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Home My WebLink About05102021 City Council Work Session Packet - Electric Rates Seward City Council Work Session Packet Topic: Discuss Electric Rates May 10, 2021 City Council Chambers Beginning at 5:30p.m. 1 May 10, 2021 Seward Electric System the Financial Engineering Company Cost of Service/Rate Study 1 2 AssumptionsResultsConsiderations ••• TermsWhy and how of Cost of Service StudiesExisting rates and how they compare to othersAnalysisRecommendationsMonthly Bill Analysis Tonight’s Agenda•••••• 2 3 ) mo - up - hased power Customer charge ($/month), energy charge ($/kWh), demand charge ($/kWSometimes based on projected costs and sales with end of period trueSometimes based on actual and billed following period ••• Portion of overall rate implemented to collect for system costs except fuel andpurcChanged through action of governing bodyPortion of overall rate charged to collect for fuel and purchased power costsChanges automatically on set schedule (monthly, quarterly, etc.)$/kWh ••••• Base RatesCost of Power Adjustment (COPA) A Few Terms•• 3 4 inute period m - oincident Peak C - Typically measured over a 15 ak onth of the system or a customer onth • Highest rate of power usage during the mUnits (kW, MW)Peak of rate class at time of system monthly pePeak demand of customer class during the m •••• Peak DemandClass Coincident PeakClass Non A Few Terms••• 4 5 peak periods. This, in turn, could lead to - o make no effort to shift load to off For example if the demand rate is set too low, a large customer may continue thigher power costs borne by all customers. o ustomers may or may not be in their best interests or the best Simply put, to ensure that the “cost causer” is the “cost payer”Without rates being set to cost of service, investment decisions by cinterests of other ratepayers Why Are Cost of Service Studies Performed?•• 5 6 RUC Manual used in for this study Alaska eveloped a manual that sets forth the methodology used Expenses are dependent on several factorsRecognizing this, National Association of Regulatory Commissioners dthroughout the industry (NARUC Manual)NARUC Manual required if rate regulated by Regulatory Commission ofEven though Seward is not rate regulated, methodologies set forth in NANot an exact science How Are They Performed?••••• 6 7 7 8 Existing Rate Structure and Rates 8 9 Comparison to Other Utilities 9 10 s t l u s e R d n a s i s y l a n A 10 11 Residential/Harbor/LGS/ASLC UpSGS Down •• Slight rebound in 2020 • 2020 Energy Sales Assumptions• 11 12 way clearing; major project over two years - -of Eliminate Generating Fuel / Purchased Power (recovered through COPA)Eliminate Revenues from Sales (calculated independently)Add $250,000 for rightAdd $300,000 for target margins •••• 2021 BudgetAdjustmentsTotal Net Revenue Requirements = $6,846,906 ••• Revenue Requirements for Seward Electric Assumptions• 12 13 Approximately $2.00/month for average Residential user • ave averaged $0.00315/kWh less than what was charged ASLC pays lower COPA than all other customersIf ASLC had paid same as others during 2020, COPA to others would hActual COPA is based on purchased power costsThe following numbers are based on 2020 averages A Note on COPA•••• 13 14 Existing Rate Classes Results – 14 15 With Industrial Rate Class Revenues for Industrial class preliminarily based on LGS rate Results – 15 16 Allocated costs/customerCan be refined with site visits and detailed dataSetting Industrial rate less than allocated cost of service may be warranted ••• evenues and allocated revenue requirements or allocations based on class peak Street Lights and Harbor high percentage due to relatively low rAllocation to Harbor probably low due to unavailability of load data fAllocation to Industrial may be high Considerations••• 16 17 4 years – COSS in 3 esidential consumer) up Increase COPA to ASLC by $0.0324/kWh (approximately $12,500/month)Decrease COPA to others by $0.00315/kWh (approximately $2.00/month for average R - •• Based on 2020 average COPA, this will:Increase base rate by $0.0031/kWh ($2.00/month for average Residential consumer)No overall increase when considering reduced COPAMoves base rate to within 6% of allocated cost of serviceInitial year based on revenues $75,000 less than target margin ••••• Move ASLC to full COPANudge Residential up a bitSet Industrial base rate at 5% less than cost of serviceMove ASLC to Industrial rate but phase in over three yearsNo change to remaining ratesFollow Rate Recommendations•••••• 17 18 COPA impact based on 2020 averagesActual COPA based on actual purchased power costs and sales •• Remember, Cost Impacts• 18 19 Residential 19 20 Small General Service 20 21 Harbor 21 22 Large General Service 22 23 Industrial (Existing Two LGS Customers) 23 24 ASLC 24 25 ASLC (Initial Year) 25 26 ASLC (Final Year Compared to Initial Year) 26 27 ??? Questions / Comments ??? 27 COST-OF-SERVICE STUDY SEWARD ELECTRIC SYSTEM DRAFT May 2, 2021 the Financial Engineering Company 28 SEWARD ELECTRIC SYSTEM COST-OF-SERVICE AND RATE ANALYSIS STUDY Table of Contents Page I.INTRODUCTION Background ................................................................. 