Staff Report Item 16
Staff Report Item 16
To: Ava Community Energy Authority
From: Howard Chang, CEO
Subject: Review of Reserve Fund Policy
Date: March 19, 2025
__________________________________________________________________ Summary/Recommendation
Inform the Board of Directors on Ava’s Reserve Fund Policy as to how it was established, discuss objectives and utilization, provide context to comparable best practices, and set the stage for possible improvements and funding plan considerations.
Financial Impact
This is an informational item with no financial impact.
Analysis and Context
Background and History of Ava’s Reserve Policy
On June 10, 2018, the Board of Directors (the “Board”) approved by resolution (R-2018-26) a financial reserve policy (P-2018-10) to allow Ava to contribute surplus revenues to reserves.
This policy consisted of a waterfall allocation to four separate funds:
• General Operating/Credit Reserve
• Rate Credit Reserve
• Collateral Reserve
• Local Development Reserve
The Board approved by resolution (R-2021-2) to update the financial reserve policy on January 20, 2021, as driven by negotiations with Ava’s credit facility, the restructuring of Local Development as a separate fund, and as advised in preparation for Ava’s first credit rating Staff Report Item 16
review. This update consolidated the reserves into a single reserve fund except for the Local Development Reserve, which was rolled into the balance of the newly created Local Development Fund and now holds all budgeted allocations.
Additionally, the update set a target funding percentage to 50% of operating expenses for the fiscal year, with a range set to a minimum of 25% and a maximum of 75% Survey of Comparable Best Practices
In considering the relevance of Ava’s reserve policy, staff has completed a broad survey of the reserve policies for 23 public agencies to discover the comparable best practices. These agencies were selected to cover the various comparable criteria of other Community Choice Aggregators (CCA’s), non-CCA California public energy providers, and regional operating agencies. The complete list of agencies surveyed is presented here:
• AC Transit—Regional Operator
• Alameda Municipal Power—Non CCA Public Power
• Ava Community Energy--CCA
• Central Coast Community Energy--CCA
• City of Burbank Water & Power—Non CCA Public Power
• Clean Energy Alliance--CCA
• Clean Power Alliance--CCA
• Clean Power SF--CCA
• Desert Community Energy--CCA
• East Bay Municipal Utility District—Regional Operator • Los Angeles Department of Water and Power—Non CCA Public Power • MCE--CCA
• Orange County Power Authority--CCA
• Peninsula Clean Energy--CCA
• Pico Rivera Innovative Municipal Energy—Non CCA Public Power • Pioneer Community Energy--CCA
• Redwood Coast Energy Authority--CCA
• Sacramento Municipal Utility District—Non CCA Public Power • San Diego Community Power--CCA
• Silicon Valley Clean Energy--CCA
• Sonoma Clean Power--CCA
• South Placer Municipal Utility District—Non CCA Public Power • Valley Clean Energy--CCA
The objectives of the survey were to test for generally accepted targets and ranges (if applicable) of reserve fund levels, discover best approaches to funding reserves, and discover best practices for utilization and use discretion. The results of the survey are as follows:
Staff Report Item 16
Statistics of respondents as related to target levels and ranges:
• 22 (96%) have a target reserve that averages 48% (stdev = 17%) of annual operating expenses (OpEx) or gross revenues
o One (4%) respondent had no target identified, but did have minimum and maximum range tied to gross revenues
o Two respondents had reserve targets dependent upon gross revenues, the rest were operating expenses
o One respondent had a fixed dollar target amount not seemingly dependent upon financial aspect
o Ava has a target of 50% of annual OpEx
• 12 (52%) have a minimum reserve target averaging 29% (stdev = 10%) of OpEx, one of which was tied to gross revenues.
o 11 (48%) had no mention of minimum reserve targets
o Ava has a minimum target of 25% of OpEx
• 10 (43%) have a maximum reserve target averaging 73% (stdev = 27%) of OpEx, one of which was tied to gross revenues.
o 13 (57%) had no mention of maximum reserve targets
o Ava has a maximum target of 75% of OpEx
In terms of how reserves are funded, more than half (15) funded reserves from net revenues, 2 funded from gross revenues, and the rest (6) did not specify funding mechanism. Ava funds its reserves from net revenues.
