HomeMy WebLinkAbout04102023 City Council Laydown - Bower Memo on Electric City of Seward �� �, City Manager's Office
PO Box 167 Janette Bower, City Manager
Seward, Alaska 99664 Phone: 907-224-4012
A(XJ6 Email: jbower@cityofseward.net
04102023 CC Laydown
(Bower)
City of Seward
Electric Sale — Homer Electric Association Information
On May 9, 2022, City Council passed Resolution 22-067 directing the City Manager to develop a
timeline and process for examining the advantages and disadvantages of selling the City electric
utility. Since that time and after a thorough assessment that included three executive sessions,
the Council decided to proceed with a special election scheduled for May 2 of this year and
selected Homer Electric Association (HEA) as its preferred electric service provider following a
formal Request for Proposal. In addition to receiving a bid from HEA, the City received a proposal
from its current wholesale power provider, Chugach Electric Association (CEA).
In comparing the two proposals, the total financial submissions were very close, with each coming
in between $37 million and $38 million over 10 years less depreciation, as shown in Attachment
A. Each utility also committed to increasing its fixed cash offer at closing to cover any additional
investments made by the City for electric system improvements. For the Council, the two
proposals were close enough that other factors stated in the offers were used to determine which
utility would be the right choice for Seward. This process included hearing from each utility directly
during an executive session on October 27, 2022.
Some of the key factors included:
Community Fit— While the Council believed both utilities would be able to provide Seward with
long-term energy security, Council members felt HEA was better suited for the Seward
community. There was a concern from Council members that CEA, being a much larger utility,
would not place as much emphasis on Seward's community.
HEA was clear in its presentation that it wanted to be a strong partner for the community, even
committing to rebranding its utility from Homer Electric Association to Kenai Peninsula Energy
Cooperative. HEA also pointed to the many political and business relationships and other synergies
HEA and the City of Seward already share across the Kenai Peninsula due to their location on the
peninsula.
Board Representation — HEA also committed to adding a membership district for the Seward
area, ensuring representation on the HEA board of directors. While the seat would ultimately
need approval through a vote of HEA's members, HEA said that Seward-area electric customers
would be allowed to participate in that board vote once the sales transaction is formally approved
by the Regulatory Commission of Alaska.
Also, prior to regulatory approval, HEA said the City would be able to appoint a non-voting interim
board participant through a selection made by Seward's City Council.
Page 1 of 2
Long-term Rate Strategy — While the Council is fully aware that HEA's rates today are higher
than CEA's rates, the Council believes—based on the presentations from each utility—the gap in
rates between the two today will close in the future. During its presentation, HEA discussed in
great detail the investments it has made over the past decade in generation resources, energy
storage capabilities, customer-focused technology and cybersecurity. HEA further explained how
these investments have positioned the utility well for meeting future industry and regulatory
requirements.
With many key operational and technology investments already made, HEA pointed to the stability
it will realize in its member rates as other utilities across Alaska are beginning to make similar
investments. The Council recognizes that HEA's rates may never be as low as CEA's, but Council
members believe rates between the two utilities will become more competitive and that HEA's
strong focus on the community and customer service is worth the tradeoff.
In conclusion, a key concern of selling the electric utility that Council discussed on several
occasions is how would the City offset the Electric Department's annual contribution to the City's
general fund, which in 2021 was approximately $2.1 million. One solution that would offset a
sizeable portion of the annual general fund contribution is the creation of a trust fund using sale
proceeds after debt is paid. Annual dividends from the income generated by the fund would go
into the City's general fund. Accounting estimates project that as much as 40 to 60 percent of
the 2021 contribution could be offset through this dividend.
Other offsets to the general fund contribution, such as a 10-year premium payment, and a lease
of City office space, are outlined in the HEA proposal and are shown in Attachment A.
Throughout the Council's assessment, its primary focus was to ensure a more secure energy
future for the City's electric customers. The Council firmly believes this is best achieved through
a merger with a larger electric utility, where there are more human and financial resources, an
opportunity for longer-term rate stability due to a larger customer base, and expanded operational
resources that ensure system reliability. Today, Seward is trying to manage the changes occurring
in the rapidly changing electric utility industry with only 10 employees and other limited resources.
