Audit and Finance Committee
August 29, 2023
2:00PM
Central Coast Community Energy
70 Garden Court, Suite 300
Monterey, CA 93940
REMOTE LOCATION VIA TELECONFERENCE
Any interested parties or community Committee Members may attend, and participate in, the meeting at the following addresses where Committee Members may also join the meeting from:
City of Watsonville
275 Main Street, 4th Floor
Watsonville, CA 95076
City of Pismo Beach
City Hall
760 Mattie Road
Pismo Beach, CA 93449
City of San Luis Obispo
City Hall
990 Palm Street, Hearing Room
San Luis Obispo, CA 93401
Public may participate through ZOOM. For ZOOM participation please join by computer audio at:
https://us02web.zoom.us/j/89130443641
Or join by phone:
+1 669 900 6833 or +1 669 219 2599
Enter this Webinar ID Number: 891 3044 3641 when prompted. Please note there is no Participant Code, you will press # again after the recording prompts you.
You will be placed in the meeting as an attendee. To make a public comment:
If joined by computer, please press the button to raise your hand If joined by phone, please push *9 on your keypad
If you have anything that you wish to be distributed to the Committee Members, please provide 15 copies to a member of 3CE staff or the Board Clerk, who will distribute the information to the Committee Members and staff.
The public may comment on the consent agenda and matters not listed on the agenda but within the Committee Members 's jurisdiction at the opening of the meeting. The Committee Members may not take action at this meeting on any item not listed on the agenda other than to refer the matter to staff or set it for a future meeting. The public may comment on a specific item listed on this agenda when the Committee Members consider that item. Speakers are limited to 3 minutes each.
In addition, Committee Members of the public may request and receive copies without undue delay of any documents that are distributed to the Committee Members, unless there is a specific exemption under the Public Records Act that prevents the disclosure of the record. (Cal. Gov’t Code Section 54957.5)
In compliance with Government Code Section 54957.5, non-exempt writings that are distributed to a majority or all of the Committee Members in advance of a meeting and that relate to an agenda item will be made available at 3CE’s offices located at 70 Garden Court, Suite 300, Monterey, CA 93940 during normal business hours and are also available on the 3CE website located at: https://pub-3ce.escribemeetings.com/
AGENDA
Welcome & Roll Call
1. Support seeking the Policy Board's approval to adopt the Fiscal Year 2023-24 Recommended Budget for Central Coast Community Energy (3CE) including updated Financial Policies and cost-based rate adjustments Adjournment
Staff Report Item 1
TO: 3CE Operations Board of Directors
FROM: Robert M. Shaw, Chief Executive Officer
PREPARED BY: Dewayne Woods, Chief Financial Officer
SUBJECT: Support seeking the Policy Board's approval to adopt the Fiscal Year 2023-24 Recommended Budget for Central Coast Community Energy (3CE) including updated Financial Policies and cost-based rate adjustments
DATE: August 29, 2023
RECOMMENDATION:
Consider supporting the Policy Board approve and adopt Fiscal Year 2023-24 Recommended Budget for 3CE, including the Financial Policies and cost-based rate adjustments on October 1, 2023, and January 1, 2024.
BACKGROUND:
Annually 3CE adopts a budget that runs through October 1st through September 30th. Attached is the Executive Summary providing detailed information on the Fiscal Year (FY) 2023-24 Recommended Budget including the major cost drivers and corresponding COS rate adjustments required to maintain a balanced budget.
DISCUSSION/ANALYSIS:
The Recommended Budget for FY 2023-24 totals $562.8 million and funds 52 Full- Time Equivalent (FTE) positions. Significant changes since the adoption of the FY 2022-23 budget include: increases in Cost of Energy (COE) by $116.9 million or 29%, increases in Salary and Benefits by $346,541 (3.8%), and increases in Services and Supplies of $2.6 million (8.5%), for an overall increase in appropriations of $119.6 million (27%).
The COE accounts for 92.4% of all expenditures and drives 3CE’s rates, outpacing all other expenditures, which total a mere 7.6% of overall costs combined. The 7.6% is comprised of 1.7% related to staffing,
and the remaining 5.9% is allocated for services and supplies, including all energy incentive programs.
Salary and benefit increases reflect annual salary increases and the expected filling of vacancies.
The two major cost increases in Services and Supplies are a contracted increase in Data Manager fees of $1.7 million and an increase in the agency’s operational contingency by $900,000. The increase in Data Manager fees was expected due to the FY 2022-23 transition to a single data and customer billing operations provider. The increase in contingency reflects a policy recommendation to budget 5% of operational appropriations for contingencies, excluding COE.