1 Terms .......................................................................... 2 II.COST-OF-SERVICE STUDIES The Process ................................................................. 5 Functionalization ..................................................... 6 Classification ........................................................... 6 Allocation ................................................................ 7 III.SES SYSTEM Power Supply Costs ..................................................... 9 Rate Structure ............................................................. 9 Base Rates............................................................... 10 Cost of Power Adjustment ........................................ 10 IV.BILLING DETERMINANTS AND REVENUE REQUIREMENTS Billing Determinants .................................................... 12 Revenue Requirements ................................................. 14 V.COST ALLOCATION Introduction................................................................. 17 Industrial Rate ............................................................. 17 Allocation Factors ........................................................ 17 Results ........................................................................ 18 Considerations ............................................................. 20 Effect of Moving ASLC to Industrial Rate ...................... 21 VI.SUMMARY AND RECOMMENDATIONS Summary ..................................................................... 23 Recommendations ........................................................ 23 Table of Contents i 29 SEWARD ELECTRIC SYSTEM COST-OF-SERVICE AND RATE ANALYSIS STUDY Table of Contents Continued Tables and Figures Table 1 Classification of Revenue Requirements ............................ 7 2 Current Base Rates .......................................................... 11 3 Average Monthly Bill Comparison ..................................... 11 4 Historical Number of Customers and Energy Sales ............ 12 5 Billing Determinants ........................................................ 14 6 Revenue Requirements ..................................................... 16 7 Allocation Results ............................................................ 19 8 Allocated Revenue Requirements/Customer ..................... 20 9 Cost of Power Comparison Alaska SeaLife Center ........... 19 10 Monthly Bill Impact Residential ..................................... 26 11 Monthly Bill Impact Small General Service ..................... 27 12 Monthly Bill Impact Boat Harbor .................................... 28 13 Monthly Bill Impact Large General Service ..................... 28 14 Monthly Bill Impact Industrial ....................................... 29 15 Monthly Bill Impact Alaska SeaLife Center (Initial Year) .. 30 16 Monthly Bill Impact Alaska SeaLife Center (Final Year) ... 31 Figure 1 Coincident / Non-Coincident Peak .................................... 3 2 Process ............................................................................ 8 3 Historical Energy Sales..................................................... 13 4 Historical Cost of Power Alaska SeaLife Center ............... 22 5 Projected Cost of Power Alaska SeaLife Center ................ 25 Table of Contents ii 30 SEWARD ELECTRIC SYSTEM COST-OF-SERVICE AND RATE ANALYSIS STUDY Table of Contents Continued Appendixes A-1Allocation of Revenue Requirements (Existing Rate Classes) A-2Allocation of Revenue Requirements (Industrial Rate Class) B Classification of Revenue Requirements C Classification of Plant D-1Misc Factors (Existing Rate Classes) D-2Misc Factors (Industrial Rate Class) E Comparison to Rates of Other Utilities Table of Contents iii 31 I. INTRODUCTION BACKGROUND As with any electric utility, setting the rates for the Seward Electric System Rates must be low enough to be affordable for the ratepayers. At the same time, rates must be high enough to maintain the financial health of the system. System reliability must also be considered, and deferring maintenance to keep rates low can quickly lead to an unreliable system with more expensive repairs in the future. But deciding the level of revenues to collect is only part of the decision process. How to collect those revenues must also be considered. Should rates differ among the rate classes or should all ratepayers pay the same rate? Consider for example, a utility that has numerous small customers and one large, industrial customer that operates for only a short period of time each require the utility to install large equipment to deliver power to that customer. A single rate for all customer classes may result in other rate classes paying for the additional infrastructure since the industrial customer operates for only limited times. Accordingly, utilities perform cost-of-service/rate studies every several years to ensure revenues are commensurate with