
addressing normal variations from planned or budgeted cash flows, as well as
addressing contingencies that may arise from utility operations. They are generally
established by formal policy. Restricted cash reserves set equal to 30 to 60 days
operating costs are typical in the electric utility industry. Many California municipal
utilities have historically conducted business with only operating reserves and such
additional cash reserves as might be required under bond covenants.
Capital Reserves are often appropriate for utilities that own large power facilities. Also,
some utilities set aside capital reserves associated with their participation in shared
generation or transmission projects, such as those sponsored by NCPA. Beyond the
requirement to fund its share of capital reserves for joint power facilities, no need has
been noted for Lodi Electric Utility to establish capital reserves for additional power
supply. There are, however, capital need contingencies associated with its on-site
infrastructure.
The establishment of a Special Reserve to ensure that Lodi Electric Utility "remains
competitive" during this period following the unsuccessful restructuring of the electric
utility industry in California warrants some discussion. During early 2001 power price
volatility exceeded what anyone could have predicted. Even though California power
markets have now somewhat stabilized, albeit at higher levels than those of ten tears
ago, consideration should still be given to maintaining a special reserve to ensure Lodi
Electric rate competitiveness at least for the next several years. However, just like ten
years ago when electrical restructuring was in its infancy, it is not wise for anyone to
pretend to have knowledge of what future power costs might be. Still, the basis for
setting the level of special reserves remains the same - risk management.
3
Establishment of a Debt Service Reserve could have value as an indication to rating
agencies that Lodi Electric Utility is taking its recent downgrading by Fitch Ratings
seriously and that among the steps it is taking to strengthen its cash position, it is
formulating one to specifically address lender concerns.
COMPARISON WITH LOCAL PRACTICES
The attached limited survey, Appendix A, illustrates how each of five similar sized and
larger California municipalities address fund reserves. It is note worthy that few have
formal council policies that address the requirement for and level of cash reserves, but
that all maintain operating reserves to some degree. For those utilities that have council
directed policies with respect to operating reserves, the levels range from 30 to 45.6
days. (The 45.6 -day period results from a policy requiring that operating reserves be set
at 1/8t of annual expenses.) Operating reserves for electric as well as water utilities are
typically found to be in the 30 to 45 day range, although 15 -day and 60 -day levels are
sometimes encountered.
RECOMMENDATIONS
It is recommended that Lodi Electric Utility establish an Operating Cash Reserve Fund
set at an amount equal to 45 days of its budgeted operating costs in FY07. Establishing
operating reserves at this level is consistent with both local and nationwide electric
utility practices. (Normally, the most recent fiscal year would serve as the base year,
however, because last year was highly untypical the current budget year is proposed to
be used as the base year.)
It is also recommended that a Capital Reserve Fund in the amount of $500,000 be
established. This is roughly the cost to replace and install a 66/12 -kV substation
transformer, which represents the largest single contingency on the Lodi Electric Utility
system.
It is further recommended that the Rate Stabilization Fund be set in the amount that is
reflective of a 20% purchased power increase over a six month period. For FY07, this
amount would be $4,200,000.
FISCAL IMPACT
Referring to Table 1 below, at the end of FY 2006, Lodi Electric Utility had
approximately $14 Million in various unrestricted accounts or funds. Approximately
$10.6 Million of that amount, however, was from bond proceeds which have restrictions
placed on their use. The remaining approximate $0.5 Million (Lodi Electric Utility
operating reserves) represents less than three days of working capital on projected FY
2007 expenses of approximately $66.5 Million. However, the nearly $3.2 million that
Lodi Electric Utility has "on account" with NCPA can viewed as a contributor to the
recommended operating reserve total, since the NCPA Operating Reserve can be used
by Lodi Electric to offset NCPA power supply costs and may be returned to the utility
4
upon request. For this reason it is appropriate to consider the NCPA General Operating
Reserve toward meeting the recommended 45 -day operating reserve requirement as
developed in Table 2.