The increase in COE and other expenditures is financed by a recommended adjustment to electricity generation rates as follows: increases by an average of $0.025 per kilowatt-hour (kWh) in the PG&E service area and maintaining the 2%-minus per kWh rate in the Southern California Edison (SCE) service area, resulting in a $101 million increase in revenue collection. The COS rate increases will be effective October 1, 2023, and January 1, 2024, to provide a phased in approach to minimize overall increases to our ratepayers.
To keep rates as low as possible for our customers, this year’s Recommended Budget does not anticipate adding to the agency’s Net Position given that reserves are within an acceptable range as defined by the Recommended Financial Policies. This year 3CE’s Financial Policies are completely updated with new reserve policies to reflect the complexity of our overall business. Reserves are structured with a Strategic Reserve equal to 25 percent of budgeted appropriations, an Energy Rate Stabilization Reserve equal to 20 percent of budgeted COE, a Renewable Energy Innovation and Initiatives Reserve equal to five percent of COE, a Capital Infrastructure Reserve to be based on a Capital Improvement and Replacement Plan, and an increase of the Operational Contingency to five percent of appropriations excluding COE.
FISCAL IMPACT:
Adoption of the Recommended Budget funds $562.8 million in expenditures and allows 3CE to continue operations with a balanced budget while minimizing costs to our ratepayers.
CONCLUSION:
It is recommended to support the Policy Board approve and adopt the Fiscal Year 2023-24 Recommended Budget for 3CE including updated Financial Policies and cost-based rate adjustments.
ATTACHMENT(S):
1. Executive Summary of the Budget Book
Executive Summary
14 Fiscal Year (FY) 2023-24 is 3CE’S sixth year of operation, and over this short period, much has been accomplished. The Recommended Budget for FY 2023-24 totals $562.8 million and funds 52 Full-Time Equivalent (FTE) positions. Significant changes since the adoption of the FY 2022-23 budget include: increases in Cost of Energy (COE) by $116.9 million or 29%, increases in Salary and Benefits by $346,541 (3.8%), and increases in Services and Supplies of $2.6 million (8.5%), for an overall increase in appropriations of $119.6 million (27%). The COE accounts for 92.4% of all expenditures and drives 3CE’s rates, outpacing all other expenditures, which total a mere 7.6% of overall costs combined.
The above chart reflects the importance of COE to the agency’s forecasted expenditures. After accounting for the COE, the remaining 7.6% is comprised of 1.7% related to staffing, and the remaining
5.9% is allocated for services and supplies, including all energy incentive programs. Salary and benefit increases reflect annual salary increases and the expected filling of vacancies.
The two major cost increases in Services and Supplies are a contracted increase in Data Manager fees of $1.7 million and an increase in the agency’s operational contingency of $900,000. The increase in Data Manager fees was expected due to the FY 2022-23 transition to a single data and customer billing operations provider. In FY 2023-24, this transition will be complete. The increase in contingency reflects a policy recommendation to budget 5% of operational appropriations for contingencies.
Customers’ electric generation rates in Pacific Gas & Electric’s (PG&E’s) service area are based solely on 3CE’s actual costs. With only 7.6% of budgeted costs related to non-energy procurement, cost-based rates in combination with prudent financial management provide substantial benefits to our customers.
The increase in COE and other expenditures is funded by a recommended adjustment to electricity generation rates as follows: increases by an average of $0.025 per kilowatt-hour (kWh) in the PG&E service area and maintenance of a 2%-minus per kWh rate in the Southern California Edison (SCE) service area, resulting in a $101 million increase in revenue collection.
To keep rates as low as possible for our customers, this year’s Recommended Budget does not anticipate adding to the agency’s Net Position given that reserves are within an acceptable range as defined by 3CE’s Financial Policies.
15 The chart below provides a summary of the FY 2023-24 Recommended Budget:
Maintaining competitive rates is a core goal and key component of 3CE’s stated aims of achieving 100% renewable energy, local control of our energy decisions, local economic stimulation, and decarbonization through electrification. This Recommended Budget provides rates that range on average between 3% to 22% below PG&E’s estimated rates (see chart below).
