HomeMy WebLinkAbout0498.092November 12, 1992
THE HONOPABLE CITY COUNCIL
Palo Alto, california
Attention: Finance Corr.mittee
Members of the Council:
Report in Brief
This report presents ";.he 1991-92 year-end status of the four
Electric Fund reserves. It describes the events that caused large
savings in the electric po~er purchases category during 1991-92,
savings which resulted in a Transfer Stabilization Reserve (TSR)
balance substantially in excess of the policy limit criteria set by
Council in 1988 (CMR:293:8). The original purpose of the TSR is
discussed. and is contrasted to its current function. Finally, the
report presents and analyzes four possible policy options for the
Council and utilities Advisory committee (UAC) to consider, and a
staff recommendation.
As can be seen in the sUmmarized income statement which follQ","s,
the Electric Fund experienced very favorable operating variances in
1991-92.
The largest variance was experienced in the power purchases budget
category. which represents approximately 75 percent of the Electric
Fund's operating budget. A graph of budget-to-actual variances for
the electric power purchases category has been included to show the
variability cf this major expense over the last ten years. While
the number of units purchased has increased at a fairly predictable
pace~ the cost per unit of the City'S purchases has been more
subject to uncertainty and affected by events outside the control
of the city.
CMR:498:92
o
INCOME STATEMENT -ELECTRIC FUND
BUDGET vs ACTUA.L
FY' 19!n~·92
( .000)
Year Ended June 30, 1992
OPERATING REVENUES:
Customer sales
City department sales
Service connection charges
other revenue
Total operating revenues
Operating expenses:
Purchase of utilities
Administration and general
Engineering (operating)
~esource planning
Dperaticns and maintenance
Dapreciation end amorti~ation
Total operating expenses
operating income
Nonoperating revenues (expenses):
Interest income
Interest expense
Gain(Loss) on disposal of F/A
Budget
63,477
1,648
355
1. 869
67.349
38,444
3,633
970
3,727
4,475
o
51.249
16! 1 00
4,463
(7,052-)
o
:-otal nonoperating (expenses) ___ U~)
Income before operating
transfers
Operating transfers:
Operating transfers out:
Rent
Capital Projects
Rate of RetUrn
Net operating transfers
Net income
CM.!~: 498: 92
_li...2.ll
(2,502)
(50 )
(6.998)
-.ll.~Q)
3,961
2
Actual
63 ~ 410
1,562
199
1. 94Q
67,111
28,397
2,022
436
2,468
5,009
3.058
41,390
25 .. 721
4,379
(6,964)
(22 )
P,607.l
...1.l..--lli
(2,502)
(50)
~9~)
(<;.550)
13,564
Favorable
(Unfavorable.)
(S7)
(a6)
( 156)
71
(23B)
10,047
1,611
534
1,259
(S3.j)
D~0.58)
9,859
9,621
(84)
88
(22)
( 18)
..JL..2Q]
c
0
0
-.. -Q
9,603
OF
Electric Fu nd -Power Purchases
Ten Year History -----------------------------
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.f'1 .. ",_1 Year Ended 6/30/ __
CMR:49S:92 3
Actual Units Purchased
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i~X
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E: ~~ ~~ ~ ~; ee G 9~ 9" 92
;: 'c"" 'r'~1l' t '~.~ l; '.3~,
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After funding appropriate Electric FunQ reserve levels, the
renair..ing retai:J.ed earnings are p~.aced in the Fund' 5 TsR. The
following table displays th~ actual reserve levels in the Electric
Fund as of June 30, 1.99::!, and compares them 'With both the projected
level in the budget, and the actual level at the end of 1990-$1:
ELECTRIC FUND RESERVE LEVELS
(mil1io~s Dt dollars)
___ ~ne 30. 1992
~un~ __ .l.Q.c.......U.ll Budgeted Actual
Emergency Plant
Replacement Reserve l $1.B $1.. $1. 9
System Improvement
Reserve 2 9. J 9.4 9.7
Transfer Stabilizat,ion
Reserve' 10.8 11. 7 24.0
Calaveras Reserve" 29.2 25.5 26.1
The 1991-92 TSR year-end balance is more than $12 million higher
than the amount budgeted, and nearly $11 million higher than the
mm.u limit of the reserve ri3nge set by COllncil policy. This
balance reflects the large savings .... 'hich occurred in the power
purchases category.
lThe hergency Plar,t Reserve was established for unplanned
emergencies for replacement or repair of damaged equipment~
"The System Improvement Reserve was established to permit large
plann~d expenditures and to provide financial resources for
participation in attractive supply alt.erna't.ives as they arise.
