HomeMy WebLinkAboutRES2023-064 Financial Engineering Company Contract CITY OF SEWARD,ALASKA Sponsored by: Regis
RESOLUTION 2023-064
A RESOLUTION OF THE CITY COUNCIL OF THE CITY OF SEWARD,
ALASKA, AUTHORIZING THE CITY MANAGER TO ENTER INTO A
CONTRACT WITH THE FINANCIAL ENGINEERING COMPANY IN AN
AMOUNT NOT-TO-EXCEED $55,350 TO CONDUCT AN ELECTRIC
RATE STUDY SO THAT CUSTOMER RATES CAN BE SET
APPROPRIATELY TO RECOVER EXPENSES AND GENERATE A
REASONABLE FINANCIAL RETURN TO THE CITY'S GENERAL FUND
WHEREAS, The Financial Engineering Company is led by Mike Hubbard, an expert
in rate making who has assisted the City of Seward with rate increases since 2008; and
WHEREAS,the City's electric department is facing significant increases in expenses
related to deferred maintenance on its transmission infrastructure and substations, higher
costs for supplies and materials,higher costs for consulting services, and overall increases in
inflation; and
WHEREAS, the City's electric department must begin paying interest in 2023 and in
2025 paying on the principal of the $10 million revenue bond secured in 2022, a total amount
which ranges from $441,750.00 to $595,250.00 annually; and
WHEREAS, the rate study would get underway in mid-June with approved increases
in customer rates implemented no later than January 1, 2024; and
WHEREAS, the increase in customer rates would be based upon"cost of service"to
ensure rates accurately reflect the expenses incurred to serve each customer classification; and
WHEREAS, the proposed rates increase for each customer classification would be
presented to City Council for approval by The Financial Engineering Company in late summer
or early fall of 2023.
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 contract with The
Financial Engineering Company to conduct a electric rate study to appropriately set customer rates
no later than January 1, 2024.
Section 2. Funding in an amount not to exceed $55,350, including expenses related to
travel and lodging to perform discovery/due diligence and to present the rate study findings to
Council,is hereby appropriated from 15000-3000-7009.
CITY OF SEWARD,ALASKA
RESOLUTION 2023-064
Section 3. This resolution shall take effect immediately upon adoption.
PASSED AND APPROVED by the City Council of the City of Seward,Alaska,this 22nd
day of May, 2023.
THE CITY OF SEWARD,ALASKA
cc914.11
Sue McClure,Mayor
AYES: Osenga, DeMoss, Calhoon, Wells, Finch, Barnwell, McClure
NOES: None
ABSENT: None
ABSTAIN: None
ATTEST:
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Kris Peck
Deputy City Clerk
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City Council Agenda Statement
Meeting Date: May 22, 2023
To: City Council
Through: Norm Regis, Acting City Manager
From: Rob Montgomery
Subject: Resolution 2023-064: Authorizing The City Manager To Enter Into A
Contract With The Financial Engineering Company In An Amount Not-To-
Exceed $55,350 To Conduct An Electric Rate Study So That Customer Rates
Can Be Set Appropriately To Recover Expenses And Generate A Reasonable
Financial Return To The City's General Fund.
Background and justification:
For electric utilities, having customer rates set appropriately is critical to the financial health of
the organization. The City's electric department must increase its customer rates no later than
January 1, 2024 to effectively recover its expenses and generate a reasonable return to the City's
general fund. Beginning in 2025, the City will begin making payments on the principle of its $10
million revenue bond, issued in 2022 to assist the City with its transmission infrastructure and
substations rebuild project. The amount of this annual payment of principal and interest ranges
from $441,750.00 to $595,250.00.
The utility is also facing significant increases in expenses related to higher costs for supplies and
materials, higher consulting services costs, and overall increases in inflation.
If approved, the rate study will get underway in mid-June with a presentation being made to
Council by The Financial Engineering Company in late summer or early fall. Any increase in rates
would be based upon "cost of service"to ensure rates accurately reflect the expenses incurred to
serve each customer classification. The Financial Engineering Company is led by Mike Hubbard,
an expert in rate making who has assisted the City of Seward with rate increases since 2008.
Seward's last rate study was conducted in 2021. The most significant results of that stud
included the creation of a new Industrial rate classification for Seward's largest users of
power and residential customers with average usage were given an increase of about $2 on
rates. However, this amount was offset by an approximately $2 reduction in the Cost of
Power Adjustment (COPA) for customers, which was a result a true up on the COPA for the
Alaska SeaLife Center.
Comprehensive and Strategic Plan Consistency Information
This legislation is consistent with (citation listed):
Comprehensive Plan: 3.7.1.3 "Continue to improve the quality and efficiency of city
governmental services."