Energy
Staffing, Salaries and Benefits
Services and Supplies
FY 2023-24 Forecasted Expenses
AS A PERCENT OF TOTAL
Customer Classes Average Difference
3Cchoice to PG&E
Rates
Residential -16%
Small Commercial -17%
Medium Commercial -22%
Large Commercial -21%
Agricultural -18%
Streetlights -3%
3Cchoice Rate Comparison
to PG&E
PG&E Average $/kWh $0.138
3Cchoice
(PG&E Territory) $/kWh $0.116
FY 2023-24 Budget Summary
FY 22-23 Final
Adopted
FY 23-24 Baseline FY 23-24
Recommended
Augmentation
FY 23-24
Recommended Budget
FY 23-24 Variance
Prior Year Budget
REVENUE
Total $461,797,031 $455,128,399 $107,705,049 $562,833,447 $101,036,416
COST OF ENERGY SOLD
Subtotal $403,427,380 $520,297,514 $520,297,514 $116,870,134
SALARIES & BENEFITS
Subtotal $9,190,535 $9,537,076 $9,537,076 $346,541
SERVICES & SUPPLIES
Subtotal $30,416,173 $29,968,253 $3,030,605 $32,998,858 $2,582,685
CAPITAL
Subtotal $202,779 ($202,779)
Total Appropriations $443,236,867 $559,802,843 $3,030,605 $562,833,448 $119,596,581 Total Financing Sources $461,797,031 $455,128,399 $107,705,049 $562,833,448 $101,036,416 Total Budgeted Change to
Net Position $18,560,164 ($104,674,444) $104,674,444 ($0) ($18,560,164)
92.4%
5.9%
1.7%
Executive Summary (continued)
16 The 3CE service area overlapping with SCE’s service territory is planned to transition to cost-based rates as part of our next three-year rate-setting cycle covering years 2025-2027. Rates for our customers in this area are currently set to follow SCE’s generation rates minus 2%, maintaining 3CE’s competitiveness in the market.
In September 2020, 3CE’s Policy Board voted to serve 60% of retail sales with clean and renewable energy by the end of 2025, with the larger goal of being 100% clean and renewable by 2030. Today we are on our way toward meeting those goals while maintaining competitive electricity rates and providing innovative services for our community.
In recent years 3CE has increased our number of long-term PPAs, which serve to stabilize rates in addition to growing our renewable energy portfolio. 3CE currently has six renewable projects online that are producing energy that meets more than a quarter of retail sales. Six more projects are in development with anticipated commercial operation dates prior to 2026. Assuming the on-time delivery of these projects, 3CE will meet its goal of 60% clean and renewable energy in 2025.
While 3CE has demonstrated success bringing new clean and renewable resources online, the electricity generation sector, including 3CE, faces several challenges that could impact 3CE’s aggressive renewable goals.
Project Delays
Developers continue to claim impacts to contractual online dates from supply chain disruptions, inflation, the Russian War in Ukraine, and mounting interconnection issues. Delays to 3CE’s new generation projects jeopardize our ability to meet compliance obligations, and to stabilize the cost of energy with fixed low-cost contracts. 3CE is working with developers to help address these impacts, ensure value for customers, and bring resources online as fast and cost-effectively as possible.
Wholesale Market Volatility
Natural gas storage and distribution constraints, a colder-than-usual winter, prolonged summer heat events throughout California and the western United States, and many of the same macroeconomic conditions impacting developers, continue to fuel unprecedented wholesale market volatility. A strategic and layered procurement approach in accordance with 3CE’s Energy Risk Management Policy, maintenance of a strong credit rating, and disciplined fiscal management by our Boards has enabled 3CE to minimize the cost impacts to date.
Resource Adequacy
Resource Adequacy (RA) is not energy and does not create additional capacity for the grid. Rather, RA is a compliance product that commits generators to be available to dispatch when needed.
Regulatory changes have increased the amount of RA that Load Serving Entities (LSEs) are required to purchase, while the retirement of fossil-burning generators and limitations on qualifying imports have decreased the supply of available RA resources. The imbalance of supply and demand has spiked RA prices by over 200% year over year to levels that exceed price caps set by many regulatory commissions across the country. While California has no resource adequacy price cap, states that do generally set the cap below what officials deem excessive. 17 The impact on 3CE has been dramatic. RA constituted 11% of the budgeted FY 2022-23 COE.
That number is anticipated to be 17.5% of COE at the current fiscal year close. In the FY 2023-24 Recommended Budget, RA accounts for 29% of the total COE and 93% of the total increase in COE.
The current environment presents many challenges to bringing new renewable electricity projects to 3CE’s energy portfolio. Developing PPAs will need to be expanded to bring pricing stability and ensure the attainment of our renewable goals in the years ahead.
Regardless of the increased COE and an ever-changing regulatory environment, 3CE’s rates remain extremely competitive on average when benched to those of Investor-Owned Utilities (IOUs) like PG&E and SCE. This Recommended Budget strives to balance increased costs with our mission to provide renewable energy at affordable rates. We present this budget as a step in the right direction to serve our communities while meeting the challenges associated with a highly competitive energy procurement market and heavily regulated industry.