CITY OF POMONA
COUNCIL REPORT
January 24, 2022
To: Honorable Mayor and Members of the City Council
From: James W. Makshanoff, City Manager
Submitted By: Chris Diggs, Water Resources Director
SUBJECT: ADOPT RESOLUTION TO ALLOW FOR AN ADJUSTMENT OF POMONA CHOICE ENERGY RATES RECOMMENDATION:
It is recommended that the City Council take the following actions:
Continue Public Hearing;
Adopt the following resolutions:
RESOLUTION NO. 2022-06 – A RESOLUTION OF THE CITY COUNCIL OF THE CITY OF POMONA, CALIFORNIA, ADJUSTING RATES FOR POMONA CHOICE ENERGY COMMUNITY CHOICE AGGREGATION PROGRAM AND
RESOLUTION NO. 2022-09 – A RESOLUTION OF THE CITY COUNCIL OF THE CITY OF POMONA, AMENDING the FY 2021-22 OPERATING BUDGET BY APPROPRIATING $2,400,000 FROM WATER FUND RESERVES AND TRANSFERRING $2,400,000 TO THE POMONA CHOICE ENERGY AUTHORITY FUND, APPROVE A PAYBACK SCHEDULE TO THE WATER FUND FROM THE POMONA CHOICE ENERGY AUTHORITY FUND AND AMEND The FY 2021-22 OPERATING BUDGET BY INCREASING REVENUE ESTIMATES AND APPROPRIATIONS IN THE AMOUNT OF $2,400,000 EXECUTIVE SUMMARY:
On March 1, 2022, the Pomona Choice Energy (PCE) exit fee will be reducing by 97 percent and Southern California Edison (SCE) will be increasing its power generation rate by 23 percent. Because of this, staff is requesting for the City Manager to have the authority to adjust PCE rates to the originally modeled rate for PCE, which is three percent under the rates charged by SCE. If authorization is granted to the City Manager to adjust rates, it will be retained and allow for future adjustments as long as they are within the authority provided within the attached resolution or until it is rescinded. Additionally, if SCE lowers its rates, or if the exit fee is increased, PCE will be allowed to keep its rates as set, but no higher than three percent above SCE’s rates.
FISCAL IMPACT:
Based on the rate schedule provided herewith, anticipated revenues generated will be sufficient to cover PCE costs long term. To cover said revenue shortfall, rates are proposed to be increased and a loan of up to $2,400,000 will be necessary. Staff proposes a loan from Water Fund reserves (Fund 571) to Pomona Choice Energy Authority (Fund 551) for a term of approximately 3 years, where after that time PCE will have repaid the Water Fund and will remain financially solvent thereafter. Attachment No. 2 delineates the terms of the loan and the proposed loan interest rate.
PUBLIC NOTICING REQUIREMENTS:
The City provided a ten-day notice of the public hearing to the community before the January 10, 2022, council meeting. This notice was published on December 31, 2021, and January 7, 2022, in the Inland Valley Daily Bulletin (Attachment No. 3). The community meeting was advertised on social media, City Manager email distribution list, and on the home page of the Pomona Choice Energy website located at www.pomonachoiceenergy.org. The website provides the user to choose a language.
PREVIOUS RELATED ACTION:
On July 19, 2021, Council established PCE rates and authorized a $4.5 million loan from the Water Fund to cover revenue shortfalls.
DISCUSSION:
Continuance from January 10, 2022
On January 10, 2022, Mayor Sandoval requested this item be continued to the January 24, 2022, City Council meeting as he wanted additional time to review the item. Since that meeting, staff changed the Resolution 2022-06. Within the resolution is an added requirement that before PCE rates are to be adjusted, the City Manager shall bring the proposed rate adjustment to the City Council for discussion. All other items remain unchanged.
Background
Because of the volatility of the power markets over the past couple years, it has been difficult for PCE to establish a rate that: 1) covers the cost of power, and 2) provides a discounted rate as compared to SCE. Some of these difficulties surround the differences in the rate making process of both SCE and PCE. Specifically, as PCE has only recently been established, our rate making process, in large part, establishes rates on a forward looking basis. This means that PCE rates are based on the projected rates over the coming months based on the cost of power pre-purchased and what the cost of power is projected to be in the future. Given the volatility of the power market, this has been difficult and has led to the need to adjust and re-adjust rates as the power markets continue to reach repeated all-time highs.