Table 1: Total Cash Available - End of FY2006
Fund Designation
Current Balances*
Operating Reserve
$ 520,000
Capital Reserve
-0-
Rate Stabilization Reserve
-0-
Debt Service Reserve
-0-
Bond Proceeds Balance**
$ 6,532,000
NCPA Operating Reserve**
$ 3,165,600
Total Cash Available
$10,217,600
* As provided by Lodi Electric Utility
** Restricted Use Funds. Total on hand at end of FY2006 was $10,380,000 -- approximately $6.532
available after prior capital project commitments.
As shown in Table 2 below, establishment of the three reserve funds at the
recommended levels would require that an additional $9,215,000 ($12,900,000 -
$3,685,000) be set aside. It is not likely that funding at the recommended levels can be
accomplished quickly. Lodi Electric Utility will need to consider rate increases or
surcharges to convince its customers and rating agencies that it is taking appropriate
steps to operate its utility on a stronger financial platform.
Table 2: Fund Reserve Comparison of Current and Recommended Levels Exclusive of
Restricted Funds
Fund Designation
Current
Balances*
Recommended
Minimum Balances
Shortfalls
45 -Day Operating Reserve**
NCPA General Operating
$ 520,000
$3,165,000
$ 8,200,000
$ 4,515,000
$3,685,000
Capital Reserve
-0-
$ 500,000
$ 500,000
Rate Stabilization Reserve
-0-
$ 4,200,000
$ 4,200,000
Total Cash on hand
$3,685,000
$12,900,000
$9,215,000
* As of 6/30/06
APPENDIX A
CASH FUND RESERVE PRACTICES
OF
SELECTED CALIFORNIA MUNICIPAL UTILITIES
MUNI #1
MUNI #2
MUNI #3
MUNI #4
MUNI #5
Utility Department
Electric + H2O
Electric + H2O
Electric + H2O
Electric
Electric + H2O
Formal Reserve Policy set by City
Council
Yes
No
No
No
Yes
Co -mingled Funds?
No
No
No
No
No
Operating Reserve?
Yes, 30 days
Yes, undefined
Yes, 45 days
Yes, undefined
Yes, 45.6 days
Capital Reserve?
Yes
No
Yes
No
No
dbt4-2010
Alameda
BART
Biggs
Gridley
Healdsburg
Lodi
Lompoc
Palo AMD
PCWA
Plumas-Slerra
Port of Oakland
Redding
Roseville
Santa Ckm
Truckeee-Donner
Turlock irr. Dist
Ukiah
Total
Total Possible
Est Probability
Total
Footnotes:
(A)
1'R)
(C)
(D)
(E)
(F)
NORTHERN CALIFORNIA POWER AGENCY
GENERAL OPERATING RESERVE CONTINGENT LIABILITIES
NOTE: Purpose of this document is to communicate: (1) astfmated reasonably possible contingent liabilities, and (2) current member G.O.R. reserve funding
Im ml9. Because pervasive uncertainties associated with disfunctional world-wide economic and market conditions may adversely affect mernbsrs`
near term ability to maintain funded reserves consistent with "good utility practice", a conservative aggregate probability of 10095 has Wen assumed throughout.