revenue requirements and that the revenues collected from each rate class are fair and equitable. As described later in this report, the process of allocating revenue requirements to each rate class is performed through a multi-step process that has been developed and used nationwide. The underlying goal of this process is such that the is the SES does review its rates each year during the budget process, but that review is limited to aligning total revenues and revenue requirements. The last full rate study that investigated revenues and expenses on a class level was performed in 2014. Based on that analysis, certain changes were implemented over the next several years. These changes included: 1.Seasonal Rates. In order to take advantage of the higher population and economic activity during the summer, a seasonal rate for Residential and Small General Service was implemented where the winter rate was discounted and summer rate higher. 2.. SES purchases all of its power requirements from Chugach Electric Association ( I. Introduction Page 1 32 consists of a customer charge, energy charge, demand charge, and . Prior to the restructuring, the COPA SES charged its customers was equal to the Chugach FPPA, and the customer, energy, and demand charges were included in the SES base rates. In order to be more cost transparent, the COPA was modified to include all Chugach costs and the base rates were lowered accordingly. 3.Automatic Adjustment.In the past, rates were automatically adjusted at the beginning of each year based on the change in the Consumer Price Index. This adjustment is no longer automatic and reviewed to be commensurate with budgeted expenses. Given the length of time since the last full rate study, staff felt it prudent to perform a detailed cost-of-service study. The study is to also include a review of the Special Contract now in place for the Alaska SeaLife Center (ASLC) and the merits of implementing an Industrial rate for large customers. As such, the services of the Financial Engineering Company were retained for performing the analysis, and this report summarizes the analysis and findings. TERMS Certain terms are used in this report that may not be familiar to those not closely associated with the power industry. These terms are described below. Energy The total amount of power consumed over a given period. For example, a 100-watt light bulb, if left on continuously, uses 2,400 watt-hours of energy during a 24-hour period. During the entire year (8,760 hours), 876,000 watt-hours of energy are consumed. Units: The unit of measurement is typically kilowatt-hours (kWh) or megawatt-hours (MWh). 1 MWh = 1,000 kWh = 1,000,000 watt-hours Demand, or Peak Demand The maximum rate of consumption of power. Usually, this is measured over a 15-minute period, but instantaneous demands are also used. If in the previous example a second light is turned on for 15 minutes, then the peak demand is 200 watts. Units: The unit of measurement is typically kilowatts (kW) or megawatts (MW). I.IntroductionPage 2 33 1 MW = 1,000 kW = 1,000,000 watts System Peak The combined peak demand of all utility customers placed on the utility. Units: kW, MW Coincident Peak The usage of power of a particular rate group at the time of system peak. Units: kW, MW Non-Coincident Peak The peak demand of a particular rate group. The non-coincident peak of a rate group does not necessarily happen at the time of the system peak. If the -coincident peak occurs at the time of its coincident peak, then the two are equal, otherwise (as is usually the case) the non-coincident peak is greater than the coincident peak. Units: kW, MW Coincident peak and non-coincident peak are illustrated in the following figure. Figure 1 SES COST OF SERVICE STUDY Coincident/Non-Coincident Peak I. Introduction Page 3 34 Billing Determinants The amount of energy sales, demand sales, and number of customers for each rate group during a year. Units: kWh, kW-months, customer-months Base Rates Rates that are set by the utility to recover the annual revenue requirements that are not associated with fuel or purchased power costs. Base rates include a customer charge, energy charge, and demand charge and are set through action by a governing body. Base rates are in effect for periods of one or more years; whereas fuel and purchased power costs are typically recovered through a separate charge that changes on a monthly or quarterly basis. A rate that recovers the cost of generating fuel and purchased power. Because these expenses vary considerably each month, SES adjusts its COPA on a monthly basis and is levied on all energy purchases by customers in addition to the energy charge in the Base Rates. I. Introduction Page 4 35 II. COST-OF-SERVICE STUDIES THE PROCESS Before the process of how a cost-of-service study is performed, one must first understand the infrastructure of a utility and what are the influencing factors in developing this infrastructure. To procure and deliver power to a customer, the utility must: Construct a generation system or procure power