City Council Agenda Report
Meeting Date: August 15, 2023
From: Todd Dusenberry, General Manager of Public Utilities Department: Public Utilities
Submitted by: Adriana Ramos, Administrative Analyst
Subject
Vernon Public Utilities Electric Cost of Service Analysis and Updated Energy Cost Adjustment Billing Factor
Recommendation
Adopt Resolution No. 2023-19 to update and implement an Energy Cost Adjustment Billing Factor procedure and computation method which establishes an Energy Cost Adjustment to be billed under all electrical rate schedules for energy transmitted, distributed, and supplied to the City of Vernon electric customers.
Background
The last Electric Cost of Service Analysis and Rate Design Study (Study) for Vernon Public Utilities (VPU) was completed in 2019 and included a multi-year financial plan. On April 2, 2019, the City Council adopted Resolution No. 2019-07 approving and adopting a four-step rate adjustment for Fiscal Years 2020 through 2023 as follows: (i) a 0.8% electric rate increase effective July 1, 2019, (ii) a 1.9% electric rate increase effective July 1, 2020, (iii) a 4% electric rate increase effective July 1, 2021, and (iv) a 4% rate increase effective July 1, 2022.
On April 4, 2023, the City Council approved an agreement with NewGen Strategies & Solutions, LLC (NewGen) to conduct a new Study and to provide rate adjustment and rate design recommendations. This analysis offers the best strategic approach to determine the appropriate rates to address stakeholder needs and ensure that only the costs to operate the utility are built into VPU’s rates. The approach for this Study involves the incorporation of VPU’s data, market information, and community input to provide an integrated view designed to allow VPU to make long-term financial, operational, and capital planning decisions.
Furthermore, because of this Study, VPU will have the financial model necessary to respond to market changes that impact customers. One of the objectives of this Study is to ensure VPU continues to provide competitive and stable rates to its customers. The Study with NewGen consisted of the following:
1) System Level Load Forecast
2) Electric Cost of Service Analysis
3) Rate Design
4) Financial Forecast Model
5) Financial Reserves Policy
The overall financial and operational goals of the Study were to confirm that:
1) VPU continues to meet its bond covenant requirement to maintain a 1.1 Debt Service Coverage Ratio (DSCR) and a target of 1.2 DSCR was established for setting rates in the forecast period.
2) A minimum level of cash reserves is established at approximately 180 days and a target of 300 days cash on hand is maintained with rates.
3) Reasonable electric load growth estimates are included in the multi-year financial plan. 4) VPU provides competitive base rates and a stable Energy Cost Adjustment (ECA) to customers.
5) A long-term VPU Financial Reserves Policy is established. 6) VPU continues to maintain the highest reliability standards and customer service to customers.
VPU has met the above goals while continuing to respond to inflation and supply chain issues, including higher costs for energy, natural gas, materials and supplies, chemicals, and construction costs, and continues to provide exceptionally reliable service.
The following points represent changes to VPU’s Electric Cost of Service Analysis since the last Study and are the key drivers of higher costs, and place upward pressure on electric rates:
1) California Independent System Operator (CAISO) energy prices are higher and natural gas costs are significantly higher when compared to historical prices. 2) Electric load reductions are seen in the 2024 load forecast when compared to the 2019 load forecast; however, beginning in Fiscal Year (FY) 2025-26, VPU is forecasting higher new electric load growth.
3) The Malburg Generating Station (MGS) acquisition and debt service requirements are now included in the DSCR calculation.
4) The FY 2023-24 VPU Electric Fund Forecast when compared to the approved budget includes higher wholesale revenues, adjustments for Economic Development Rates, and higher insurance costs.
As part of the FY 2023-24 budget process, VPU engaged in multiple outreach meetings regarding VPU’s financial and operating plans, which included communication about the Utility’s Study, as well as solicitation of customer feedback regarding the state of the Utility. Furthermore, information regarding the Utility's financial and operating plans was shared by VPU staff during a Joint Special Business and Industry Commission/Green Vernon Commission meeting and a Business Breakfast on April 25, 2023 and May 3, 2023, respectively.
On August 10, 2023, VPU presented the results of the Study to the Vernon Business and Industry Commission. Following staff’s presentation, the Commission discussed the results of the Electric Cost of Service and Rate Design Study. The information was received favorably by the Commission.
As part of the proposed budget for Fiscal Year (FY) 2023-24, the Utility included a proposed five percent (5%) electric rate increase to address factors beyond the Department’s control, including rising energy and natural gas costs, supply chain issues, and regulatory and legislative mandates, as well as the departure of key business customers. On June 6, 2023, City Council adopted Resolution No. 2023-13, amending the electric rates for FY 2023-24 as recommended with a five percent (5%) rate adjustment effective July 1, 2023. Following the results of the Study, Staff weighed several options focusing on the impact of any future base rate and ECA adjustments on customers and recommends the following:
1) VPU’s strategy is to meet its revenue requirements and minimize rate adjustments to customers by implementing an ECA of $0.02 in both FY 2023-24 and FY 2024-25 and an ECA of $0.01 in FY 2025-26.
2) Staff is recommending no additional Base Rate adjustments after FY 2023-24 and no future ECA adjustments after FY 2025-26. However, the ECA is subject to change to the extent that actual power supply expenses differ from those included in the Study’s underlying assumptions to ensure the proper recovery of power supply expenses. 3) VPU shall reconcile the ECA monthly, including the tracking of any ECA under collection or over collection amount. If necessary, VPU, at a minimum, shall have quarterly ECA adjustments of the baseline ECA (amounts noted in paragraph one above), including any under collection or over collection amount. VPU will strive not to exceed an ECA of $0.04. 4) VPU currently plans to utilize $18 million from the Utility’s Expense Stabilization Fund to meet its revenue requirements in FY 2023-24.
5) Establish a VPU Financial Reserves Policy, which is expected to be presented to the City Council in September 2023.
6) VPU plans to update the Study within three years, if not sooner, depending on customer, financial, and economic conditions as well as responding to changes in the underlying assumptions included in the Study.
As a result of this strategy, rates for the larger commercial and industrial classes, such as the TOU‐V and TOU‐Vt, are still extremely competitive, including comparisons with the Los Angeles Department of Water and Power (LADWP) and Southern California Edison (SCE). In addition, surrounding public utilities are in the process of completing similar Cost of Service and Rate Design studies. The rate trends for neighboring publicly-owned utilities reflect the following:
1) Burbank Water and Power just passed rate increases for two years (FY 2024 and 2025) of
8.5% and 8% per year.
2) Recent CAISO market prices have put upward pressure on all utilities, increasing energy cost adjustment rates throughout the state.
3) Riverside is also currently considering but has not yet approved rate increases of 7%, 7%, 7%, 2% and 2% for the next five years. The rate increases are targeted more at residential than commercial and industrial customers, but industrial is potentially looking at 6% increases.
Pursuant to Vernon Municipal Code Section 13.36.040, any changes in the ECA shall be made from time to time by resolution of the City Council when, in the City Council’s opinion, such changes are necessary for the sound financial operation of the Public Utilities Electric Fund.
The proposed resolution has been reviewed and approved as to form by the City Attorney’s Office.
Fiscal Impact
The utilization of $18 million from VPU’s Expense Stabilization Fund in FY 2023-24 and an Energy Cost Adjustment of $0.02 FY 2023-24 and FY 2024-25 for each fiscal year and an Energy Cost Adjustment of $0.01 in FY 2025-26 are expected to meet VPU’s forecasted revenue requirements.
Attachments
1. Resolution No. 2023-19
2. Cost of Service Analysis and Rate Design Study Report