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HomeMy WebLinkAboutRes2020-069 Sponsored OF SEWARD,ALASKA by: Meszaros RESOLUTION 2020-069 A RESOLUTION OF THE CITY COUNCIL OF THE CITY OF SEWARD, ALASKA,AUTHORIZING THE CITY MANAGER TO ENTER INTO A PROFESSIONAL SERVICES CONTRACT WITH THE FINANCIAL ENGINEERING COMPANY, TO PREPARE A RATE STUDY FOR THE ELECTRIC ENTERPRISE FUND FOR AN AMOUNT NOT-TO-EXCEED $40,000,AND APPROPRIATING FUNDS WHEREAS, the City of Seward will start the process of negotiating a new Power Sales Agreement as the contract with Chugach Electric Association(CEA)will expire the end of 2021; and WHEREAS, the City Electric Utility will want to have a clear understanding of the cost of providing power to all classes of customers so that negotiations for a new power sales agreement can be tailored to provide each class of customers with the lowest cost power available; and WHEREAS, the laws of the State of Alaska require public utilities to charge customers based on the principles of cost causer, cost payer; and WHEREAS, the City's Electric Utility should consider the need to have different rate classes of customers so that each class can be charged according to cost causer, cost payer principles; and WHEREAS,the City's Electric Utility has not changed rates since 2018, and the Electric Rate Study has not been done since 2014; and WHEREAS, the City of Seward needs to make sure that the utility is providing reliable power at the lowest cost possible; and WHEREAS, a rate study will undertake a complete look at the cost of providing reliable power to those served by the City of Seward; and WHEREAS, a rate study will also ensure that each class of ratepayers will pay appropriate rates for their electric service including the costs of connecting services and other charges for connection and disconnection; and WHEREAS, the Electric Utility has recently installed a new metering system that could affect the fees and charges allocated to customers; and WHEREAS, Michael Hubbard of The Financial Engineering Company has provided professional services for City of Seward previously and is qualified and capable of performing CITY OF SEWARD, ALASKA RESOLUTION 2020-069 the Electric Enterprise Fund rate study; and WHEREAS, Hubbard is available to do this study in an expeditious manner; and WHEREAS, The Financial Engineering Company can do this study for an amount not- to-exceed $40,000; and WHEREAS, The Financial Engineering Company can be contracted for these services consistent with the City's bid procedures, as read in section 6.10.120 of the City Code, which allows for an exemption of competitive bidding for the procurement of professional services. NOW, THEREFORE, BE IT RESOLVED BY THE CITY COUNCIL OF THE CITY OF SEWARD, ALASKA that: Section 1. The City Manager is hereby authorized to enter into a Professional Services Contract with The Financial Engineering Company to include an Electric Rate Study. Section 2. The contract will be performed at a cost not-to-exceed $40,000. Section 3. Funding in the amount of$40,000 is hereby appropriated from Electric Fund unassigned fund balance account no. 15000-0000-3400 to contracted services account no 15000- 3000-7009. Section 4. The City Manager shall have a rate study"kick off' session at a Council meeting or at a Council work session within 30 days of the passage of this Resolution. Section 5. This resolution shall take effect immediately upon adoption. PASSED AND APPROVED by the City Council of the City of Seward, Alaska, this 24th day of August, 2020. T . Y 1FS • '.i, ALASKA 1.4 „,,gar Christy Ter , , Mayor CITY OF SEWARD, ALASKA RESOLUTION 2020-069 AYES: Baclaan, McClure, Seese, Osenga, Terry NOES: None ABSENT: None ABSTAIN: Crites (This item was approved on consent; Council Member Crites abstained from voting on the Agenda and Consent Agenda due to a Conflict of Interest for other items on Consent) ATTEST: rends J. Ballo M City Clerk .•tt•. OF SE ''•, .'�• •V�.•'•GO�°R1T•'•.Q� o, • • SEAL `.