SJCE COST OF
SERVICE STUDY
Transportation and Environment
Committee
November 7, 2022
0 Lori Mitchell, Director of Community Energy
Zach Struyk, Assistant Director
Joe Flores, Deputy Director
AGENDA
• Strategic Plan Framework Recommendations
• SJCE Financial Update
• Cost of Service (COS)
• Process
• Results
• SJCE Rate Strategy
• Next steps
1 STRATEGIC FRAMEWORK PLAN
RECOMMENDATIONS
• Adopt cost of service model for setting rates
• Build reserves of 180 days' worth of operating expenses to strengthen financial resiliency
2 Commissioned Deloitte & Touche, LLP - Strategic Plan Framework for 2023 – 2025
SJCE FINANCIAL UPDATE
3 Despite costs associated with extreme heat event in early September, SJCE continues to be on track to be able to begin repaying Commercial Paper in FY 22-23 Unrestricted Ending Fund Balance
2019-2020
Actual
2020-2021
Actual
2021-2022
Actual
2022-2023
Modified Budget
$23,519,000 $8,124,000 $80,614,000 $170,986,000
Rate adjustments enacted by the City Council in December 2021 and lower PCIA charges beginning in early 2022 significantly improved the budgetary position of SJCE Benefits
• CCA can start up operations
quickly
• Easy for customers to understand
rates under new service provider
• Establish customer confidence
Challenges
• IOU rates rise and fall, so does
CCA rates
• Volatile IOU added fees
• Limits ability to set rates that fully
recover costs
• Impacts CCA ability to build
reserves
RATE SETTING IN THE PAST, FIX TO IOU
STANDARD RATES
4 Common for Community Choice Aggregator (CCA) to fix rates to Investor-Owned Utility (IOU) standard rates
COST OF SERVICE PROCESS
• Industry-accepted
framework for utility
rate-setting
• Determines the total
costs incurred by a
utility in providing
service to its customers
and the allocation of
those costs to customer
classes
5 REVENUE REQUIREMENT
• Base Year/Test Year data comes from SJCE financial forecast of revenues and expenses
• Test Year data is a 3-year average (FY 2023–2025) to support longer term rate making where possible
• Current SCJE rates are applied to annual billing data to derive revenues to compare to Test Year Revenue Requirement
• Power supply costs are more than approximately 75% of operating expenses; fluctuations in market costs and power supply will impact total Revenue Requirement
6 COST ALLOCATION
7 Conventional COS
rate making takes COS
results then designs
rates to recover COS.
The process is slightly
different for a
competitive market
and offering….
DESIGNING RATES IN COMPETITIVE MARKET
8 *PG&E Rates
Recover
costs by
customer
class
Recover
costs
systemwide
• Complete cost of service study to
ensure all costs are recovered and
meet financial goals
• Review current rates to determine if
they recover costs
• Consider all competitive service
options (i.e., compare to PG&E)
• Design competitive rates
*PG&E rates are not necessarily representative of the
SJCE’s cost to serve.
COST OF SERVICE RATE DESIGN BENEFITS
9 Local Control: Enhances the City Council’s discretion and autonomy to set rates that recover the full cost to provide service while achieving financial and clean energy goals Fairness: Enables SJCE to design rates to recover the cost to serve customers fairly among rate classes
Competitiveness: Ensures that SJCE rates and service options remain competitive with investorowned utility rates Predictability: Provides the ability to decouple from investor-owned utility volatility in rate setting and provide customers more consistent and transparent rates Simplicity: Avoids the tracking of complicated and sometimes illogical rate class structures and the rate setting processes of the investor-owned utility
PG&E rates will always be considered in SJCE’s rate setting process to facilitate customer bill comparisons.
SJCE 2023 COST OF SERVICE
RESULTS
10 2023 SJCE REVENUE REQUIREMENT
11 All costs that need to be recovered from customers determines the projected SJCE revenue requirement Forecasted CY 2023 Total
Revenue Requirement (Millions)
Better Expected Worse
Power Supply Payments $343 $363 $390
Operations, General, Administrative and Interest Payments $34 $34 $34 Contribution to Reserve $66 $66 $66
Total Revenue Requirement $443 $463 $490
2023 CONTRIBUTION TO OPERATING RESERVE
12 Forecasted CY 2023
Contribution to Operating
Reserve (Millions)
Better Expected Worse
Total Revenue Requirement $443 $463 $490
Cash Collected from Energy Sales at Current Rates $504 $504 $504 Potential Additional Contribution to Operating Reserves $61 $41 $14 Contribution to Operating Reserve from Revenue Requirement $66 $66 $66 Total Contribution to Reserves at Current Rates $127 $107 $80 2023 ENDING BALANCES
13 Forecasted CY 2023 Ending
Balances (Millions)
Better Expected Worse
CY 2022 *Unrestricted Cash $106 $101 $96
CY2023 Total Contribution to Reserves based on Current Rates $127 $107 $80 CY 2023 Incremental Contribution to Reserve based on 2023 Rates/PCIA $57 $37 $17 CY Total Unrestricted before Commercial Paper Loan Repayment $290 $245 $193 Commercial Paper Loan Repayment $60 $60 $60
CY 2023 Unrestricted Cash net of Commercial Paper Loan Repayment $230 $185 $133 Operating Reserve in Days @$1M per day, Dec 2023 230 185 133 *Not inclusive of $20 Million Restricted Cash
SJCE 2023 RATE STRATEGY
14 PCIA VOLATILITY
15 • In 2023, the
PCIA is
expected to be
-$3.14/MWh;
SJCE will
assume $0
• Every 0.5₵/
kWh increase in
the PCIA
represents $18
million in lower
SJCE revenues
Note that the PCIA value is the average PCIA for the year. The date is when the PCIA changed to reflect the new rate for the rest of the calendar year.
BUILD RESERVES, OFFER COMPETITIVE RATES
FOR CLEAN ENERGY
• Use forecasted margin between the cost of service and expected PG&E generation rates and added fees applicable in 2023 to build operating reserve to keep rates stable in the future
• Reduce rates relative to PG&E from eight percent above and set them as equal or at a small discount relative to PG&E’s generation rates
• SJCE customers expected to see a reduction in monthly generation charges 16 NEXT STEPS
• Staff will further evaluate the Cost of Service summary report and PG&E October filing to develop SJCE power mix and
rates recommendations for consideration at the December 6, 2022 City Council meeting
17 QUESTIONS
18