POTENTIAL ESTIMATED FUNDING
REQUIRED FROM
THE GENERAL OPERATING RESERVE
FUNDING SUMMARY
Market Power
Local
Unfunded
13enefils
Yketem
Self -Insured
HydroProj#1
Agency
Total
Less
Funding
Volatility Cost
Resource
Geo
StabIftation
Base Resource
Loss on
Dry Year
Llablllty
Estimated
GEN OP RES
Excess
Reserve
Adequarry
Decommissioning
Reserve
Reserve
plants
Impact
Reserve
Funding
Avail. Balance
(o ficit)
B
G
D
E
(F)
(G
NRequirements
313112009
3/3112009
$
b -
$ 4,192,394
$ 203,984
$ 30.908
$ 4,380,937
S 2,521,687
$ 11,768
s 11,611,672
$ 19,704,296
$ 8.092,824
-
-
-
37.204
114,818
-
-
771765
463,787
1,326.003
1,162.216
104,588
-
56,370
10,792
77.643
68,906
11,765
320,064
213,610
(106,264)
188,667
83,438
17AM
173,786
87,191
0
11,765
8622860520
361,3116
(200,860)
29T,106
-
912,356
46,158
51,666
953,387
418,600
11,755
2,691,099
3,299,578
608,478
744,516
-
2,552,809
24030
136,537
2,667,617
2,6741989
11,705
8,951,263
5.263,921
(3,687,342)
644,183
-
914,095
61,024
74,158
956,204
579,988
11,765
3,236,216
2,999,148
(239,068)
x,809,766
-
-
204,390
3,234,111
4,876,228
5,779,706
11,768
15,912,956
1,510,428
(15,402,528)
NIA
-
136
-
-
-
11,765
11,901
15,reo
3,599
-
174,078
36,T12
461,963
359,547
426,165
11,703
1470229.769
566,915
903,31
349,432
-
-
16,AW
158,937
-
11,765
535,614
136,829
{398,785)
NIA
-
-
12,494
-
-
11,785
24,269
487,486
427,197
NEA
-
1,967,568
190,274
-
2,562,999
2,476,671
111755
7,189,276
1,509,910
(5,679,366)
NEA
-
11,023,394
498,334
-
11,519,147
7,640,530
11,765
30.693,189
19,498,659
(11,194,510)
NIA
-
-
3,888
-
-
11,765
17652-73588
211,394
993,741
NIA
-
1,672,079
58,+104
-
1,642.738
-
11,766
3,284,946
1,481,908
(1.803,038)
571,056
-
1,394,236
67,542
90,873
1,456,939
514,424
11,765
4,106,835
7,0651309
2,958,474
5,709,384
$
$ 2032,777
$ 1887,066
$ 4,872 397
$31,610,a4Q
1 $ 22,972,760
1 $ 200,000
91,785,2)D4
1 $ 65,616,450
1 ; ,158,783.54
%709,384 $ -
24,832,777
$ 1,687,066 $
4,872,397 $31,510,840
$ 22,972,760
$ 200,000 $ 91.766,204
X x
x
xx
x
x
x
100 h 10096
100%
100%
100% 1009E
100%
10096 -
$ 5.709,564 $ -
$ 24,83Z777
t 1 687 066 $
4.872,397 $31,510,846
S 23,972,760
$ 700,000 $ 91,785,204
Average Annual Electric Market prices in $OMWh-. (High w $78.58)( Median =$57.72}.
TBD.
Current estimated unfunded daeemmrssloaing cost In 2007 escalated dollars to currant date- Unfunded portion is currant cost lass: Funded portion vdth interest earned to -data.
Decommissioning is currently planned to begin In or about2030 and be completed by 2034.
Volurdarydedicated benefke stabilization reserve for future leveexation of medical and mdrerront benafils code, if and when required by actuary.
Eudrnsted Green Book cast of replacement power necessary to support WAPA in 2016-M1111 in the evert of a critical dry year. Yolkyrr Book update In process by WAPA.
Overall cost estim ie, of amount Indhddual psrticipaMg' might reasonably expacttn hind for insurance deductibles, aW.1nsured retention, or uninsured rlak In the event of a property
loss. NOT worst case scenario -rather, highest probable mm*num lass for each participant because of diverse ownershlp percentages,
Esesrsted replacement power cost differential batwsen average and dry year generallen at high marketfomcast price.
Equal shares of $200,000 liability insumm:o deductible in the event otsuch a general loss.