To illustrate the volatility of the power markets, Table 1 below shows seven different forward-looking projections made over a 22 month period. The first being on December 2019, shown in the grey line, and the last being October 2021, shown in the white line. Each projection estimated the cost of power for the period of October 2021 through December 2023. Starting with the projection made in December 2019, cost projections for power ranged from approximately $25/MWh to a high of approximately $48/MWh. These projections were based on the best available information in December 2019. However, as the events surrounding the escalation of power costs unfolded, future projections progressively increased. What was projected to cost about $48/MWh 22 months earlier is now being projected to cost over $100/MWh. This was unfortunately at the exact time PCE was being launched.
Table 1
SCE on the other hand bases its rates looking backwards. This means that, in large part, SCE sets rates for the coming year based on their performance in the prior year. In both cases, PCE and SCE, because of market volatility, customer power rates are seeing dramatic price increases. In SCE’s situation for next year, starting on March 1, 2022, power generation rates are anticipated to increasing 23 percent, as over the past year SCE under collected from its customers by nearly $800 million for power generation. Again, this under collection is based on the fact that SCE’s current rates are based on projections made in the prior years, and did not account for the observed price escalations, nor were they sufficient to cover the cost of supplying power to its customers.
The power market volatility has also brought an interesting, and positive, situation to PCE. Because the cost of power has increased as much as it has, the contracts associated with the exit fee, are such that they are now being utilized as they are now beneficial to SCE. This situation has resulted in the exit fee being reduced by 97 percent.
Looking Forward
These latest developments provide PCE an opportunity to offer a power rate that is at or under that of SCE. The SCE rate increase and reduction of the exit fee slated to go in to effect on March 1st. Because of this, staff is recommending establishing a new rate that is three percent less than SCE’s rate. Given the current power costs, this adjustment will establish a rate that covers current costs of purchasing power and at the same time provides a discount, in comparison to SCE.
Additionally, with the exit fee temporarily being all but eliminated, PCE can benefit as rates can be properly align to the cost of providing services without having to artificially lower rates to remain competitive, see Table 2 below. In doing so, PCE can capture revenues once retained by SCE.
Table 2
Cash Flow
Based on the history of rate setting for PCE, it is difficult to determine a long-term projection of rates and revenues with a high level of certainty and price validity. However, based on the latest information available, Table 3 below provides revenue and expense projection through FY 2029-2030. Based on the cash-flow analysis provided the rates as proposed generate sufficient revenue through the forecast period, with the exception of the current year. To rectify this shortfall, it is recommended that an additional loan of $2.4M be provided from the Water Fund. With the ARP funds that the State Water Board received from the US Treasury, PCE will receive $387,000 that PCE will receive to cover unpaid power bills, and the additional rate funds, it is anticipated that full repayment of the loan will be completed by FY 2024-25 as shown in Table 3 below.
Table 3
Because of the volatility illustrated in Table 1, staff is hesitant to provide predictions with any certainty, or to state that power prices will remain at any level in the future. Because of this uncertainty, PCE continues to purchase power for the coming years that will insulate the utility from pricing spikes. These purchases, called hedges, increase as the year the power will be used comes closer to the time of use.
Additionally, as SCE’s rates are being increased in large part to make up for past year losses, there is the possibility SCE rates will be decreased once the losses are recovered, through the May 1, 2022, rate increase. This SCE rate decrease would not necessitate a rate decrease by PCE, unless the SCE rate decreased to more than three percent of PCE, in which case pursuant to the attached resolution PCE would need to reduce its rates, or return to Council for direction.
Finally, it needs to be noted that the revenue projections in Table 3 are based on the proposed rates and are assumed to be in place through FY 2029-2030. This being the case if rates are changed the projections will need to be updated.
Recommendation
To effectuate the recommendation, staff is seeking for the City Manager to be authorized to make PCE rate adjustments that are within a criteria established by the City Council. It is recommended that the City Council authorize the City Manager to adjust PCE rate up to a discount of three percent of SCE’s rate (PCE rates shall assume the exit fee is part of its rate for rate making purposes). If after March 1, 2022, SCE again changes its generation rate, the City Manager would be authorized to change PCE generation rate, so long as the rates charged by PCE do not exceed 103 percent of the SCE rate, and as indicated pursuant to the updates resolution shall be brought to the City Council for discussion purposes prior to implementation.
Prepared by:
Chris Diggs, Water Resources Director
Julie Carver, Environmental Compliance Supervisor
ATTACHMENTS: No. 1 – Resolution for Pomona Choice Energy with Exhibit A No. 2 – Resolution for Water Fund Loan and Payback Schedule No. 3 – Notice of Public Hearing
Resolution Amending Rates for Pomona Choice Energy