• • 11. . • . • • • F �OFP�p',it' Agenda Statement Meeting Date: August 24, 2020 To: City Council Through: Scott Meszaros, City Manager From: Cory Borgeson, Interim Electric Director Agenda Item: A Resolution of the City Council of The City of Seward,Alaska,Authorizing the City Manager to Enter Into a Professional Services Contract with the Financial Engineering Company, to Prepare a Rate Study for the Electric Enterprise Fund for an Amount Not-To-Exceed$40,000,and Appropriating Funds. BACKGROUND & JUSTIFICATION: The setting of just and reasonable rates is one of the most important decisions a governing body of utility undertakes. Since the City of Seward Electric is not subject to rate regulation by the Regulatory Commission of Alaska,this responsibility takes on even more significance. Alaska law requires utility rates be just and reasonable and allocate costs based on the principals of cost causer/cost payer. Seward's rates structure for residential users has three components; 1. Customer Charge which is supposed to represent the cost of hooking onto the system, 2. Utility Charge which covers the operations and interest and depreciation expense of the utility; and 3. the cost of Power which is a pass thru of energy costs which represents Seward's costs of power from Chugach Electric. For commercial users, there are an additional charge called the demand charge which ensures that large users pay enough in rates to cover their peak electric usage. This rate study will look at these rates as well as analyze the revenue requirements for the utility. The City last did a rate review in 20I6/2017. There have been adjustments to rates based on the consumer Price Index. The cost of power is adjusted monthly as Chugach Electric's rates for Seward fluctuate monthly. There are several reasons for doing a comprehensive rate study, including, but not limited to: the need to look at industrial rates, changing costs of operations that are not reflected by CPI, and changes in electric loads and usage that could change allocation of costs among classes of customers. When setting electric rates, a utility's goal is twofold. First and foremost is to set rates to recover adequate revenues. Second, the utility should strive to set rates for each customer class close to the allocated cost of service. This helps ensure that the cost causer is the cost payer. 209 The second goal of setting rates close to the allocated cost of service,can only be achieved through a study that requires large amounts of staff time or the expense of hiring outside consultants. For this reason, utilities typically perform studies on an infrequent basis and implement interim rate adjustments on an"across-the-board"basis where all rates are adjusted by the same percentage or by the same amount. The All Requirements Power Sales Agreement with Chugach Electric will end in December of 2021. Performing this study will help the City understand the electric needs of Seward's citizens resulting in fair and reasonable rates based on electric consumption. This will also allow Seward to gain information that can help negotiate a new Power Sales Agreement that can better incorporate Seward's industrial users. These factors indicate it is time to do a full rate case and not set interim rates for two more years. Mike Hubbard of Financial Engineer Company has worked with the City of Seward for the past ten years. His proposal (which is attached)sets the cost at just under$40,000 and certainly reflects his knowledge base. Using the Financial Engineer Company saves the City costs and will allow for an efficient rate study process. This rate study should take between four to six months with the goal of having it completed in four months. Also, this contract with the Financial Engineering Company is consistent with the City's bid procedures as quoted below in section 6.10.120 of the City Code,which allows for an exemption of competitive bidding of professional services: "Professional services are those that require special knowledge and judgment that includes analysis, evaluation, prediction, planning or recommendations and which result in the production of a report or the completion of a task. Examples of professional services include accounting, architectural, appraisal, engineering, land surveying, financial consultation, legal services, lobbying, planning, economic analysis, computer programming and system analysis, insurance consultation and risk analysis, and other specialized services." INTENT: Enter into a Professional Services Contract with the Financial Engineering Company, to prepare a rate study for the Electric Enterprise Fund for an amount not-to-exceed$40,000. CONSISTENCY CHECKLIST: Yes No NIA 1. Comprehensive Plan: x 2. Strategic Plan: x 3. Other: FISCAL NOTE: Funding for this contract will come from Electric Fund reserves and expended to the contracted services account. Approved by Finance Department: 210 ATTORNEY REVIEW: Yes X_ No Not Applicable RECOMMENDATION: City Council approve Resolution 2020-069, authorizing the City Manager to enter into a Professional Services Contract of the Financial Engineering Company, to prepare a rate study for the Electric Enterprise Fund for an amount not to exceed$40,000. 