HomeMy WebLinkAboutMinutes - October 18, 2005 SSCITY OF LODI
INFORMAL INFORMATIONAL MEETING
"SHIRTSLEEVE" SESSION
CARNEGIE FORUM, 305 WEST PINE STREET
TUESDAY, OCTOBER 18, 2005
An Informal Informational Meeting ("Shirtsleeve" Session) of the Lodi City Council was held Tuesday,
October 18, 2005, commencing at 7:02 a.m.
A. ROLL CALL
Present: Council Members — Hansen, Hitchcock, Johnson, and Mounce
Absent: Council Members — Mayor Beckman
Also Present: City Manager King, City Attorney Schwabauer, and Deputy City Clerk Perrin
B. TOPIC(S)
B-1 "Update on Electric Utility's financial position, Market Cost Adjustment, and recent power
purchases"
Interim Electric Utility Director, Dave Dockham, stated that the Market Cost Adjustment
(MCA) process is the second step in a three-step process, which began with the power
purchase to procure the City's net short position in order to stabilize the power cost. The
second step is to get the revenues and expenses back into balance on a fiscal year basis,
which staff is proposing to accomplish through the MCA. Tie third step will be to
implement the long-term financial rate structure and to "true up" the rates that will be
adjusted through the MCA so that they more accurately reflect what the financial structure
of Electric Utility actually is.
The City purchased enough energy to fill 95% of the need. For the months of November to
June, power was procured at a cost of $11.6 million. Because the month of October had
already begun, staff was unable to purchase out on a forward basis and instead did a
"balance of the month" purchase of approximately $0.6 million. Additionally in September,
there was a small open position, which amounted to $100,000; therefore, for the September
to June period, the total procurement for the net open position was $12.3 million. When the
request to purchase was made three weeks ago, staff anticipated that the cost would be
$13.1 million.
The Northern California Power Agency (VCPA) has four geothermal turbines in the Lake
County area, one of which failed. All NCPA members that participate in this project
received a pro -rata reduction due to the one unit failing; therefore, in order to return to the
95% level, staff will need to procure q)proximately 6% additional need for November and
December. The estimated cost for this purchase is X50,000 a month. In terms of
procuring 95% versus 90% of the net open position, there is very little difference in how
much volatility occurs in the actual procurement costs; however, staff will work with NCPA
to determine the optimum time to close that position.
City Manager King explained that the City sets its target at 95% equals 100%. The reason
for this is that the demand variable is unknown and cannot be controlled, and the City
should not over procure its power. Once purchased, the City must use or lose the power
and cannot sell it. At the 95% level, if customers do not consume more than what the City
purchased, it has not over bought, but if it goes above 95% or the demand increases, the
differential could be purchased. It is probable that once the MCA is implemented
customers will conserve in order to control their costs and the City could see a decrease in
the demand.
Mr. Dockham reported that the Electric Utility Department has 30 plus divisions within the
budget and outlined the four core functions:
Continued October 18, 2005
1) Administration, which provides management and administrative services to the
entire department — $1.1 million;
2) Construction and Maintenance, which includes the line crews that perform the
overhead and underground maintenance, new construction, technical services that
handle the substation construction and maintenance, and the troubleshooting
division that handles customer problems or outages on the system — $3.7 million;
3) Business Planning and Marketing, which functions include rate forecasting,
budgeting, field service metering, and the public benefits program — $1.5 million
(NOTE: The public benefits program represents approximately half and is a state
mandated program); and
4) Engineering and Operations, which functions include designing of enhancements to
the system, working with developers to extend facilities to new development
projects, metering, and utilities operations that provide dispatch services to both
the Electric and Public Works Departments — $2.1 million (NOTE: Public Works
helps fund the dispatch services at $500,000 per year).
Sixty-five percent of the total Electric Utility budget is related to bulk power costs, and 8%
is in debt, which equates to 73% of the department expenses that are non -discretionary.
Over time, there will be an opportunity to reduce bulk power costs; however, presently there
is a very high market and forward prices that are not moving. In terms of future cost
reductions, it has to come from Operations and Maintenance, which has already seen a
20% reduction; any further cuts will affect City services.
On the revenue side, virtually all of the income comes from power sales, with a small
amount from investments and bonds. Previously, there was a much more sizeable interest
income, but as those bonds have been used in operating the Utility, the interest income
has diminished. Additional revenue includes the payments from Public Works for the
dispatching services, income from developers, and accident repayment. The total revenues
are $56.7 million and total expenses are $35.9 million; since fiscal year 2003, Electric
Utility has been operating at a loss every year and it has been increasing over time. Fiscal
year 2005-06 began with an $8.3 million deficit, but with the addition of the power purchase
and the 20% reductions in the Operating and Maintenance expenses, staff was able to get
the increase limited to $900,000 instead of $3 million. There is still a savings account that
is available to offset the fact that the Utility is operating in a deficit condition. As part of the
budget, it was expected that the savings account would be completely eliminated and the
City would have a $2.2 million deficit this year; however, at the end of last year, the fund
balance was slightly higher than originally anticipated, and the deficit was reduced to $1
million. f the MCA is not implemented, the Utility will continue to operate in a deficit
condition. If the MCA is applied, the City will have $3.4 million in the savings account at
the end of the year.