from some source. Construct a transmission system to deliver the power from the generating site to the distribution system. Construct a distribution system complete with poles, transformers, and meters to deliver the power to the end user. Hire staff to operate and maintain the system and to perform administrative duties such as meter reading, preparing and sending out bills, and other activities. Generation/Production, Transmission, Distribution, Customer Accounts, and Administrative. But what factors influence each of these functions? The Generation system must be sized to meet total system peak (or, Coincident Peak) along with adequate reserves. The Transmission system must also be sized to meet the Coincident Peak as power is delivered from remote areas to the system. The Distribution system is, however, a bit more complex. Poles, wires, meters, and transformers are, to a large extent, a function of how many customers there are. But the size of wires and transformers are also a function of how large a customer is since a customer with a larger load requires larger equipment to carry the load. Thus, the Distribution system is sized to meet both the number of customers and size of load. Since the distribution system is not sized to meet the total system load but rather the load in the immediate area, the Non-Coincident Peak is used. Customer accounts, which includes meter reading, billing, and other related activities, is influenced by the number of customers regardless of the size of Recognizing these influencing factors, the National Association of Regulatory II. The Process Page 5 36 a not arbitrary or capricious toward any one or more rate classes. All Alaskan electric utilities that are rate regulated by the Regulatory Commission of use the process set forth in the NARUC Manual when the methodologies set forth in the NARUC Manual are used herein. In very general terms, the analysis is performed in a multi-step process. These steps are: 1.Projecting the amount of customer months, energy sales, and demand sales. 2. 3.Functionalizing the revenue requirements into those being related to generation, transmission, distribution, and other functions. 4.Classifying the functionalized revenue requirements into those being related to energy, demand (coincident and non-coincident), customer, or direct. 5.Allocating the classified revenue requirements to each rate class. 6.Designing rates tha allocated cost of service. The first two steps are relatively straightforward, although the uncertainties in projecting either can lead to under- or over-collections. The next three steps are discussed as follows. F UNCTIONALIZATION accounts expenses are functionalized through the Uniform System of Accounts. Administrative and General expenses, interest expenses, and other items are functionalized as either production, transmission, distribution, or consumer accounts using the labor components of expenses already functionalized, functionalized plant in service, and other factors. C LASSIFICATION Once the revenue requirements are functionalized, they are then classified as either demand-, energy-, or customer-related. At the risk of over-simplification, the NARUC Manual prescribes the functionalized revenue requirements to be classified as shown in Table 1. As one can see, the classification mirrors the influential factors described on the preceding page for each function. Detailed classification methodologies for the various line-item expense codes are provided in the NARUC Manual with the goal of classifying in a fair and equitable manner. The NARUC Manual is published for the use of all utilities nationwide and II. The Process Page 6 37 acknowledges that certain deviations from the methods prescribed may be warranted due to local conditions. Table 1 SES COST OF SERVICE STUDY Classification of Revenue Requirements Classification Functionalized Demand Revenue EnergyCustomer Non Requirement Coincident Coincident Productionxx Transmissionx Distributionxx A LLOCATION The final step in the cost-of-service analysis is to allocate the classified revenue requirements to each customer class (or rate group) based on typically allocated based on sales. If a particular class accounted for 30 percent of the sales, then 30 percent of the costs classified as energy-related would be allocated to that class. Energy- and customer-related expenses are fairly straightforward, but demand allocations become much more complex since there are a number of different methods that can be used. Some form of the coincident and non-coincident peaks are typically used, with such forms including the annual peak, average of the four peak months, average of the twelve months over the year, average of the three summer and three winter peak months, and so on. Further complicating the matter is that a great deal of load research must be conducted in order to estimate these class peaks with any precision. Such research can be expensive, and the benefits of obtaining the data can quickly be eroded by the associated costs. Load research of comparable