HomeMy WebLinkAboutMinutes - August 26, 2014 SSLODI CITY COUNCIL
SHIRTSLEEVE SESSION
CARNEGIE FORUM, 305 WEST PINE STREET
TUESDAY, AUGUST 26, 2014
An Informal Informational Meeting ("Shirtsleeve" Session) of the Lodi City Council was held
Tuesday, August 26, 2014, commencing at 7:02 a.m.
Present: Council Member Johnson, Council Member Nakanishi, Mayor Pro Tempore Hansen,
and Mayor Katzakian
Absent: Council Member Mounce
Also Present: City Manager Schwabauer, City Attorney Magdich, and City Clerk Robison
Rates and Resources Manager Melissa Cadek provided a PowerPoint presentation regarding the
Lodi Electric Utility (LEU) ten-year financial forecast. Specific topics of discussion included
background, best financial practices, LEU rate history, review of LEU revenue and expenses,
summary of LEU expenses, forecast assumption on non-power costs, forecast assumption on
power costs, and findings and conclusions.
In response to Council Member Nakanishi, Ms. Cadek stated that the purpose of the large rate
increase in 2005 was to catch up to costs.
In response to Mayor Pro Tempore Hansen, Ms. Cadek stated that expenses under the
"distribution system" category include costs associated with maintaining and repairing the system,
while costs associated with new improvements are under the "capital" category. The "other fixed
costs" category includes the two debt service items, cost of service to the General Fund, and
public benefits.
In response to Mayor Katzakian, Ms. Cadek stated that the 2002 debt service will be paid off in
fiscal year 2015/16, the savings will go toward paying down the 2008 debt service, and the net
reduction in debt payments will go from $8 million annually to $5 million. In further response,
Deputy City Manager Jordan Ayers stated that the 2002 debt service will be paid off July 1, 2015.
In response to Council Member Nakanishi, Ms. Cadek explained that the 2008 debt service was a
refinance and conversion to a fixed rate debt. City Manager Schwabauer responded that the
original debt was issued in 2000 to install a utility line to the White Slough Water Pollution Control
Facility, build the LEU corporation yard, maintain infrastructure, and install street lights. It was
structured as an interest rate swap and, because of how detrimental this debt service was to the
City, former City Manager Blair King renegotiated the debt to buy the City out of the swap. It was
an expensive move, but it represented a significant savings to the City in the end. In further
response, Mr. Schwabauer stated that the 230 kV intertie project could require debt service,
and this project would also result in a significant savings once the debt was paid. This project is
dependent upon Pacific Gas & Electric (PG&E) participation, but he hoped the project would
move forward sometime between the years 2020 to 2022.
Electric Utility Director Elizabeth Kirkley reviewed the list of projects on the ten-year capital
improvement program and the costs associated with each.
A. Roll Call by City Clerk
B. Topic(s)
B-1 Lodi Electric Utility Ten-Year Financial Forecast (EU)
In response to Council Member Johnson, Ms. Kirkley stated that the $600,000 for the 230 kV
project is for required engineering studies done prior to design and construction, some of which
Council has previously approved.
Ms. Kirkley expressed the importance of maintaining the LEU distribution system in order to
maintain the City's reliability with its customers. In response to Mayor Pro Tempore Hansen,
Engineering and Operations Manager Jay Marchesseault stated that he believed the City's
current reliability rating is around 99 percent, which takes into account the duration and frequency
of outages.
In response to Council Member Johnson, Ms. Kirkley stated that the primary issue contributing to
outages is the fact that the City has only one substation. The 230 kV project would give the City
two substations, which would increase capacity. The existing system has serious concerns
effecting reliability, such as aging cables that need to be replaced and vaults that need repair.
In response to Mayor Pro Tempore Hansen, Ms. Cadek stated that the electric utility reserve of
90 days operating expenses is for unexpected emergencies so as not to draw upon the existing
capital budget.
In response to Council Member Johnson, Mr. Schwabauer stated that the General Fund has its
own reserve for catastrophic events and LEU has its own separate reserve because to have one
Citywide reserve would require that a significantly greater amount be set aside. He stated each
utility should have its own reserve in case of a catastrophic event.
In response to Mayor Pro Tempore Hansen, Mr. Schwabauer stated that there are two separate
requirements for the 90 days cash on hand for unexpected contingencies: one is a Council policy
and the other is required by the Northern California Power Agency (NCPA) for gas purchases. Mr.
Ayers explained that there are two types of reserves, but they overlap and are not duplicated; it is
the same dollars for each pot of reserves.
In response to Mayor Pro Tempore Hansen and Council Member Nakanishi, Ms. Cadek stated
that the City will meet the 30 percent renewable energy requirement by 2020, it will maintain that
level beyond 2020, and during the time frame of 2021 to 2024 the City will make approximately
$3 million in renewable energy purchases.
In response to Mayor Katzakian, Ms. Cadek stated that large hydro projects are only included in
the renewable requirement if there is an impact on fish, but the small hydro projects are
included and are primarily done through geothermal projects.
