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May 6, 1993
THE HONORABLE CITY COUNCIL
Palo Alto, California
Attention: Finance Committee
Recommen4atio n for aft Eleotric customer Refun4
Members of the Council:
Report in Brio:
In November 1992 in rS6ponse to a staff report entitled Electric
FUnd Reserves -End of Year Ealan~ {CMR ~9a:92), council directed
staff to return during the 1993-54 budget process with a
reco!!U'l:lendation on how to dispose of the Electric Fund surplus.
This report is in response to that reque.st. Since receiving-the
assignment, staff has evaluated several options on the appropriate
disposition of the existing electric fund reserve surplus. Staff
recommends that the electric utility implement a credit reoate to
electric customers during the seoond quarter of FY 1993-94. The
amount of the refund will be finalized in the months ahead, and
staff will notify council of the amount of the refund prior to
distribution in the sp.ccnd quarter of FY 1993-94. This report
recommends Council approval af th~ attached Lesolution which
establish'E!s the electric customer refund plan for FYS3-94.
In November 1992, the Council received a staff report entitled,
Ele.£tric Fund Reservps-End-Of-.Xear Balances (CMR:49B:S2). That
report explained that a number of events caused approx~mately a $10
million savings in the electric po\o'er purchases to arise at the end
of FY 91-92. The report further indicated that this unanticipated
savings raised the balance in the Transfer Stabilization Reserve
(TSRj above the Council a.ppro .... ed "policy limit crite.ria. In
response to that report, Council directed staff to return during
the 1993-94 budget process ~ith a recor.~endation on ho~ to dispose
of the electric fund surplus. A 'Wide rang..: of option:$; were
evaluated by staff including, but not limited ta, enacting a rate
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decrease, applring the surplus to· ... 'at"ds do vat" iety of ne",· programs,
sending checks directly to the customers, or allowing the surplus
to remain in the reserve to avoid futu:;-e rate ir.creases.
staff reconmends that ~he surplus be applied as a Cus~omer refund
in the form of a bill credit as the best option to stabilize rates.
This app~oach vould provid~ imreediate rate relief to all electric
utility customers in Pdlo Alto, while also representing the best
alternative in terms of the financial implications for the electric
fund on a long-term basis. Disposition of the surplus in this
manner will maintain sound reserves levels in the electric fundi
I'esult in fewer rate _increases ir. the fut~I4~, and enable current
rate levels to meet fjnancial obligations in the 1990's. Based on
cun:-ent long-range financial projections, the next proposed
e:lectrit: rate increase should not occur until FY 1995-96. The
primary disadvantage of this option reiative to othEr alternatives,
is the high administrative workload. However, the advantages of
a refund over a rate decrease or other alt~rrlatives far out..-eigh
this s:hortcol'r,ing, and staff is confident that a refund 'Will be
implemented effectively.
Proposed Electric CtlsJ:.omer Refund Plan
Upon Council approval of the attached resolution, staff ~lans to
:begin the ref'und this fall. P..ece:1t proje_ctions indicate that the
combined reserve balance in tt1e Transfer Stabilization RE'_serv.e and
system Improvement Reserve at the end of FY 1992-93 will
approximate $45 IIlillion~ Based on this estimate and other
factors, staff prcjects ~t thi~ time a refund amount of
approximately $13 million to $23 million. If a $1) million refund
is implemented, a resident who averages 500 kilowatt-hours per
month consumption _ould receive approxi~ately a $72.00 credit on
their electric bill, over a two to three month period. The two or
three largest electric industrial customers in the city ~ould each
receive a bill credit approximating a :>lillian dollars.
The attached resolution obl igates the city to start an electric
customer refund during the second quarter of F¥ 19~3 -94. Ho'.;'ever,
becaus* the exact amount of the ref~nd will not be kno .... n until Ail
relevant financial data has been considered, the resolution is
silent on the amount of the refund. In the 'Weeks and Illont.hs ahead l
a number of factors ""i 11 detenr.ine the amount of the refund. Fer
example, there could be FY 1992-93 budget variances ~hich will
change reserve levels at the end of this fiscal year. Another
factor which will change the amount of !:efund is the potential
a~option of new reserve policies. R~gardless of the reserve policy
in place, staff proposes to refund the reserve balance in excess of
a level rapresenting the midpoint between tbe ta.r-get and -:naximum
reserve level guidelines.