211 the 1, inanCial Engineering Company 235 Rockland Street, Rockport, Maine 04856 www,FinEngCo.com Phone: (207)593-913I Cell/Text: (207)691-8347 E-mail: mhubbard@FinEngCo.com August 18, 2020 Mr.,Cory Borgeson, Electric Utility Manager City(of Seward PO Box 167 Seward, Alaska 99664 Dear Cory. Attached is a proposed contract for a Cost of Service/Rate Design study for the Electric Utility. If you have any questions regarding the attached material, please do not hesitate to call for text me at (207) 691-8347. Very truly yours, THE'fINANCIAL ENGINEERING COMPANY MICHAEL D. HUBBARD 212 CONTRACT Thq Financial Engineering Company ("FEC") shall provide the following work for the City of Seward ("City") regarding a cost-of-service/rate study for the City's Electric Utility. METHODOLOGY Overall — A cost-of-service study is to be performed that properly allocates the Electric UtiiGty's revenue requirements to each customer class. Although the utility is not rate regulated by the Regulatory Commission of Alaska ("RCA"), the work will be performed using the guidelines set by the RCA for regulated utilities. Thus, revenue requirements will be allocated to each customer class using appropriate functionalization, classification, and allobation factors set forth in the cost allocation manual developed by the National Association of Regulatory Utility Commissioners (the "NARUC Manual"). Rates will then be designed such that the revenues collected from each customer class will be approximately equal to the allocated revenue requirements. In this way, the "cost causer" becomes the `"cost payer." The study will be similar to past studies performed for the City but will include an analysis regarding the establishment of an Industrial rate for very large customers. The adequacy of rates will be reviewed over a two-year period commensurate with the current budget cycle (20�0/2021). The City also desires to compare its electric rates with those of other Railbelt utilities as well as various other utilities in the State. These comparisons can then be used to make decisions regarding the need to implement budget adjustments going forward. Task 1 - Data Request. A data request will be prepared and forwarded to the City. Once the data is received, it will be reviewed and a preliminary analysis will be performed regairding potential rate classes, revenue adequacy and other metrics. Task 2 — Initial Meeting (virtual). Once the preliminary analysis is performed, a virtual meeting (via Zoom or similar) will be held between City staff and the Financial Engineering Company. The purpose of the meeting is to: • Review the proposed scope of work and make necessary clarifications, modifications, or additions. • Review data collected from the initial data request and obtain supplemental information as necessary. • Discuss known factors that will change historical operating results. (This process, referred to as normalizing revenue requirements, is discussed in greater detail below.) • Discuss billing history and how billing determinants may change in the near future. - 1 - 213 • Discuss the preliminary findings. Task 3 — Model Update/Analysis. The Revenue Requirements/Cast-of-Service/Rate Design model developed for previous studies will be updated and modified to provide a two-year forecast using the preliminary budgets for 2020/2021. The model will also include actual 2078 operating expenses and expected expenses for 2019 to illustrate changes in line-item budget amounts. Projected revenues will be based on assumed billing determinants and existing rates. Billing determinants will be equal to recent history but modified based on conlversations with staff. The model will then allocate the revenue requirements to the various customer classes basbd on industry-accepted principles. In general terms, variable costs are allocated based on each class' respective energy requirements, fixed generation and distribution costs allocated based on each class' contribution to coincident and non-coincident peak, and customer-related costs based on number of customers. At times, direct assignments are used where costs can be attributed to a specific customer class. Demand data is typically difficult to obtain for those classes that are not demand metered, but the Financial Engineering Company has developed methodologies for estimating