utilities and an analysis of billing demands can be used in lieu of the expensive load research. After the revenue requirements have been allocated to each class, the existing rates are applied to the billing determinants (number of customers, energy sales, demand sales) to determine if the rates recover less than or more than the allocated cost of service. Rates are then adjusted accordingly. It is important to understand that rates are adjusted so that the forecasted revenues to be collected are relatively close to the revenue requirements and no more. II. The Process Page 7 38 ure 2 Process Fig SES COST OF SERVICE STUDY II. The Process Page 8 39 III. SES SYSTEM POWER SUPPLY COSTS SES receives all of its power supply from Chugach, although back-up generation is maintained in the event of service disruptions. The monthly CEA bill for power consists of a relatively small customer charge, an energy charge, a demand charge, and the fuel and purchased power adjustment (FPPA). The first three rates are modified through a general rate proceeding with the RCA, whereas the FPPA costs and generating efficiencies. CEA reduces the overall bill by a fixed amount each me of the Bradley Lake Hydroelectric Project. Prior to the last rate study, SES passed the cost of CEA power on to its customers via two mechanisms. The FPPA portion was passed through djustment (COPA). The remaining costs of CEA power (customer, energy, and demand charges) were recovered in the base rates that SES charged its own customers. Whenever CEA modified its own base rates, SES base rates were correspondingly adjusted. This methodology had two disadvantages. change to SES base rate could over- or under-collect the amount needed. Second, it was difficult for the user to see how much of the bill was attributed to power supply and how much for the SES system. As a result, SES now includes the entire CEA monthly power supply bill in the COPA. However as will be discussed later in this report, the Special Contract with the Alaska SeaLife Center was not modified, and the COPA charged to the ASLC FPPA and not the entire bill. Alaska SeaLife Center and $0.0987/kilowatt-hour for the remaining customers. RATE STRUCTURE SES has four primary rate groups, two additional sets of rates for Yard Lights and Street Lights, and the special contract for the ASLC. Rates charged to each rate class are comprised of two major components Base Rates and COPA. Base rates are, in turn, further subdivided into several sub- components, and each is described as follows. III. SES System Page 9 40 1.Base Rates. Implemented to recover costs of the system that are not related to fuel or purchased power. Base Rates do not fluctuate during the year and are changed only through Council action. a.Customer Charge. A fixed dollar amount the customer must pay each month regardless of how much energy is used. These rates are implemented to recover some of the fixed, customer-related costs of the utility such as carrying charges and depreciation of transformers, meters, service connections, and part of the distribution system as well as expenses related to meter reading, billing, and customer service. b.Demand Charge. Typically charged only to large customers and based on peak usage (in kilowatts, or kW) during the month. These charges are used to collect part of the demand-related costs of the system such as those associated with production, transmission, and part of the distribution plant. c.Energy Charge. Used to recover the remaining revenue requirements and charged based on energy usage by the customer. 2.Cost of Power Adjustment. The COPA is implemented to recover all purchased power costs. It fluctuates each month and is assessed on all energy used by a customer. Rates in effect are summarized in Table 2 on the following page. A comparison of SES rates to those of other utilities is provided in Appendix E, and the average monthly bill for the various utilities is summarized in Table 3. As will be discussed later in this report, SES has two very large customers that are currently included in the Large General Service rate class that might be better served through a separate rate. The summary in Table 3 separates these two customers from the remaining Large General Service customers. III. SES System Page 10 41 Table 2 SES COST OF SERVICE STUDY Current Base Rates Table 3 SES COST OF SERVICE STUDY Average Monthly Bill Comparison III. SES System Page 11 42 IV. BILLING DETERMINANTS AND REVENUE REQUIREMENTS BILLING DETERMINANTS The number of customers and energy sales for the 2012 2020 time period are shown in Table 4, and energy sales are summarized in Figure 3. As can be seen, the number of customers has increased while at the same time energy sales have decreased; although sales did rebound slightly in this past year. Residential sales, as a percentage of total sales, has increased slightly, but the increase from 2019 to 2020 may be a reflection of the decreased economic activity during the pandemic. With the slight increase in sales in 2020, the billing determinants incurred