The causes of the revenue in -balance are primarily driven by the rapidly increasing cost of
power supply, no rate adjustments since 2002, and a series of heavily -discounted rates for
the largest commercial and industrial customers. In 2003, the power supply cost was $30
million a year. In 2004, the power supply cost increased by 5% over the prior year, 2.5% in
2005 over the previous year, and as budgeted in 2006, it was estimated at 20% over last
year; however, as 2006 materialized, it actually increased by 29%. Overall, power costs
increased nearly 39% since the last MCA in November 2002.
Council Member Johnson questioned the possibility of building in a cost of living adjustment
to the electric utility rates, as was done with the recent water rate increase.
Mr. Dockham stated that, had Lodi raised rates systematically over the last four years, the
increase in the first year would have been 1 %, the next year 3%, then 7%, and for this year
11 %. Over time, the impact of the increase the City is facing now could have been much
less had it followed this systematic increasing of rates over the last four years.
W
Continued October 18, 2005
Mr. King compared the difference of a cost of living adjustment for water versus electric
rates. The basic costs for water remain constant (i.e. infrastructure and operational costs
are the biggest drivers, which tend to change more slowly). For electricity, there is a
commodity cost that has rapidly increased, and a Consumer Price Index cost of living
adjustment would not have been sufficient.
Council Member Hansen stated that the Council needs to understand what is occurring and
make a policy decision on whether or not from this point forward it will factor in market cost
increases in order to avoid a similar situation from occurring again.
Mayor Pro Tempore Hitchcock pointed out that the MCA is the adjusting factor; however, it
has not been implemented. At the American Public Power Association conference, it was
clear that a MCA was the standard used for making adjustments to the market cost of
power.
City Manager King was unaware of the reason why the MCA was not utilized from 2002 to
present and he felt that staff should further explore how to implement the MCA in a more
streamlined fashion, yet still include the Council in its oversight responsibility.
Mayor Pro Tempore Hitchcock questioned if it would have made a difference had the City
not waited so long to purchase power, to which Mr. Dockham replied that it would have
been $3.4 million less expensive (i.e. a 20% increase over the previous year versus 29%).
Mr. Dockham stated that quarterly updates would be provided to the Council on the water
and electric utility rates, which would be an opportunity for the operating departments to
inform Council how the MCA is working and whether a rate adjustment is necessary.
The City offers a discounted rate off of the published rate to a number of contract customers
as an economic stimulus. These customers were on a contract for several years before
2003, and when those contracts terminated, the customers were to either move to the
published rate or be phased in over a period of time. The decision was made to phase
them in over a four-year period, and there should have been a steady progression up to the
published rate; however, the increase has continued to be minimal due to the fact that the
City is operating at a deficit. Electric Utility staff will be meeting with the contract
customers to explain the situation, as these customers will see the largest increases
associated with the MCA recommendation.
In response to Council Member Hansen, Mr. Dockham stated that the contracts expired in
2001 and were renegotiated in 2003-04 with this four-year transition element, which would
end in October 2006, bringing them to the full published rate. Approximately half of the
revenue from the proposed MCA comes from this group.
City Attorney Schwabauer explained that these contracts do not set the rate; they set a
discount percentage off of the published rate and do not inhibit the Council's ability to
change the published rate.
In response to Mayor Pro Tempore Hitchcock, Mr. Dockham stated that these contracts
represent approximately $5 million in lost revenue to the City. NCPA prepared a rate
structure comparison of Lodi and other cities, which demonstrated that Lodi is far below
every other city for industrial customers.
Council Member Hansen expressed concern about how the MCA would affect these
commercial and industrial customers as it would have a huge effect on their budgets mid
year.
Council Member Johnson requested a copy of the NCPA rate comparisons.
3
Continued October 18, 2005
Mr. Dockham explained that the City must raise the electric rates, and there is an approved
mechanism in place through the MCA, which was adopted by Council in 2001. A delay of
this MCA only increases the need for a larger increase later. Each month, the Utility is
$800,000 further into debt. If the City waits until December to implement a rate increase, it
increases by 1.2% over the 19.5% average that staff is requesting now and will continue to
multiply geometrically.
To determine the MCA, staff began with an abbreviated cost of service analysis by
considering each class of customer in the City and assigning costs incurred to each. Staff
used information from 2005, scaled it up for 2006, and then compared the power supply
expenses to the revenues that were generated from each of the rate classes. The MCA
was arrived at by dividing the total amount needed by the total kilowatt (kw) of consumption
in each class. The rates were then tiered in order to keep them equal to or less than
Pacific Gas & Electric's (PG&E) rates.