these amounts, and these methodologies have been accepted by the Regulatory Commission of Alaska. As part of the analysis, the model shall be modified to include an option of establishing an additional Industrial rate class for very large customers. Billing data of large customers shall be reviewed to determine a logical threshold for this new rate class. Options will be explored that can be implemented to smooth large swings in the monthly Fuel Cost Adjustment will be investigated. Historical amounts will be reviewed as well as the Cause of any large swings. From this, options can be developed and provided to the City for consideration, The model will be developed using the Excel platform. Task 4 — Rate Design. The rate model will determine the adequacy of rates under several scenarios. These scenarios include the following. M Overall adequacy. The total utility revenues projected to be collected for 2020 and 2021 will be compared to the total utility revenue requirements for each year based on the following rates. o Existing rates o CPI adjustment for 2021 only o Other adjustments • Individual Rate Class. How close each rate class' rates are set to cost-of-service will be determined by comparing the revenue requirements allocated to the rate class to the projected collected revenues from the rate class. Revenues will be based on the adjustments described above. - 2 - 214 Industrial Rate. As described in Task 3, the option of establishing an Industrial rate for very large customers shall be included in the model. The analysis and summary of findings will include both with and without a new Industrial rate. In order to facilitate the understanding of overall rate adequacy and the comparison to other rates (Task 5), an analysis shall be performed that shows how budgeted revenue requirements must change for each $0.025/kWh in rates. In other words, if existing rates were to be reduced by $0.025/kWh, the budget must be decreased by "x amount" to maintain adequate revenues. Task 5 — Other Rates. Rates of the Railbelt utilities and selected other utilities within the State will be collected and a comparison made to those of Seward. The comparison will be made for each rate class of Seward and will show monthly bills for various usage levels. The comparison will separate base rates and fuel cost adjustments in the event inferences can be made. If the rates developed in Task 4 are higher than other utilities, a summary shall be provided that shows the budgetary reductions required for rate parity. Task 6 — Written Report. A written report describing the analysis and findings will be prepared. The report shall also make reference to industry-accepted practices so that the reader will know that the analysis was performed with no hidden agendas and would meet the requirements of an RCA review. The report shall be written such that those not knowledgeable of the electric utility industry can understand the work performed. Task 7 — Presentations. A virtual presentation shall be made to the City Council. The presentation shall summarize the report and provide the Council and public opportunities to have any questions and concerns addressed. The presentation will include a review of curront and proposed rates and the calculation of a customer's bill for each rate class. Task 8—Refinement. The analysis, rate development, and report will be refined, if required, based on any concerns of the Council. BUDGET A budget to perform the scope of work has been prepared and is summarized in Attachment 1. The budget is based on two site visits (preliminary and presentation). Should a second meeting with Council be required, costs for that work and meeting are separately identified. The work can be performed on a fixed-fee basis or a time and materials with the total billing not to exceed the amount shown in the Attachment. - 3 - 215 Approved by: Michael D Hubbard Cory R. Borgeson the Financial Engineering Company City of Seward Approved by the Seward City Council on - 4 - 216 CITY OF SEWARD-ELECTRIC DEPARTMENT RATE STUDY Budget TASK HOURS Labor Expenses Total 1 Data Request/Initial Analysis 32 $ 6,400 $ 6,400 2 Initial Meeting/Data Refinement 8 1,600 1,600 3 Model Modification/Update 40 8,000 8,000 4 Rate Design 54 10,800 10,800 5 Other Rate Review 8 1,600 1,600 6 Report 24 4,800 4,800 7 Presentations 4 800 800 TOTAL 170 $ 34,000 $ 34,000 8 Second Presentation Preparation 16 $ 3,200 $ 3,200 Presentation 2 400 400 Subtotal 18 $ 3,600 $ - $ 3,600 TOTAL 188 $ 37,600 $ - $ 37,600 - 5 - 217