during that year are used for this study. Table 4 SES COST OF SERVICE STUDY Historical Customers and Sales by Rate Class IV. Billing Determinants / Revenue Requirements Page 12 43 Figure 3 SES COST OF SERVICE STUDY Historical Energy Sales (kWh) The number of customers, energy sales, and billing demands for 2020 are shown in Table 5. As described earlier, the billing determinants of the two large customers are shown separately from Large General Service in Table 5. IV. Billing Determinants / Revenue Requirements Page 13 44 Table 5 SES COST OF SERVICE STUDY Billing Determinants REVENUE REQUIREMENTS The next step in the process is to establish the amount of revenues collected from rates. Since fuel and purchased power expenses are recovered through COPA, the revenue requirements used in the rate study are the remaining expense. For this analysis, revenue requirements are based on the 2020 budget with certain adjustments. The revenue requirements and adjustments are summarized in Table 6 at the end of this section, and a more detailed summary is provided in Appendix B to this report. Adjustments made are explained as follows. 1.Fuel for Generators. This expense is collected from COPA and is therefore eliminated. 2.Wholesale Power Costs. Similarly, expenses associated with wholesale power purchases from CEA are also collected through the COPA mechanism and are, therefore, eliminated. 3.Contractual Services Transmission. Insufficient amounts were budgeted for the clearing of transmission right-of-ways, and bids IV. Billing Determinants / Revenue Requirements Page 14 45 have now been received for the work. Based on these bids, the revenue requirements were increased by $250,000. 4.Payment in Lieu of Taxes. The SES budget transfers this expense to another account, but the expense is nonetheless incurred by the utility. Accordingly, Payment in Lieu of Taxes is included in the revenue requirements. 5.Debt Service. Principal payments on debt are not included as an expense since the inclusion of depreciation on the assets funded with debt would be a double counting of expense. 6.Revenues from Sales. Revenues from sales are calculated independently, and the budgeted amounts are not included. Other revenues, such as connect fees, interest earnings, etc., are included. 7.Target Margin. There are certain inherent inaccuracies in the projection of both revenues and revenue requirements. Actual expenses may be higher or lower than projected as might be actual billing determinants (energy sales, billing demands, etc.). Accordingly revenue requirements for regulated utilities include return on rate base or projected net revenues that will provide higher margins (profits) than that required by lenders. For unregulated utilities such as SES, revenue requirements can simply be increased by an appropriate net margin. For purposes of this analysis, a net margin of $300,000 is added to the revenue requirements. It is important to note that the revenue requirements are relatively fixed in nature. Certain costs may be influenced be the number of customers; but even then, these costs are fixed once the infrastructure is built. It is only billing-related costs that are directly influenced by the number of customers at any one time, and these costs represent a very small amount of the total revenue requirements. Thus, the revenue requirements will not be influenced by the level of energy sales or the number of customers. IV. Billing Determinants / Revenue Requirements Page 15 46 Table 6 SES COST OF SERVICE STUDY Revenue Requirements IV. Billing Determinants / Revenue Requirements Page 16 47 V. COST ALLOCATION AND RESULTS INTRODUCTION Cost-of-service studies are not an exact science. Although the NARUC Manual was established to set forth guidelines in classifying the various revenue requirements, the process requires estimates of certain allocators to be made. Furthermore, customers in one rate class are generally in different locations than others, but geographical boundaries are typically blurred. Finally, the process is based on a snapshot in time, and usage patterns and relative usage change over time. All in all, the results should not be taken as exact numbers but rather guidance on whether rates are set too high or too low. INDUSTRIAL RATE As described earlier in this report, SES has two customers in its Large General Service rate class that are significantly larger than other customers within that class. The question then becomes: Should these two customers be provided service through a new, Industrial, rate class? The short answer is yes. Rate classes are established for groups of customers with similar usage patterns since customers with similar usage patterns typically impose similar costs on the utility. The analysis conducted for this rate study is based on both the existing rate class structure and establishing an Industrial rate class for very large customers. ALLOCATION FACTORS Revenue requirements are based, in part, on the 2020 billing determinants described in the previous section. These, then, form the allocation