However, the single largest impact on the amount ot -che refund
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rela'tes to ar. outstanding capacity settlement agreement between
Western and Pacific Gas ~ Ele~tric company, ~hich has been recently
approved :by the Federal Energy Reyulatory CommisCiion~ 'I'he tiwinq
of this credit from Western is lik.ely to OCC'.lT between July 1993
and Dece:nber 199). For Palo Alt.:J, it could result in a refund of
between $9 mil1io~ ~nd $lj million. aouev~r, the settle~~nt is
subject to review by th€ California PUblic utilities Cotn .... niGsion
(epUe). The CPUC has six months tc either approve or challenge the
settlelJlent~ According to Western staff, the probabil i ty of an
intervention from the CPUC is less than 5 percent.
A plan to start the refund during the second quarter of F19J-94
accomplishes t~o objectives: First. from an accounting standpoint,
it eli~inates the potential accrual difficulties which arise when
bill credits occur in either June or July~ Secondly, it provides
additional time in which the City can monitor any CPUC actions
taken with r~gard to the Western/PG&E settlement agreement.
The proposed customer refund plan is similar to t!1e plan v,sed
successfully by the city in 1980, 1985, and 1988. AccordinqlYr
statf recommends council adopt the refund plan describ2d belo~:
• Refund to .be I.'laCle in a one time bill credit to e~ch qualifying
customer. The refund v.'i11 be shown as a credit on the customer's
monthly electric bill end 2. statetT,ent will accompany the bill fully
a.dvising the customer regarding the refund. In the event the
credit exceeds ~he total electric bill, the residual credit ~ill
automatically be carried to~ard to the successive month(s) until
it is o:;ero.
• Disbursement of the refund ~il1 begin during the second quarter
of FY 1993-94 {October-December}. The computer program will base
the individual customer refund on their respective usage over a
recent twelve month period. This Itrefund billing period" is
identified as the twelve month perica prior to d.istribution. For
example, if distribution begins in November 1993 r a Cilstomer';s
refund .. ould be based en usage., p-copcrtionate to Palo A.ltc's total
electric consumption for the period November 1992 through October
1993~ This approach is reco~~ended because the current computer
billing system can retain only the l~st 12 months billing history
anQ is a common method employed for utility refunds.
• Qualifying cU9tomers are all active electric ratepayers at the
time of disbursement who purchased electricity from the City during
the refund billing period. A general attempt will not be made to
locate and. refund to fOrl7ler Palo Alt.o electric custct'lers, since
finQing such customers could be e~tremely costly, time-consuming,
and impractical. Forwarding addr.esses of such cus.tomers are
generally not YJ10wn by the utilitf. However, fonner cu;;tomers ~ho
do come forward and request a refund will receive a refund if their
usage occurred during the refund hilling period. A notice
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regarding the procedure: to obtain a refund 'Will be Pilblisl1Cd in a
Bay }I.rea newspaper. Applications from former or e.xl£:ting Cl.lstollle-rs
will be honored until March 31 1 1994.
• The recommended ref~nd formula is as follows:
Amonnt ot Refund (est. $13-23 million)
-----------------------------------= Refund Rata/kwh Tota~ kilowatt-hours (kwh's) sold
to existi:1q customers during refund
billing period
Refund Rate/kwh X CUstomer's respective kwh usage during
refund billing period = CUstomer's Refund Credit
Recommen4ation
Staff recommends that council approval of the attached resolution
adopting the FV 1993-94 Electric customar Refund Plan as outlined
in this report. Staff .. ill inform the council of the electric
r~fund amount prior. to distribution in the second quarter of FY93-
94.
