I have been searching for the right place to start in relaying information to everybody about the utility sale in a clear way. It has been exceedingly difficult to even get started due to the sheer volume of info. Yesterday, I addressed a question on Facebook, and the narrative finally came pouring out. I am re-posting it here for the benefit of a wider audience, with some minor adaptations for the blog format. It may be somewhat of a “stream of consciousness” so forgive me if it jumps around a bit. It does give good information, however.
In 2013, Sawvel and Associates concluded the Electric and Natural Gas Cost of Service and Rate Study. The rate study made several recommendations. The rate study identified that rates were high on gas and low on electric. At that time, we were under favorable market prices for gas. It recommended that the City implement a specific mechanism to ensure customer charges are fully covering the cost of the supply. The methods by which this could be accomplished was to increase the base rate to cover the fixed supply cost, and institute a variable rate “rider” which would be adjusted periodically to cover variable costs associated with purchasing the gas and electric on the market (transmission costs, market purchases, gas transport costs, etc.). None of those recommendations were implemented, though rates were adjusted to bring cost and expenses closer together. This had the opposite effect of what the study recommendations intended.
In the case of the cost of the gas supply, prices increased at the same time our rates were adjusted down. The result was less revenue and greater expenses. The net negative impact has been roughly $930,000 in less than one year. It is true that market rates have since stabilized, however there is a lag in the figures I am presenting to you here. $930,000 negative impact is the result prior to the recent upswing of gas market prices that we experienced this summer. The negative fiscal impact will likely be greater than $930k by the end of the fiscal year. We will have to wait and see. That doesn’t need to alarm anyone, as we have the fund balance to cover this impact, though it can not be allowed to continue in this manner. So what will rates look like if we keep the utilities? Good question. I can’t predict them without a comprehensive analysis, which will need to take future utility rate structure changes and organizational changes into account. We can’t complete this until later. I don’t need an analysis to tell you that the utility rates will go up if we don’t sell though, and please understand that I do not say this as a scare tactic either. I’ll explain.
We made it from 250 residents to 25,000 residents on the current system and have done relatively well, all things considered. The size and scope of the business now require significant changes to the business model to protect and insulate residents from the effects of supply cost volatility. Here are the expenses we know about if we keep the utilities:
- We will hire additional staff to increase service levels and infill losses from employee attrition.
- We will hire a rate analyst or contract with an analyst firm.
- We will invest some capital on system improvements and additional work vehicles, which we denied in the last budget cycle due to the potential sale.
- We will likely need to install electric infrastructure to to serve White Hills. This cost is estimated at approximately $1,100,000. (RMP will not be maintaining that service area if the city retains the utilities. By law they can require us to take over the service territory, and they have indicated that they will as this will be somewhat of an “orphaned” service territory.)
- In the near future, we will need to hire or retain a FERC (Federal Energy Regulatory Commission) attorney to manage utility regulatory matters. Due to pending federal regulations which will affect the expense of maintaining and inspecting our high pressure gas line, we may have additional expenses with gas.
We will also change the structure of the rates to follow the recommendations made in the rate study. This means we will have a variable component of our rate to make certain we are covering all costs.
We are facing brand new EPA regulations which will have a destabilizing effect on gas and electric rates. The key regulations are Mercury & Air Toxic Standards, and also section 111 of the Clean Air Act. I have reports which identify the short-term impacts of new regulations, and one of the key impacts will be the closure of about 20% of the existing coal power plants in the country by 2017. That means that by 2017, 60 gigawatts of coal-generated electricity will be taken offline and must be replaced by some other source. The only technology that is currently ready to take the place of coal is natural gas. This increase in demand on gas will place some pressure on gas markets, and it will also increase the correlation between gas prices and electric prices.
We own power generation resources that serve less than 2% of our consumption needs. We produce 0% of our gas needs. RMP owns power generation resources that serve over 90% of their customer needs. Questar Gas produces 50% of its gas through Wexpro. The ability to produce your own commodity builds in relative fixed cost which allows for better forecasting of business revenues and expenses. The utility industries are prone to price volatility, and resource ownership is perhaps the most effective way to turn variable costs into long term fixed costs. Where RMP and Questar Gas can build in supply cost stability, we have almost 100% market risk. Some of that market risk is long term and some is short term. We currently manage market risk by entering into “long term” contracts, though those too will expire and must be renegotiated at whatever the prevailing market prices are at that time. We can manage some of our risk through hedging, though, hedging is, by nature speculative.
We are in a city that is growing its energy consumption by about 9-10% per year. Every bit of new demand we place on the supply increases the market risk to the utility business, and ultimately to the customers’ prices. If we keep the utilities, setting up the organization to better manage supply cost and mitigating risk will be my primary focus.
If you think this explanation is complicated, trust me, it goes SOOOO MUCH deeper.
Is it possible that we can be effective at keeping our utility rates below those of RMP and Questar Gas while experiencing sustained rapid population growth, with new EPA regulations that remove coal energy from the market and place greater strain on natural gas? Yes. It is possible. Would I bet that we can keep rates below those of RMP and Questar Gas? I would not.
We are good at many things in concern to our utilities and we have great employees who know our system. The size and needs of the utility business are quickly growing in scale and scope and there is good reason to think critically about our own ability to provide better rates and service than other options such as Rocky Mountain Power and Questar Gas. They have both served communities throughout Utah with good results. These new EPA regulations represent a brand new reality for the entire gas and electric utility businesses and will have an impact on our utilities. The question we must ask ourselves is, “Who is better equipped to deal with these changes as we grow to our projected population of 114,000 people over the next 35 years?” I think you know what my answer is, and I will vote accordingly. I encourage each of you to vote on November 4th armed with this information, and ready to accept the changes that will be coming whether we sell or whether we retain our utilities. This is our last opportunity to sell the utilities. If we keep them, we do not have time to rethink our direction. We will move forward with purpose and focus as a committed utility provider.
$26,000,000 in bond debt will be eliminated and we will have an anticipated $10 million or more in available funds to put towards future projects, or to retire other debt of the city if the sale goes through.