In terms of discretion in utilization of reserves, 10 agencies allow CEO discretion for utilization of reserves, 8 require board approval, and 5 do not specify. Ava currently requires Board approval for use of reserves.
The conclusion can be drawn from the results of the survey that Ava’s current minimum, target, and maximum reserve levels are in line with the agencies surveyed. The ranges are intended to allow flexibility to build reserves over time, swing with any market volatility that would impact annual operating expenses levels, and provide guidelines for potential future utilization.
Staff recommends maintaining the current min/max/target levels and consider adjustments in the future as Ava approaches its target level.
Reserve Policy Funding Plan
With expansion to San Joaquin County current forecasted annual operating expenditures for a full year are estimated at approximately $1.2 billion, which translates to a 50% reserve target of $600 million. Current reserves are at $330 million and are expected to approach $400MM at the end of FY 2025, as shown in the table below which shows the history of reserve levels and upcoming estimates for the next fiscal year.
Staff Report Item 16
Contribution Year Contribution Withdraws Balance Operating Expenses* PctCoverage 2018-2019 40,513,687 - 40,513,687 410,686,000 9.9%
2019-2020 49,704,640 - 90,218,327 383,045,000 23.6%
2020-2021 - - 90,218,327 471,897,000 19.1%
2021-2022 65,655,073 - 155,873,400 562,667,000 27.7%
2022-2023 75,000,000 - 230,873,400 732,885,000 31.5%
2023-2024 100,000,000 - 330,873,400 826,473,000 40.0%
2024-2025** 65,668,500 - 396,541,900 1,076,267,000 36.8% *Operating Expenses are fiscal year ahead for coverage purposes **Proposed contribution with projected operating expenses to cover for FY 25-26 as of 1/28/2025 To reach the 50% annual operating expenses target, staff is asking for feedback from the Board on developing funding plan options. Final options and recommendations are intended to be brought to the Board during this year’s budget development cycle1.
Options being currently considered are:
• Prioritize funding with full net revenues until 50% target is met o Estimated time: 3 – 6 years depending upon broader economic conditions of California energy space
o Pros:
▪ Low risk to value proposition to meet target
▪ No impact to balance budget
▪ Clear intention to public
o Cons:
▪ Dependent upon broader California energy space economics ▪ Limits options on surplus allocations
• Five years to target:
o Allocate about $40-$50 million per year
o Pros:
▪ Clear budget line item
▪ Clear intention to public
▪ Retains flexibility with surplus allocations
o Cons:
▪ Risk to value proposition and balanced budget in lean years • Ten years to target
o Allocate $20-25 million per year
o Pros and cons are same as 5-year option but with reduced risk to value proposition and balanced budget
1 Budget development cycle is in the last quarter of the fiscal year: April through June. Budget approval is typically with the June Board meeting.
Staff Report Item 16
Purpose & Utilization of Ava’s Reserve Policy
As stated in Ava’s reserve policy, the purpose of reserves was to hold a suitable cash balance to meet targeted levels of operating expenses with the objectives of:
• Maintain long-term financial independence and rate stability • Secure favorable commercial terms with vendors and power providers • Support the maintenance of a credit rating
• Provide liquidity for unanticipated expenditures
• Meet Ava’s strategic objectives, and
• Have cash available for other operational needs as approved by the Board Although not explicit in the policy, the operating intent of the reserve fund is to provide resources in cases of extreme need, such as local natural catastrophes (earthquakes, tsunamis, fires, etc.) or significant energy market events that lead to price volatility and financial risk to Ava. Examples include but are not limited to climate event driven extreme supply shortages or demand spikes, market manipulation (ala 2000-2001), global pandemics, geopolitical economic events, etc. In consideration of power resource ownership, such reserves will also be maintained for unplanned outages and other unplanned investments/costs. In general, reserve funds are considered as a last use resource of liquidity.
Rate Stabilization Fund Policy Considerations
Ava has a GASB 62 Revenue Deferral Fund in which budget surplus allocations have been made. This fund has primarily been maintained to allow matching of timing for on-bill credits, the solar & storage incentive program, and a one-time allocation towards long-term renewable energy & clean energy storage investments.