Strategic Plan:
Other:
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Certification of Funds
Total amount of funds listed in this legislation: $ 0
This legislation (✓):
Creates revenue in the amount of: $
x Creates expenditure in amount of: $ $55,350
Creates a savings in the amount of: $
Has no fiscal impact
Funds are (✓):
X Budgeted Line item(s): 15000-3000-7009
Not budgeted
Not applicable
Fund Balance Information
Affected Fund (✓):
General SMIC X Electric Wastewater
Boat Harbor Parking Water F1 Healthcare
Motor Pool Other
Note:amounts are unaudited
Fund Balance/Net position — unrestricted/unassigned $ 6,298,233
Available Unrestricted Cash Balance: $ 7,433,978
Finance Director Signature: --���
Attorney Review
RYes Attorney Signature:
Not applicable Comments:
Administration Recommendation
eAdopt Res
Other:
124
the Financial Englneering Company 235 Rockland street,Rockport,Maine 04856
Cell/Text: (207)691-8347
wwvv.FinEngCo.com E-mail: mhubbard(a FinEngCo.com
April 23, 2023
Mr. Rob Montgomery, Electric Utility Manager
City of Seward
PO Box 167
Seward, Alaska 99664
Dear Rob:
Attached is a proposed scope of service and budget 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 or text me at (207) 691-8347.
Very truly yours,
THE FINANCIAL ENGINEERING COMPANY
/u el/i 7),
G
MICHAEL D. HUBBARD
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CONTRACT
The 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 Utility'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 allocation 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."
It is noted that although the Electric Utility is not rate regulated, a potential purchaser of the
utility is regulated. That utility will be interested not only in the results of the study but the
underlying analysis and assumptions. Therefore, models developed for this study will be
structured to be easy to follow by third parties and available for distribution at the City's
request.
The last cost-of-service study performed several years ago resulted in the development of an
Industrial rate for several large customers, with the Alaska Sea Life Center transitioning from
a special contract to the Industrial rate. The analysis in this study will include a review of the
Industrial rate and whether the assumptions used in establishing the rate remain valid.
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 regarding
potential rate classes, revenue adequacy and other metrics.
Task 2—Initial Meeting. Once the preliminary analysis is performed, FEC will travel to Seward
to meet with City staff. 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 to better reflect
on-going expenses.
• Discuss billing history and how billing determinants may change in the near
future.
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• Discuss future betterments that are planned, the anticipated costs, and methods
of financing.
• Develop projections of an operating budget for 2025 (see Task 3).
Task 3 — Model Update/Analysis. The Revenue Requirements/Cost-of-Service/Rate Design
model developed for previous studies will be updated and modified to provide two years of
historical expenses, the 2023 budget, and projections for 2024 and 2025. Expenses for 2024
will be taken from the current budget, but 2025 expenses will be developed through
discussions with the City. Billing determinants will be equal to recent history but modified
based on conversations with staff.
The model will then allocate the revenue requirements to the various customer classes based
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 FEC has developed methodologies for
estimating these amounts, and these methodologies have been accepted by the Regulatory
Commission of Alaska.
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.
• Overall adequacy. The total utility revenues projected to be collected for 2024 and
2025 will be compared to the total utility revenue requirements for each year based
on existing rates.
• Individual Rate Class. How close the rates of each rate class 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.
Specific rates for each class will then be developed such that projected revenues are
reasonably close to the allocated cost of service. If rate adjustments are required, several
options shall be developed for consideration.
Tasks—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.
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
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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. FEC will travel to Seward and present the results 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
current 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.
Approved by:
Michael D Hubbard Norm Regis, Acting City Manager
the Financial Engineering Company City of Seward
Approved by the Seward City Council on
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CITY OF SEWARD- ELECTRIC DEPARTMENT
RATE STUDY
Budget
TASK HOURS Labor Expenses Total
1 Data Request 4 $ 1,000 $ 1,000
2 Initial Meeting/Data Collection
Labor 24 6,000
Air Fare 2,250
Surface Transportation 500
Hotel 1,000
Meals 200
Subtotal 24 6,000 3,950 9,950
3 Model Modification/Analysis 40 10,000 10,000
4 Rate Design 24 6,000 6,000
5 Other Rates 8 2,000 2,000
6 Report 36 9,000 9,000
7 Presentation aind Preparation
Labor 20 5,000
Air Fare 2,250
Surface Transportation 500
Hotel 750
Meals 200
Subtotal 20 5,000 3,700 8,700
TOTAL 156 $ 39,000 $ 7,650 $ 46,650
8 Second Presentation
Labor 20 5,000
Air Fare 2,250
Surface Transportation 500
Hotel 750
Meals 200
Subtotal 20 5,000 3,700 8,700
TOTAL 176 $ 44,000 $ 11,350 $ 55,350
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