There are 19,000 customers in the residential class; it costs 10.5 cents per kw hour to
procure energy for this group and the City collects 5.8 cents per kw hour. The difference
between the two is a MCA of 4.5 cents. To collect this beginning in November, the MCA
would need to be 7.3 cents per kw hour; however, h order to stay below PG&E, the
maximum increase would be 4.3 cents per kw hour. The average consumption for the
residential class is 700 kw per month; at this consumption level, Lodi's rates are currently
above PG&E's. PG&E's rates begin increasing rapidly in the higher levels of consumption.
Under the proposal, Lodi's rates would be above PG&E's until its "true up" (of approximately
11%) takes effect in January 2006, at which time Lodi's and PG&E's rates would be
identical. A residential customer that uses wound 700 kw hours per month would see
either a decrease in rates or an increase of approximately 2%. About 65% of Lodi's
residential customers fall in this range.
In the all electric class, 95% of the 600 customers use less than 1100 kw hours per month.
Under the proposal, these customers would see a decrease in their electric rate.
In the low-income residential class, 80% of the 1,500 customers use below 800 kw hours
per month. Included in this class are medical discount eligible customers and the low-
income discounts. Under the proposal, there is a small increase. Mr. Dockham added that
there is concern wth the high consumption level in this class, as it is not conducive with
the low-income structure, and staff will investigate this further.
In the residential mobile home class, there are six parks in town, which would see varying
levels of increase. To calculate the increase, staff used the highest billing month in August,
took the difference between what they are paying now and what they would be paying under
the new rate, and divided that by the number of pads that exist in the park. This results in
a spread of different increases per pad, because some of the mobile home owners receive
medical or low-income discounts. The revenue generated from this group is $150,000.
Staff recommends that this group be equivalent with residential customers and the mobile
home rate be eliminated.
The commercial/industrial rates are as follows:
00 G-1, small restaurants—little or no increase
00 G-2, fast food stores -7.4% increase
00 G-3, large grocery stores -22.5% increase
00 G-4, large hardware stores -14.5% increase
00 G-5, large high schools -15% increase
Step three would be to implement the long-term rate structure and financial plan for the
Utility. More analysis needs to be done before staff can "true up" the rates and recommend
a permanent financial structure. Fifty percent of the power supply for next year still needs
to be procured. Should Lodi choose to become a participant in one of the power plant
al
Continued October 18, 2005
opportunities, there is some investment that would be required, which would affect the
City's expense structure. If it came to fruition, the costs would be rolled into the overall
financing of the plant; however, if it did not go forward, it is an expense that would be
absorbed into the operating structure. Further analysis is needed on the City's debt
structure. NCPA is working on a policy that would establish the maximum amount of
variable rate debt that an agency can have and the criteria that it would use to determine
whether it enters into a swap agreement.
Mr. Dockham reported that there are currently 14 vacant positions in Electric Utility and
some key positions should be filled. Staff will assess whether the various capital
improvement projects are critically needed or desirable and whether or not there is sufficient
funding remaining from the financing to cover the essential projects. Another element is the
Electric Utility service center and whether or not the proposed location would be
advantageous. Staff will return with a proposal on what the financial structure of the Utility
should look like. The MCA would indicate to financial rating agencies that the City is
committed to getting its finances back in balance.
In response to Council Member Hansen, Mr. King reported that staff is assembling a list of
candidates for the Electric Utility Director position using a targeted, selected recruitment
process, scheduled to close on November 18. No decision has been made yet on the
selection process, but the goal is to have a new director by the end of the year. Council
Member Hansen requested that both he and Mayor Pro Tempore Hitchcock be included in
the selection process based upon their experience with NCPA.
At the request of Council Member Johnson, Mr. Krueger reported that at the end of the last
fiscal year, there was $7.5 million in the bank. If the City chooses not to implement a rate
increase, there would be no reserves remaining.
Mr. King added that the proposed MCA would provide for greater revenues than expenses in
the current fiscal year, but it would not make up for the deficit experienced in the past fiscal
years.
Mayor Pro Tempore Hitchcock requested that additional information be provided to Council
before the October 19 regular meeting, including the number of customers and the actual
costs and percentage increases for residential, commercial, and industrial, similar to
NCPA's rate comparison with other cities.
C. COMMENTS BY THE PUBLIC ON NON -AGENDA ITEMS
None.
D. ADJOURNMENT
No action was taken by the City Council. The meeting was adjourned at 8:29 a.m.
ATTEST:
Jennifer M. Perrin
Deputy City Clerk
5
r�... MEMORANDUM
Office of the Lodi City Manager
TO: City Council
FROM: Jere Kersnar, Acting City Manager
DATE: October 14, 2005
SUBJECT: October 18, 2005, Shirtsleeve Session
"Update on Electric Utility's financial position, Market Cost Adjustment, and recent
power purchases"
The purpose of this Shirtsleeve Session is to provide information to assist the City
Council regarding its decision to implement a Market Cost Adjustment to the
Electric Utility sates. Formal Council action on the matter is scheduled for the
October 19, 2005, Regular City Council meeting.
At the Shirtsleeve Session, staff will deliver a PowerPoint presentation providing an
update on Electric Utility's financial position and the proposed Market Cost
Adjustment, as well as the recent power purchases.
Jump
council/corresp/memos/mEUupdate.doc