Staff is evaluating a more formalized Rate Stabilization Fund Policy to lay out a funding plan and intended utilization for review with the board.
The policy recommendation will include disbursements for specific purposes to maintain stable rate discounts for customers in response to cyclical and short-term market volatility.
Conclusion & Next Steps
Both the Reserve Fund and the forthcoming Rate Stabilization Fund are key elements necessary to provide a line of financial defense against exogenous events that stress agency finances. Establishment and maintenance of these funds ultimately benefit customers by keeping Ava financially stable and well-buffered against the unexpected. Below is a list that defines the order of how Ava manages liquidity as a resource.
Waterfall of Liquidity Resources
1. Working Capital
2. Rate Stabilization Fund
3. Credit Facility
4. Reserve Fund
Staff Report Item 16
The conclusions to be drawn from this discussion are:
• Ava’s Reserve Policy is in line with industry norms for similar agencies • To reach the 50% target a clear path for funding should be established In light of these conclusions, staff is expecting the following next steps:
• Staff will provide options and a formal recommendation on a Reserve Policy Funding Plan for Board action in May, 2025
• Staff will bring forward a draft Rate Stabilization Fund Policy for consideration in the coming months
Committee Recommendation
This matter was presented to the Finance, Administrative, and Procurement Committee on March 12, 2025. The recommendation was to move forward with bringing possible funding options to the Board at a later date that lean towards the 5-10 year timeline with an emphasis on protecting quality of service and Ava’s value proposition while continuing to support additional priorities.
Attachments
A. Policy 10.1 Updated Financial Reserve Policy
B. Presentation
Finance Department
1999 Harrison Street, Suite 800
Oakland, CA 94612
ebce.org
1-510-650-7584
1-833-699-EBCE (3223) [email protected]
Approved January 20, 2021 Item #11
Policy P-10.1
R-2021-2
EAST BAY COMMUNITY ENERGY FINANCIAL RESERVE POLICY
(Effective as of January 20, 2021, per Resolution No. R-2021-2) Purpose
EBCE’s reserve policy (this “Policy”) is established to provide a suitable cash balance to be held to meet target levels of annual operating expenses. This Policy will be maintained as described in the Guidelines to provide for the following objectives:
• Maintain long-term EBCE financial independence and rate stability, • Meet EBCE strategic objectives,
• Secure favorable commercial terms with vendors and power providers, • Support EBCE’s pursuit of, and maintenance upon receiving, a credit rating, • Provide a source of funds for unanticipated expenditures, and • Make cash available for other operational needs as approved by the Board of Directors (the “Board”).
Guidelines
EBCE shall maintain a cash reserve (the “Reserve”).
EBCE shall strive to maintain the dollar amount in the Reserve during any fiscal year to be equal to a percentage (the “Target Percentage”) of the operating expenses projected for such fiscal year based on the relevant annual budget. The reserves shall be funded by available surplus revenues as determined by the most recent audited financial statements.
If the Board does not take action to determine a new Target Percentage before the beginning of a fiscal year, then the Target Percentage from the prior fiscal year will continue to be the Target Percentage for the new fiscal year, until the Board decides to make any changes. The Board may change the Target Percentage at any time during the fiscal year.
Generally, starting in fiscal year 2021-22, the Target Percentage shall be 50%, but may range from 25% and 75%; provided that upon a finding of special circumstances by the Board, the Board may determine to use a Target Percentage outside of this range for any fiscal year (or other period of time).
Attachment Staff Report Item 16A
ebce.org
In connection with its recommendations with respect to the Reserve and the Target Percentage, Staff will monitor EBCE’s liquidity through the annual audited financial statements.
Spending Authority
Authority to spend from money in the Reserve must align with Board approved budgets or approved for special action by the Board.
Board Discretion
The Board may, by resolution, modify or suspend any provision of this Policy for any duration at any time.