Respectfully submitted,
-c,J..2..,,'l J;ll~' --
W. RAIIDY BALDSCHUN
Assistant Director of utilities,
AI.~~:iV" S7 ices
EDWJo';~
Interim Direc~or of Utili~ies
JU~~
City Manager
Attachment.s: Resolution
CllR:2H:93
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RESOLU'Tl.::m NO.
RESOL'U'"TrCN OF ThE CGUNCIL OF TH::: crTY OF PALO ALTO
M>OPTING THE FISCAL YEAR 1993 -94 ELECTRIC CUSTOMER
REFUl"ou PLAN
WHEREAS. staff has repQr~~d large savings in ~lectric power
pu.!'cha:::es which res:..llted in the accu..1T'llllaticn Qf reserves in the
Transfer Stabilizat-ion Reserve in excess of the pol icy lirr.it set by
the Council in 1988 (CMR:293:8); and
WHEREAS, en N~velT'be~ 12, 1992. staff reque:?:ted (CMR.:49€:
92) and received the Council's dir-ection to tetuDl during the
fiscal )'ear 1993-94 :t.urlget process 'N'ltl". recorrunendations on rates,
ra~e structures and reserve levels; a~d
'~EREAS, staff has recommended that a portion of f~nds in
excess of a l~vel represented as the midpoint: bet',ieen the relevant
re~erve(s) target level guidelines ar~d the maximul11 level guidelines
established for the Elect:r"ic Fund Transfer Stabil ization Reserve be
credited to Palo Alto electric utility r;1l5tomers on a one-time
basis during-fiscal year 19.93~94. c'JlT!rrIencins in the second q'..J.arter
of fiscal year ~993-94; and
WHEREAS, it is presently difficult to calculate the amount
of t.he funds in excess of the Electric Fund resenre levE"ls to be
credited to the electric utility cLi.stc:mers, bec.ause the staff is
accumulating dat:.a and info:rn:ation concernirlg its Electric Fund
reserves balances, and there are othar fac~or5 ~hich will be soon
resolvEd;
NOW, THEREFORE~ the Ccur.icil of thE: City of Palo alto does
hereby RBSOINE as follows:
SECTION' 1. '!'he ~Electric Customer Refund Plan" set forth
in the repo:::-t entitled "RecoTm':',enda:~ion for an ~lectric Cu.stomer
Refund, II attached hereto and incoq)orated by reference, ..... ::"ich is
proposed by the City Y.ar .. ager~ is hereby adopted, and t.!'.e City staff
is hereby authorized to execute and administer such plan in
accordance ~ith the provisions of th~ refereuced report. Under
such plan; commencing in the second ~Jarter of fiscal year 19.93~94,
a one-t.ime credit against current elect.ric utility charges ..... ill be
granted tv each qualifying elcctri C ucil ity customer n:·siding ir:
Pale Alto and receiving frotr., O!: usinS or cons\.l.'t',ing electric
utility service provided by. the City of Palo Alto during a cwelve
tt'.onCn period t.o be desigrlat.e.d by tr.e City Y.anager. The elect-ric
utility credits shall be paid out of Sun'S in the ElectLic Fund in
excess of. a levE'_l reFL'eSent-ed as the midpoir .. t bet.ween the relevant
reserve (s) target level guidelines and the maximum level g-uidelines
established for the Electric Fund TrCinsfer Stabiliz.at.ion Reserve.
'!'he City Manager is aut.horized to det.ermine the amount of funds
which will fund ttJe electric utility credits in accordance with the
formula recommended by staff in its referenced report. A report of
the aJl1.ount. of the funds ..... :.i.ch will fund the electric utiliq'
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credits shall be presented to this Council before the credits are
effected.
SE_t;i'IOl-L . .2. Tl"le Cm.:ncil finds tr.at the a:'tion hereby
project under the California approved does not const it\!te a
Environmental Quality Act.
INTRODUCED A!'.""D PA..SSED:
AYES:
NOES:
ABSENT:
ABS'I'ENTIONS:
ATTEST: A??ROVED:
!-lciyar
APPRO\."ED AS TD FORM: City Manager
Senior Asst. City Att-oniey DJrector of Finar.ce
Director of Utilities