While City Council feels a merger with HEA is in the best interest of Seward, Council members
also believe this is a decision best left up to the citizens in the May 2 special election.
Page 2 of 2
City of Seward Electric Sale
Homer Electric Proposal Analysis
Analysis performed by MC Pehle, CPA - Carmen Jackson CPA, LLC
1. Purchase Offer:
Fixed Amount per Proposal $ 25,250,000
Subtotal Original Offer $ 25,250,000
Additional Assets Purchased
since Proposal (Estimated)
Add: New Capital Assets $ 15,000,000
Less: Depreciation $ (3,200,000)
Purchase Offer at Closing 1/1/2024 $ 37,050,000
2. General Fund Contribution:*
Deferred Acquisition Payments (10 Years) $ 1,100,000
Annex Building Lease (10 Years) $ 45,000
Interest from Electric Trust** $ 1,169,775
GF Contributions: 10 Years $ 2,314,775
GF Contributions: After 10 Years $ 1,169,775
3. City's Net Funds to Establish Electric Trust:
Purchase Offer $ 37,050,000
Cash Balance 1/1/2024 (estimated) $ 4,000,000
Accounts Receivable 1/1/2024 (estimated) $ 1,590,000
Less: Retire Bond Principal 1/1/2024 $ (16,345,000)
Less: Accounts Payable (Estimated) $ (300,000)
Estimated Residual Electric Trust $ 25,995,000
*General Fund Contributions in 2022 were approximately $1,988,000
**Estimated as 4.5% interest annually earned from the residual Electric Trust Funds
Note: the contract includes a provision that increases the fixed cash offer at closing to cover
any additional investments made by the city for electric system improvements.
SES Rates Explanation
With the special election for the potential electric utility sale just around
the corner, there has been plenty of discussion on social media recently
around electric rates. While it's true HEA's residential rates today
(approximately 24 cents per/kilowatt-hour) are higher than Seward's
residential rates (approximately 22 cents/kWh), citizens should know
this will likely change in just a few short years.
Seward Electric's base rates ouer the next 3-3.5 years are projected to
increase 25- 28%, beginning with a 12.5-14% increase this coming
January. NOTE: Seward's base rate is approximately 10.5 cents. This
increase will occur regardless of the outcome of the May 2 uote. Should
the uote fail, another base rate increase will come in the 2026 to 2027
timeframe, and it will put Seward's residential rates at more than 25
cents/kWh. These increases are needed to pay for the transmission
system rebuild on Nash Road, to complete refurbishment of our three
electric substations, and to replace other aging infrastructure around
Seward. The ouerall cost for the City to complete these projects will land
somewhere between $15 million and $20 million.
Seward's base rates are projected to go another 15-25% higher in the
2028 to 2030 timeframe to add much-needed resources and meet
future transmission and cybersecurity requirements. Because Seward
is connected to the larger Railbelt grid, which serues approximately 80
percent of Alaska's population, the state will not allow reliability and
security of the grid to be compromised by a single utility.
The attached chart shows current ouerall residential electric rates of
HEA and Seward Electric as of April 7, 2023. These rate projections
were calculated and prouided by an independent consultant taking into
consideration projected future expenses and reuenues, inflation and
uarious other factors.
More information on electric rates and other topics will be auailable at
community workshops on April 12 and April 19 at the Gateway Hotel.
Citizens are encouraged to drop by anytime between 5:30-7:30 p.m. to
learn more.
SewardElectricProjected Rates
SES Rate Outlook
Bond
. ..
D' '' �, 2024—12.5%to 14% base rate
AdditionalMaintenance increase to begin$1OM
l bond payback for
$0.30 1 1 iStaffing deferred maintenance
N$.2692 $.2692 projects
$.2516 $.2516 2026—12%to 15% base rate
$o.zs 5.24 $.24$.2194 $.2194 $•2323 $.2323 increase for ongoing
deferred maintenance
$0.20
2028—6%to 10% base rate
}
o increase for additional
s 5015 staffing and another
10%-plus base rate
$0.10 increase to meet future
state/federal reliability
$0.05 and cybersecurity
standards
$0.00
Total potential base rate increase
2022 2023 2024 2025 2026 2027 2028 2029 within the next flue years:
■Current HEA Rates SES Rates 40%to 50%
Projected rates calculated with the assistance of The Financial Engineering Company