Attachment Staff Report Item 16A
Reserve Fund Review
Speaker Name | March 12, 2025
Attachment Staff Report Item 16B
Background and History of Ava’s Reserve Policy
2 June 10, 2018, the Board of Directors (BOD) approved by resolution (R-2018-26) a financial reserve policy (P-2018-10) to allow Ava to contribute surplus revenues to reserves. ▪ This policy consisted of a waterfall allocation to four separate funds • General Operating/Credit Reserve
• Rate Credit Reserve
• Collateral Reserve
• Local Development Reserve
Negotiations with Ava’s credit facility, restructuring Local Development as a separate fund, and in preparation for a credit rating review, the BOD approved by resolution (R-2021-2) to update the financial reserve policy on January 20, 2021
▪ This update consolidated the remaining reserves into a single reserve fund and discussions also led to creation of a Local Development Fund that was used to accumulate and track budget allocations to Local Development activities
• Target funding percentage was set to 50% of operating expenses for the fiscal year, with a range set to a minimum of 25% and a maximum of 75%
Attachment Staff Report Item 16B
Survey of Comparable Best Practices
In considering the relevance of Ava’s reserve policy, staff has completed a broad survey of 23 public agencies to discover comparable best practices for reserve fund policy and management The goals of the survey were as follows:
• Test for generally accepted targets and ranges, if applicable, for reserve fund levels
• Discover best approaches on funding reserve funds
• Discover best practices for use discretion
3 Agencies Surveyed
• AC Transit
• Alameda Municipal Power
• Ava Community Energy
• Central Coast Community Energy
• City of Burbank Water & Power
• Clean Energy Alliance
• Clean Power Alliance
• Clean Power SF
• Desert Community Energy
• EBMUD
• LADWP
• MCE
• Orange County Power Authority
• Peninsula Clean Energy
• Pico Rivera IME
• Pioneer Community Energy
• Redwood Coast Energy Authority
• SMUD
• San Diego Community Power
• Silicon Valley Clean Energy
• Sonoma Clean Power
• South Placer MUD
• Valley Clean Energy
Attachment Staff Report Item 16B
Results of Survey of Comparable Best Practices
Statistics of Respondents:
• 22 (96%) have a target reserve that averages at 48% (stdev = 17%) of annual operating expenses (OpEx) or gross revenues ▪ One (4%) respondent had no target identified, but did have min and max range tied to gross revenues ▪ Two respondents had reserve targets dependent upon gross revenues, the rest were operating expenses ▪ One respondent had a fixed dollar amount not seemingly dependent upon financial aspect ▪ Ava has a target of 50% of annual OpEx
• 12 (52%) have a minimum reserve target averaging 29% (stdev = 10%) of OpEx, one of which was tied to gross revenues. ▪ 11 (48%) had no mention of minimum reserve targets
▪ Ava has a minimum target of 25% of OpEx
• 10 (43%) have a maximum reserve target averaging 73% (stdev = 27%) of OpEx, one of which was tied to gross revenues. ▪ 13 (57%) had no mention of maximum reserve targets
▪ Ava has a maximum target of 75% of OpEx
More than half (15) funded reserves from net revenues, 2 funded from gross revenues, and the rest (6) did not specify funding mechanism. Ava funds its reserves from net revenues.
10 allow CEO discretion for use of reserves, 8 require board approval, and 5 do not specify. Ava currently requires BOD approval for use of reserves.
4 Attachment Staff Report Item 16B
Current Reserve Fund Levels & Upcoming Needs
• Currently, Ava has $330,873,400 allocated to reserves which covers approximately 40% of current fiscal year’s operating expenses.
• Stockton and Lathrop are only active in the last quarter of this current fiscal year • Next fiscal year (FY 2025-2026) will be a full operating year with Stockton and Lathrop • San Juaquin County will only be active in the last quarter of FY 2025-2026 • The following fiscal year (FY 2026-2027) will be the first year with full participation of all new communities
• Keeping to the reserve policy, Ava will expect to require a material increase to the 50% target • Staff is intending to present a reserve funding plan with the upcoming budget development session this year
5 Contribution Year Contribution Withdraws Balance Operating Expenses* PctCoverage 2018-2019 40,513,687 - 40,513,687 410,686,000 9.9%
2019-2020 49,704,640 - 90,218,327 383,045,000 23.6%
2020-2021 - - 90,218,327 471,897,000 19.1%
2021-2022 65,655,073 - 155,873,400 562,667,000 27.7%
2022-2023 75,000,000 - 230,873,400 732,885,000 31.5%
2023-2024 100,000,000 - 330,873,400 826,473,000 40.0%
2024-2025** 65,668,500 396,541,900 - 1,076,267,000 36.8% *Operating Expenses are fiscal year ahead for coverage purposes **Proposed contribution with projected operating expenses to cover for FY 25-26 as of 1/28/2025 Attachment Staff Report Item 16B
Reserve Policy Funding Plan
Ava min/max/target reserve levels are in line with the averages of surveyed agencies. The min/max ranges are intended to allow flexibility to build reserves over time, swing with any market volatility that would impact the annual operating expenses levels, and provide guidelines for potential future utilization.