factors for both energy- and meter-related expenses. Demand-related expenses are allocated based o contribution to the coincident peak and the non-coincident peak. For a large utility, these estimates are developed through detailed load research where the hourly usage of customer sample groups are monitored over at least a year. From this, estimates can then be made for rate classes as a whole. This load research, however, is relatively expensive, and the benefits of gaining the information are quickly eroded for small utilities such as SES. Therefore, other methods are used, such as reviewing billing demand records for large customers and using load research data from nearby utilities. V. Cost Allocation and Results 17 48 For this analysis, the load research data developed by Anchorage Municipal Light & Power is used as guidance and modified where deemed appropriate. It must be remembered that the load research is used to estimate load patters, not actual loads. Although AML&P is much larger than the SES system, its compactness is believed to make it a better indicator of SES load patterns than others such as Chugach. RESULTS The analysis was made for two separate scenarios. These two scenarios and how revenues were projected for each are as follows. 1.Scenario 1 Existing Rate Classes. All rate classes remain the same with no Industrial rate and the Special Contract with the Alaska SeaLife Center continues. All revenues are based on current rates. 2.Scenario 2 Industrial Rate Class. An Industrial rate class is established that includes the Alaska SeaLife Center, JAG Alaska, and OBI Seafoods. Rates for this Industrial class are initially set equal to that of Large General Service. The results of the analysis are summarized in Table 7 on the following page. Even though purchased power costs are excluded from the analysis when setting base rates, these costs (and associated revenues) are included in Table 7 since the Alaska SeaLife Center pays a lower COPA. Purchased power costs and revenues are based on the 2020 averages. Details of the results are provided in the following Appendixes. Appendix A: Allocation of Revenue Requirements Appendix B: Classification of Revenue Requirements Appendix C: C-1: Functionalization of Revenue Requirements C-2: Functionalization of Plant V. Cost Allocation and Results 18 49 Table 7 SES COST OF SERVICE STUDY Allocation Results The results show that with both scenarios, the total expected revenues are slightly less than the overall revenue requirements. The deficiency is lower in V. Cost Allocation and Results 19 50 Scenario 2 due to the inclusion of the Alaska SeaLife Center being included as an Industrial customer paying a higher rate than it currently is. The percentage adjustment projected for Harbor and Street Light rates are relatively high, but this is due in part to the relatively low allocated cost of service as compared to the other rate classes. Other factors may also be involved as will be discussed below. CONSIDERATIONS As previously stated, cost-of-service studies are not an exact science. Estimates must be made regarding usage patterns, and the physical locations of different customers blur the lines of allocations. The results in Table 7 showed the Boat Harbor rates set higher than the allocated cost of service. However, the load research used in estimating coincident and non-coincident peak did not include a customer class of such a limited size (27 meters), and it is suspected that the class diversity is less than that assumed. Thus, the costs allocated to the Boat Harbor are suspected to be a bit low. Perhaps more important is a closer look at the Industrial rate. If the allocated revenue requirements shown in Table 7, Scenario 2, are divided by the number of customers served, we see the following. Table 8 SES COST OF SERVICE STUDY Allocated Revenue Requirements / Customer The higher amount for the potential Industrial class is a result of many of the costs being allocated based on coincident and non-coincident peaks. Because these customers have relatively high demands, they are allocated an increased share of the overall system costs. While a higher amount is to be expected for these large customers due to the required infrastructure to serve them, the resulting amount is suspect. A more refined study that includes customers/line-mile, updated costs of transformers, and other factors would remedy the inaccuracies in this analysis. Site visits where the consultant meets with staff and discusses detailed system components are part of a cost-of-service study. However, they could not be performed for this current study due to the pandemic and limited staff time in the office. Therefore, an Industrial rate that is less than it allocated cost-of-service should not be dismissed out of hand. V. Cost Allocation and Results 20 51 EFFECT OF MOVING ALASKA SEALIFE CENTER TO AN INDUSTRIAL RATE If an Industrial rate was set up that included the Alaska SeaLife Center, two different consequences occur. First, COPA for the remaining customers will decrease from