In response to Mayor Katzakian, Mr. Ayers stated that the 2008 debt service will retire July 1,
2032. Mr. Schwabauer stated that staff will be meeting with the rating agencies in September and
reminded Council that power purchases, which are long-term, forward contracts, are tied to the
City's rating. Because of this upcoming meeting, it is important to move quickly on the rates in
order to indicate to the rating agencies that the City is not deferring its maintenance and that it will
ensure funds are in place to operate the system.
In response to Mayor Pro Tempore Hansen, Mr. Schwabauer stated that an agency's rating is
tied to the cost of issuing debt, but it is also tied to purchasing power, adding that the less fiscally
healthy an agency is, the more it will pay for power.
In response to Council Member Johnson, Ms. Cadek stated that the City purchases its power
through NCPA. In further response, Mr. Ayers stated that, during a power purchase, rating
agencies will look at NCPA's rating as well as all of the major participants. If the City's rating is
low, it will play a significant role in how NCPA is ultimately rated and, in turn, increase the cost of
power for everyone in the group. Mr. Ayers added that NCPA has a variable rate, whereas, the
participants have a fixed rate. Council Member Johnson stated that his main concern regarding
the rating is what is best for Lodi and not necessarily to placate NCPA. Mr. Schwabauer stated
that it is prudent that the City earn a positive rating of its own accord because it has an effect on
the City's power costs.
Ms. Cadek provided a comparison of current Lodi residential rates, at an average 600 kWh and
750 kWh, to other agencies, stating that Lodi is in the middle range. Mr. Schwabauer pointed out
that Palo Alto's rate is significantly lower because it went primarily to hydro power, and stated that
the City made the decision decades ago against going in that direction. In response to Mayor
Katzakian, Mr. Schwabauer stated that Palo Alto may experience some difficulties meeting the
renewable energy requirement, but it will not cost them as much unless it were to change to a 50
percent requirement.
Mayor Pro Tempore Hansen stated that Lodi is often compared to PG&E in its rates and the City
has made significant improvement in its rates and bond ratings. He stressed the importance of
maintaining a positive bond rating, stating that Lodi would be negatively affected if other agencies
in the NCPA joint powers agency had poor ratings.
In regard to the rate comparison, Ms. Cadek pointed out that many of the agencies on the list are
currently undergoing rate adjustments and some of those rates will likely increase in the near
future.
Council Member Nakanishi requested that staff provide a rate comparison with Stockton,
Manteca, and other local cities.
In response to Council Member Johnson, Ms. Cadek stated that Lodi's industrial rates are
favorable to the other agencies, and she would provide details on that comparison as well.
Council Member Nakanishi pointed out that a past survey of industrial customers showed that
they were more concerned with reliability than with the rate.
Ms. Cadek provided information regarding the current LEU fund balances with 2014/15 being the
first year in the ten-year model. She pointed out that fiscal year 2015/16 will be the first year that
the City will need to address the shortfall and by fiscal year 2023/24 the fund will be in the
negative.
Mr. Schwabauer explained that staff is not recommending another 17 percent increase in rates; it
will more likely be in the single-digit range initially and afterward, in order to avoid falling behind
the costs, there would be an annual adjustment similar to the water and wastewater rates.
In response to Mayor Pro Tempore Hansen, Mr. Schwabauer stated that the issue of rates will
come before Council in the very near future in order to communicate the City's efforts to the rating
agencies.
Council Member Nakanishi suggested the rates be postponed until the newly-elected Council
Members are seated and can vote on the matter. In response to Mr. Nakanishi regarding the
value of the LEU, Mr. Ayers stated it has over $80 million in assets, but he did not have numbers
available regarding what it would be worth if it were sold in today's market. Mr. Schwabauer
stated that there are various models used to value a business and he pointed out that, if the City
were to ever sell this asset, the only entity that would be in the position to purchase the LEU
would be PG&E.
Council Member Johnson, Mayor Katzakian, and Mayor Pro Tempore Hansen expressed support
for moving forward on the rate issue now, rather than postponing it until the new Council was in
place. In response to Mayor Katzakian, Mr. Ayers stated the City is scheduled to meet with the
rating agencies on September 2, a meeting that was initially scheduled for June, but was
postponed.
None.
No action was taken by the City Council. The meeting was adjourned at 8:12 a.m.
C. Comments by Public on Non-Agenda Items
D.Adjournment
ATTEST:
Jennifer M. Robison
City Clerk
Lodi Electric Utility (LEU)y()1LEU Financial ForecastAugust 26, 2014Presented by:Melissa Cadek, Rates & Resources Manager, LodAnne Falcon, Managing Director, EES Consultingtdi Electric Utilityg, Inc.