~he Transfer stabilization Reserve was established to ensure
prudent transfer levels to the General Fund.
"The Calaveras Reserve is used to help alleviate rate shock by
spreading out rate increases that are re~uired to pay Calaveras
debt service re~uirements.
=:498: 92 4
ELECTRIC POWER PURCHASES CATEGORY -SAVINGS BREAKDOWN
1991-92
($:r:.illions)
Western Power
Revenue Adjustment Clause
PG&E Dispute settlement
Cdpacity Rate Reduction
Northern California Power Association (NePAl
Sale of Surplus Entitlement (Calaveras)
Power Pool:
Sale of Surplus Energy
Reservation Fees
Turlock Reserve Sale
Forecast Deviations
$1. 26
1. 03
1. 78
3.56
.82
.15
.15
1.6Q
$10.35'*
*The difference between
Statement is because
significant, but not
category.
$lO. 35 million and $10.05 million on Income
the $10.35 million represents the most
~JLl activities in the power purchases
Byents
The $10 million variance in the budget for purchases of electric
power in 1991-92 is the result of various supplier contracts,
se~tlements and adjustments, some of which deVEloped over several
years. Most should be considered extraordinary events.
western has served as the city's major electric supplier since
1964, and now provides 93 percent of such purchases annually.
Since 1988, Western h~s utilized a Revenue Adjust1'!lent Clause in
their contract rates, which allows an adjustment to the estimated
origi~al rates charged to customers to reflect the true costs of
CMR:498:92 5
or ...
, ,
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the powee as generated or purchased. Since Western ~as able to
purchase and generate power during 1991-92 at a lower cost than
oriqinally estimated, a $1.26 million credit to the Citr resulted,
In November 1991, a dispute between PG&:E and western over transmis
sion service charges (paid by the City from 1997-1991) ~as settled.
This eventually resulted in a $1.03 million refund of such charg"=s
in the May and June 1992 Western billings. Western also reduced
their capacity rat~ on April 1, 1992 (from $7474 to $6.65 per KW
month) ~h!ch reduced exp€nditures from budget esti~ates by another
$1.78 million.
Other savings were the result of power pooling and transferring
excess capacity among Northern cali forl'l.ia Power Assoc.:iation (NePA)
members. During this last year, some of thp. interconnected msmbers
of NCPA experienced a loss of power supply availability due to
declining steam fields. These utilities in turn sought to buy any
surpluses that might be available froe NCPA and its members, which
resulted in various sales, tilroughout the year, of a portiun of
Palo Alto's surplus antitlemen.t to the Calaveras Hydroelectric
Project ~ These short-term sal.es totalled approximately $3.56
million by year-end, in addition to the long-term sales to
Roseville.
Sales of surplus energy to members of a new power pool being
developed by palo Al to and nine ether NCPA :meIilbers, res'J.lted in
savings of $820,000. In addition, the City shared in the reserva
tion fee paid by the pool members who ~ere energy deficient4 This
fee was distr-ibuted to all members 'Who agreed to make their
surpluses available to the POOl: and provided the city with a.n
additional $150,000 for the year.
When the city sold its entitlement in the NCFA Geothermal Projec:t
No~ 2 in Turlock in 1986, nCPA also agreed to provide Turlock ~ith
reserve support ft'om NCPA ' s combUstion turbine project (CT) 4 In
early 1990, staff convinced NCPA to use a portion of Palo Alto's
surplus Calaveras Proj ect E"ntitlement in place of the CTs \r,:t.:en
conditions ~arranted to support Turlock's reserve needs4 This
resulted in $150,000 in additional sales for the year. with Palo
Alto as the beneficiary.
Finally, normal forecast deviations were also favorable to electric
operations in 1991-92. Estimated costs and availability of supply
are jmpacted: by temperature, weather and the national economy. In
the final analysis, the Ci't.y was able to sell surplus energy, avoid
high-cost pec-k poWer purchases, and benefit from excess calaveras
energy, for an additional $1.6 ~il1ion savings in energy purchases.
CHR:498:92 6
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..,: ...
~se of the Reserve
COI.Lncil first approved t.he cr~ation of a Transfer Stabiliz.ation
Reserve in 1985 (CMP:276:5), and set the minimum level at the
following years's return on equity transfer to the General Fund and
the maximum level of the reserve ~t 10 percent cf current year's
sales revenue. At tha~ time. the stated purpose of the TSR was to
"ensure prudent transfer levels to the G~neral Fund~~ Th~ policy
was amended in 1988 (CHR:29J:B) to increase the maximum level of
the re$erve to 20 percent of the following year's sales revenue.