what it would have been if ASLC continued to pay the reduced COPA. With the current arrangement with ASLC paying only a portion of the CEA power costs, the remaining customers must make up the difference. In Scenario 2, ASLC is assumed to pay the full COPA, thus reducing the effective COPA paid by the others. Based on the 2020 averages, ASLC would see an increase of $0.0324/kilowatt-hour while the remaining customers would see a decrease of $0.00315/kilowatt-hour, or approximately $2.00/month for the average Residential customer. base rate costs would also increase. Combined with the increase in COPA, the total cost of power would increase nearly $200,000, or 27 percent. Table 9 SES COST OF SERVICE STUDY Cost of Power Comparison Alaska SeaLife Center In 2015, SES staff provided ASLC with a projection of rates that would transition ASLC from its then current contract rate to the LGS rate. This transition would occur over ten years. During this period, there were a series of multi-year contracts that set the rate for power sold to ASLC, the most recent being for the 2018 2020 time period. Power now being sold to ASLC in 2021 is at the same rate as in 2020 (i.e., there was no adjustment made at V. Cost Allocation and Results 21 52 the end of 2020). Although the rates were set in the contracts, the specified rates could be adjusted if Chugach modified their base rates for power sold to SES. Figure 4 provides a summary of the annual cost of power to ASLC under the 10-year plan, contract rates, and actual rates (2020 and 2021 only). All amounts are based on ASLCs actual use during 2020 and a constant COPA equal to the 2020 average. Figure 4 SES COST OF SERVICE STUDY Historical Cost of Power Alaska SeaLife Center Base on this figure and conversations with the Alaska SeaLife Center, a proposal for transitioning to an Industrial rate is provided in the following section. V. Cost Allocation and Results 22 53 VI. SUMMARY AND RECOMMENDATIONS SUMMARY The analysis conducted and summarized herein shows: 1.The existing rates combined with maintaining the Special Contract with the Alaska SeaLife Center are projected to provide revenues approximately $60,000 less than the revenue requirements. 2.The Special Contract rate is significantly less than its allocated cost of service, and the COPA it is charged results in a higher COPA to the other customers. 3.Terminating the Special Contract and moving the Alaska SeaLife Center to the Large General Service rate would result in a cost increase of approximately $200,000/year to ASLC. 4.Charging the full COPA to ASLC would result in a reduction in rates to the other customers as compared to a COPA they would be charged if ASLC was not paying the full COPA. Based on the average COPA charged during 2020, this would result in a $2.00/month savings for the average Residential user. 5.Residential base rates are set approximately 9 percent less than cost of service. The pandemic has likely overemphasized the Residential contribution to cost causer to a slight extent, and setting the rates to equal allocated cost of service might be too much. 6.Setting the Industrial rate less than its allocated cost of service may be warranted. RECOMMENDATIONS The City has several decisions to make going forward including should rates be set based on cost-of-service, what to do with the Special Contract with the Alaska SeaLife Center, and should an Industrial rate class be established. The fol 1.Continue to use allocated cost of service as a guide in setting rates. 2.Increase Residential base rates by $0.0031/kilowatt-hour. This would be $2.00/month for the average user and would be offset by the approximate $2.00/month reduction in COPA if ASLC is moved to the full COPA. This would bring the base Residential rates to within 6.5 percent of cost of service. VI. Summary and Recommendations 23 54 55 56 Table 10 SES COST OF SERVICE STUDY Monthly Bill Impact Residential VI. Summary and Recommendations 26 57 Table 11 SES COST OF SERVICE STUDY Monthly Bill Impact Small General Service VI. Summary and Recommendations 27 58 Table 12 SES COST OF SERVICE STUDY Monthly Bill Impact Boat Harbor Table 13 SES COST OF SERVICE STUDY Monthly Bill Impact Large General Service VI. Summary and Recommendations 28 59 Table 14 SES COST OF SERVICE STUDY Monthly Bill Impact Industrial (Existing LGS Customers) VI. Summary and Recommendations 29 60 61 62 Appendixes Appendix A: Allocation of Revenue Requirements A-1: Existing Rate Classes A-2: With Industrial Rate Class Appendix B: Classification of Revenue Requirements Appendix C: Classification of Plant Appendix D: Miscellaneous Factors D-1: Existing Rate Classes D-2: With Industrial Rate Class Appendix E: Comparison to Rates of Other Utilities 63 Appendix A Allocation of Revenue Requirements 64 65 66 Appendix B Classification of Revenue Requirements 67 68 69 70 71 72 73 74 Appendix C Classification of Plant 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 Appendix D Miscellaneous Factors 97 98 99 100 101 102 103 Appendix E Comparison to Rates of Other Utilities 104 105