Presentation Outline2kdBackgroundBest Financial Practices RateHistoryRate HistoryRevenue & ExpensesForecastAssumptionsForecast AssumptionsFindings & Conclusions
Background3RFPIssuedOctober2013forRaRFP Issued October 2013 for RaEES Selected January 2014FinancialModelCompletedFinancial Model CompletedIdentifies revenue requirements ovateStudyServicesate Study Servicesver 10‐year period
Best Financial Practices4According to American Public PoMeet Debt Service CoverageMandated by bond covenantsAdequate CashPay expensesPaydebtPay debtFund deferred maintenanceFund unanticipated repairsSufficient ReservesMaintain Existing Infrastructureower Association (APPA)
LEU Rate History5December2005–17%increaseDecember 2005 17% increaseAugust 2007 – Implemented ECADecember 2007 –Solar SurcharggAge of $0.00125/kWhg$/
Review of LEU Revenue & 6Baseline power revenue + ECA covers power costsDifferential exists between non‐power revenue and non‐power costspExpenses
Summary of LEU Expenses7Annual budget ‐$70M+Power costs ‐55%Other fixed costs ‐28%lCapital ‐5% Distribution system ‐12%s
Forecast Assumptions (No8RaterevenuesbasedoncurrentRate revenues based on current Assumes customer growth andeneNet effect: ~0.4% load growthExpenses based on current budgCPI escalation for most expensesDebtSer iceDebt Service2002 Series D: Paid off in FY 15‐162008 Series A: Approximately $60MNo new additional debt assumedon Power Costs)ratesandprojectedloadsrates and projected loadsergy efficiency/solarget and projectionsM outstanding
Forecast Assumptions (No910‐YearCapitalImprovementPr10Year Capital Improvement PrUnderground / Overhead InfrastrucSubstation Maintenance and ImproVehicles/Equipment ($2.7M)LED Streetlights ($2.4M)DistributionCapacity($2.3M)Distribution Capacity ($2.3M)Annex Project ($1.2M)MSC Improvements ($1M)($ )230 kV Project ($600k)on Power Costs) (cont’d)ogram($23M)ogram($23M)cture ($9.7M)ovements ($3M)
Forecast Assumptions (No10LEURFdLEU Reserve FundsCouncil Policy90daysoperatingexpenses90 days operating expensesLargest capital contingencyFunded over 4 years ($250k/yeaNCPArecommendedGeneralOpNCPA recommended General OpNCPA Required90 days cash –gas purchase requSolar Surcharge Drops Off inGHG Allowance Revenue DrLED Streetlight Project and reon Power Costs) (cont’d)ar starting FY 15‐16)peratingReserve(GOR)perating Reserve (GOR) uirements (LEC)n FY 17‐18rops Off in FY 20‐21pnewable energy requirements
Forecast Assumptions (Pow11NCPAfixedandvariablecostNCPA fixed and variable costresourcesIncludesnewAstoriasolarreIncludes new Astoria solar reSeattle City Light contract efGreenhouseGascostsincludGreenhouse Gas costs includPurchases after 2020 to meewer Costs)tsforexistinggenerationts for existing generation esourcein2017esource in 2017ffective through FY 17‐18dedforLECded for LECet RPS requirements
Findings and Conclusions13Model provides 10‐year forecast pyAssumes modest level of capital Annual shortfall over 10‐year perRevenue insufficient to fund defeNear‐term solution needed to adDefer capital maintenanceDebt refinanceRateadjustment(s)Rate adjustment(s)Otherof revenue and expenditures pinvestmentrioderred maintenance ddress revenue shortfall
Comparison – Residential Electric Charges
$0
$20
$40
$60
$80
$100
$120
Palo Alto Roseville TID Lodi Alameda Redding MID PG&E
$68
$90
$95
$100 $103 $105
$110
$114
Average Monthly BIll
(600 kWh)
Comparison – Residential Electric Charges
$0
$20
$40
$60
$80
$100
$120
$140
$160
Palo Alto Roseville TID Lodi Redding Alameda MID PG&E
$94
$114 $117
$125 $128
$135 $137
$158
Average Monthly BIll
(750 kWh)
Current Electric Utility Fund Balances
13-14 Est 14-15
Forecast
15-16
Forecast
16-17
Forecast
17-18
Forecast
18-19
Forecast
19-20
Forecast
20-21
Forecast
21-22
Forecast
22-23
Forecast
23-24
Forecast
Available Cash
$20,878,141
$18,350,688
$13,077,807
$11,583,558
$9,870,098
$9,004,062
$8,328,296
$6,527,545
$3,593,069
$824,027
($2,134,807)
NCPA GPP
Reserve Req.
(90 Days) $14,459,614 $14,991,273 $15,739,043 $15,997,039 $16,275,367 $16,236,938 $16,685,293 $17,032,020 $17,484,541 $18,035,020 $18,341,650
Meets Target YES YES NO NO NO NO NO NO NO NO NO
Council Reserve
Target (90 Days) $17,232,000 $17,080,000 $18,075,000 $17,559,000 $17,803,000 $17,850,000 $18,315,000 $18,656,000 $19,131,000 $19,589,000 $19,899,000
% of Target 121% 107% 72% 66% 55% 50% 45% 35% 19% 4% -11%
Council Reserve
Target (Capital) $1,000,000 $1,000,000 $1,000,000 $1,000,000 $1,000,000 $1,000,000 $1,000,000 $1,000,000 $1,000,000 $1,000,000 $1,000,000
% of Target 0% 0% 25% 50% 75% 100% 100% 100% 100% 100% 100%