E-8
RESOLUTION NO. 2011-39
A RESOLUTION OF THE LODI CITY COUNCIL APPROVING
THE REVISED ELECTRIC RESERVE POLICY
WHEREAS, on January 17, 2007, the City Council adopted Resolution No. 2007-13,
establishing an Electric Reserve Fund Policy ("Policy"); and
WHEREAS, the Policy set an initial Electric Reserve Target Level ("Target") of $12.9
million as follows:
• Operating Reserves: $8.2 million, equal to 45 days of budgeted operating costs
• Capital Reserve: $500,000, equal to the cost of largest distribution system
contingency
• Rate Stabilization Fund: $4.2 million, equal to 20 percent of annual market power
costs; and
WHEREAS, the Electric Utility Department's ("EUD") available cash reserves as of June
30, 2010, were $12.1 million compared to the $3.6 million cash reserves available June 30,
2006; and
WHEREAS, the Policy also provided for an updated assessment of the Target every
three years with a report to the City Council; and
WHEREAS, the attached report provides the City Council with an updated assessment
of prudent cash reserve levels for Lodi Electric Utility.
NOW, THEREFORE, BE IT RESOLVED that the Lodi City Council hereby approves the
Revised Electric Reserve Policy as follows:
Fund Designation Basis For FY 2011
Operating Reserve 90 days cash on hand $18,900,000
Capital Reserve Largest distribution system $ 500,000
NCPA- General Operating As identified by NCPA plus $ 9,300,000
Reserve allowance for unanticipated studies
000
Dated: March 16, 2011
hereby certify that Resolution No. 2011-39 was passed and adopted by the City
Council of the City of Lodi in a regular meeting held March 16, 2011, by the following vote:
AYES: COUNCIL MEMBERS— Hansen, Katzakian, Mounce, Nakanishi, and
Mayor Johnson
NOES: COUNCIL MEMBERS— None
ABSENT: COUNCIL MEMBERS— None
ABSTAIN: COUNCIL MEMBERS— None
4ND1 �JOHL
City Clerk
2011-39
4lCCT 4.\
E LECTRIC UTILITY
ESERVE PO-LICY
City Council Meeting
March 16, 2011
Bacl(ground
� Operational and financial importance
Cash reserves target is policy issue
Navigant Consulting recommendation,
prudent cash reserve level for EUD,
2006
2
Initial Target
Adopted by Council
Operating Reserve of 45 days of
I budgeted operating costs ($8.2 million)
�,➢ Capital Reserve equal to largest local
contingency ($500,000)
Rate Stabilization equal to 20% of
projected market power costs ($4.
2
million)
*Adopted by Lodi City Council, Resolution 2007-13, January 77, 2007
3
Current Electric
Ir
Reserve Policy
Initial Electric Reserve Fund Target of $12.9 million
'- ➢ Goal to reach target by year-end FY2010
Highlight cash ""raising" opportunities in budget
process
One-time cash receipts dedicated to increasing
reserves
Consider all options to increase reserves
Reassess reserve formula at least every 3 years
10
Jure 30, 201.0
Reserve Status
Location
Balance
Lodi
$12,125,835
NCPA General Operating
Reserve (GOR)
$11,011,668
Total Cash on Hand
Original Reserve Target reached
$23,137,503
by June 30, 2010
61
Updating Initial Target
o Contingent Liabilities with NCPA
I o Fitch Ratings Criteria
■ 1"A" public utilities median 107 days cash
, ■ "AA" public utilities median 121 days cash
■ Ratings affect:
13 Competitive power contract pricing
ii Future costs on bonded debt
(Lodi currently has approximately 60 days available cash
locally.)
0
NCPA Meniber Survey
Policy for Cash on
S&P Fitch
NCPA Member Hand (days) Rating Ra
Updating the Target
NCPA recommendations for GOR:
Contingent Liability
Required FY11
Funding
Hydro Plant & Western Dry Year
$2,8009000
Self -Insured Loss on Plants
$2,7009000
Unfunded Geo Decommissioning
$296009000
Market Volatility Cost Reserve
$7009000
Other (combined)
$2009000
Total Cash Target in GOR
$%000,000
New Reserve
Recommendation
'- Fund Designation
Operating Reserve
Capital Reserve
Basis
90 days cash on hand
Largest distribution
system contingency
NCPA General Operating As Identified by NCPA
Reserve plus allowance for
unanticipated studies
Total Target
9
FY 2011
$18,9005000
$500,000
$9,300,000
$28,700,000
Questions / Coniments?
10