Since the time the TSR ,"'as first established, its purpose has
ct'~anqed. Because it is funded by the net results of Electric Fund
operations each year, its purpose is actually mere to act as a
stabilizing influence for budget fluctuations (and thus for rates)
than as a guarantee of the return on equity transfer to the General
Fund, although it is i~portant to remember that the transfer is a
part of the overall ratemakinq process. At its minimum level, the
reserve serves only a short-term purpose. The mayirnu!ll level,
however, reflects ~ longer-term consideration of ~aintaining
prudent working capital reserves. Large fluctuations from the
hudget such as those experienced in the power purchases category in
199.1-92 are L"lherent in the operations of 50 large a utility, and
can be provided for in a :::-ate-stabilizing reserve~ The ct,ange of
the purpose of the TSR from one of guaranteeing annual equity
transfers to the General Fund to one of serving as a "'cushion" for
significant budget fluctuations suggests that it would be appropri
ate to re-evaluate the 1985 reserve policy. The issue of the
utility reserves is on the work agenda of the utilities Advisory
Commission for 1992-93.
The current level of the TSR ($24.0 million) is equivalent to 36
percer~t of 1992-93 projected Electric Fund sales revenue ($65.9
million), or almost four years' W'orth of p.=ojected equity "transfers
to the General Fund. The policy fer creatir.g the TSR states that,
"If the res.e.rve exceeds its I.l~per limit, or if special
circumstances wa~rant, Council may consider utili2ing these funds
for customer refunds or to offset rate increases.ft The utilities
Department ratemaking philosophy is nto price our utilities at the
lowest possible rates~ consistent lo.'ith sound finan,=ial plaIl1'ling,
-",hile promoting efficient resource utilization a.nd customer
satisfaction.~ Any disposition of the reserves surplus should be
viewed in terms of consistency 'With this ratemaking goal.
Recoqnizing that the Utilities Advisory Commission may wish to
recommend adjustments to the current reserve policy, Council may
~ish to consider the follo~i~g options~
CMR:498:92 7
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".
l~ ~nt Year (199?-93) Rebat~:
A rebate of the reserve "surplus" would satisfy the desire to'
close.ly match period events .. non-recurring as ther may be, to
the period in .... hich the resulting savings are reflected in the
reserve bal05nce. Such an approach negates the long-term
purpose of the reserve, however, and instead reflects a
na~rcw, year-to-year view of the utility operation. Should
events negatively impact raserves in future operat.ing periods,
higher rates mi;ht be necessary to restore the reserve to an
appropr iate le'.1-e1. This also is an ad.m:inistrati vely cumber
some al ternati ve, as was found ... hen the Gas Fund rebate was
processed in 1988-89.
2) Midyear 1992-93 Rate Reducti~:
An alternative which recognizes the lang-term purpose of the
TSR 'Wo'Uld be to adjust the Electric Utility rates with the
midyear budget report. However, this would not allo ..... time for
the Utilities Advisory commission to revie"" the ov-erall
reserve policy, and the short time frame ..... ould make it
difficult for Utilities and Information Resources staff to
accomplish such a rate change. Such an adjustment could also
cause an unnecassary oscillation in rates from a long-term
viewpoint.
3) 19;;3-94 Rate Reduction:
At the time staff prepared the 1992-94 budget, an electric
rate increase of 8 percent appeared necessary for the second
year of the budget. However, the 1991-92 cperating results,
coupled 'With data from 1992-9:), can be evaluated and a
reduction in the planned rate levels calculated to take effect
July 1, 199) can be considered. Such an approach would yield
the benefits of incorporating 1992-93 operating results intc
the rate strt.:cture, while preserving a long-term approac..::" in
rates versus reserve f'Unding. I~ ..... ould also allow-staff
SUfficient tima to analyze cost-of-service principles. and
rate struct'Ures involving customers with financial and medical
hardships.
4) No A_etian:
The TSR levels can be a llowed to re1'!lain ,"'ell above Council
approved levels as a buffer to future year variances.
CMR:498:92 8
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Rfecaaendatiop
Staff reco~ends CDuncil direct $~aff to ~e~urn during the 1993-94
budget p~ocess with reco~mendations on rat~s, rate structures and
reserve levels.
cc: Utilities Advisory ~cmmission