Staff recommends maintaining the current min/max/target levels and consider adjustments in the future as Ava
approaches its target level.
With expansion to San Joaquin County current forecasted annual operating expenditures for a full year are estimated at approximately $1.2 billion, which translates to a 50% reserve target of $600 million. From the previous slide, current reserves are at $330 million and anticipates approaching $400MM at the end of FY 2025.
Staff is developing a funding plan to meet target levels in 5 to 10 years.
6 Reserve Funding Options:
• Prioritize with full net revenues until
50% target met
▪ Estimated time: 3 – 6 years
▪ Pros: Low risk to value proposition to meet
target. No impact to balance budget. Clear
to public.
▪ Cons: Dependent upon broader CA energy
economics. Limits surplus options.
• Five years to target
▪ Allocate ~$40-50 million per year
▪ Pros: Clear to public. Clear budget line
item. Retains flexibility with surplus
options.
▪ Cons: Risk to value proposition and
balanced budget to meet target in lean
years.
• Ten years to target
▪ Allocate ~$20-25 million per year
▪ Pros & Cons are same as 5 years but with
reduced risk to value proposition and
balanced budget
Attachment Staff Report Item 16B
Purpose & Utilization of Ava’s Reserve Policy
7 Although not explicit in the policy, the operating intent of the reserve fund is to provide resources in cases of extreme need, such as local natural catastrophes (earthquakes, tsunamis, fires, etc…) or significant energy market events that lead to price volatility and financial risk to Ava. Examples include but are not limited to climate event driven extreme supply shortages or demand spikes, market manipulation (ala 2000-2001), global pandemics, geopolitical economic events, etc. In consideration of power resource ownership, such reserves will also be maintained for unplanned outages and other unplanned investments/costs.
Ava’s reserve policy was established to hold a suitable cash balance to meet targeted levels of operating expenses with the objectives of:
• Maintain long-term financial independence and rate stability • Secure favorable commercial terms with vendors and power providers • Support the maintenance of a credit rating
• Provide liquidity for unanticipated expenditures
• Meet Ava’s strategic objectives, and
• Have cash available for other operational needs as approved by the Board Attachment Staff Report Item 16B
Rate Stabilization Fund Policy Considerations
Ava has a GASB 62 Revenue Deferral Fund in which budget surplus allocations have been made. This fund has primarily been maintained to allow matching of timing for on-bill credits, the solar & storage incentive program, and a one-time allocation towards long-term renewable energy & clean energy storage investments.
Staff is evaluating a more formalized Rate Stabilization Fund Policy in order to lay out a funding plan and intended utilization for review with the board.
The policy recommendation will include disbursements for specific programmatic purpose and in order to maintain stable rate discounts in response to cyclical and short-term market volatility, anticipated 1-2 times each decade.
8 Waterfall of Liquidity Resources
1. Working Capital
2. Rate Stabilization Fund
3. Credit Facility
4. Reserve Fund
Attachment Staff Report Item 16B
Conclusion & Next Steps
• Ava's Reserve Policy is in line with industry norms for similar agency operations • Staff is seeking feedback from the board on funding plan duration • Staff will provide a formal recommendation on a Reserve Policy funding plan for board action in May 2025
▪ FAP subcommittee feedback was to move forward with options that lean towards the 5-10 year timeline with emphasis protecting quality of service, Ava’s value proposition to customers, while continuing to support additional priorities.
• Staff will bring forward a draft Rate Stabilization Fund Policy for consideration in the coming months
9 Attachment Staff Report Item 16B