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HomeMy WebLinkAboutMinutes - City Council - unsigned - 1992-11-191 11/19/92 City Council, Adjourned Regular Meeting November 19, 1992 Council Chambers, 1313 California Street Redding, California 5:00 p.m. The Joint Meeting of the City Council and the Electric Utility Commission was called to order by Mayor Moss with the following Council Members present: Anderson, Arness, Dahl, Kehoe, and Moss. The following Electric Utility Commissioners were present: Barzin, Gandy, Gelonek, Iwanick, Potter, and Chair Prielipp. Also present were City Manager Christofferson, City Attorney Hays, Electric Utility Director Lindley, Electric Utility Operations Manager Ryan, Electric Utility Engineering Manager Russell, Electric Utility Resources Manager Coleman, Director of Finance Downing, Director of Information Systems Kelley, Electric Utility Rates & Economics Analyst Graves, Supervising Electric Utility Distribution Planner Owen, Budget Services Officer Starman, Accountant Weida, Public Information Office Bachman, Secretary to the Electric Utility Commission Babcock, and Assistant City Clerk Moscatello. RESOLUTION - Electric Utility Rate Increase (E-090-100 & E-090) Electric Utility Resources Manager Coleman presented information on electric utility rates, the effect of inflation on costs, rate adjustment history, departmental expenses, operating reserves, estimated reserves, and a cost comparison to other cities. In addition, Mr. Coleman reviewed the Electric Utility rate adjustment mechanism adopted by City Council in October 1988. Information on capacity and energy resources was reviewed and several proposed rate increase scenarios were illustrated. Council Member Dahl asked Mr. Coleman to state what Western's power rate increases to the City of Redding will be. Mr. Coleman stated that Western will increase its rates 4.5% in May 1993, 12% in October 1993, and decrease slightly in October 1994. He explained that Western is still recovering from the effects of the drought. Western projects its increases over a five-year period, and five years ago they did not anticipate a drought. Therefore, during the next five-year projection, there will initially be high costs and then rates will stabilize. Council Member Anderson asked if the biggest part of the rate increase will pay for debt services payable in 1995. Mr. Coleman explained that the utility is trying to keep operating and maintenance reserves at 20%, and in 1996-97 there will be power-related expenses for the California-Oregon Transmission Project, Redding Power Plant, San Juan Power Project, and Western power increases. He noted that if the utility continued to rely on PG&E for power, the cost of energy would be even higher. Mr. Coleman emphasized that rate increases are driven by the cost to acquire power. Council Member Dahl recalled discussion regarding the cost of acquiring power and the utility's ability to avoid some of those costs. Mr. Coleman explained that the utility will pay PG&E $8.3 million for power in 1992; and assuming no further resource development by the City, PG&E power will cost the utility $270 million by 2012. He relayed how important it is to develop alternative power sources to avoid paying for high-priced power. In response to Council Member Arness's question, Mr. Coleman stated it is a matter of policy whether the utility plans for financing future improvements or borrows money at that time. Council Member Dahl asked how much it will cost to comply with Senate Bill HR429. Mr. Coleman explained that 3.5% of the rate increase is affected by HR429; however, the Secretary of the Interior already included some of those costs in the Western rate increase. The additional cost of HR429 that staff had not anticipated is about 1.7%, or $1.3 million. Council Member Dahl recommended that the fixed cost of this Federal legislation show as a line item on the utility bill so the ratepayers are aware of this cost. Mr. Coleman noted that staff can only approximate the cost because the accounting changes every month. 2 11/19/92 Mayor Moss suggested that the amount be averaged. Mr. Coleman relayed that a significant amount of Western's bill relates to mitigation and it may be easier to include the total environmental mitigation cost, 3.5%, rather than only the cost of HR429. Electric Utility Commissioner Iwanick stated that the proposed rate increase is high; however, because of Western's increase in power costs, it will be difficult to reduce the amount of that increase. Commissioner Iwanick said his biggest concern is the cost of future power projects, and he would like to ensure that future projects are a good value and the utility is not overspending. He suggested that an audit to compare PG&E power costs with new power costs coming on line be set in place. Electric Utility Commissioner Gandy expressed support for an 8.7% rate increase. Commissioner Gandy stated that the utility contracts with Western, as the sales agency for the Central Valley Project (CVP), for power. The average cost is .3213, but Western can change its price toward market prices based on decisions it makes, or is forced to make, with regard to the Sacramento River or anything that affects power production. He explained that Western contracts with its users to provide a certain amount of power; and, if power production is cut, power must be purchased on the open market and the cost is passed on to the user. Commissioner Gandy displayed a copy of the Electric Utility's income statement on the overhead projector. He discussed operating revenues, the cost of power, maintenance and operation, and net income; and he pointed out that the utility has experienced a loss during the last three years. Stating that some of these losses are adjustments from updating interdepartmental charges; Commissioner Gandy noted that this type of thing is going to happen to an enterprise function. Commissioner Gandy opined that it is necessary to keep enterprise functions healthy; therefore, it is his recommendation to adopt an 8.7% rate increase. He pointed out that the Commission recommended rate increases in the past that Council reduced and it shows. Electric Utility Commissioner Barzin stated that he voted against the rate increase because of the way the increase was presented, not because it was not needed. Commissioner Barzin explained that a portion of the recommended rate increase is mandated by environmental requirements, and if the increase was presented in this manner, people would understand the increase and find it easier to accept. Commissioner Barzin opined that an increase in the amount of 8.2% to 8.7% is necessary. He reiterated that the portion mandated by legislation should be presented to the public as a mandated increase. Electric Utility Commission Chairman Prielipp stated that the Commission deliberated on every item that affected the rate increase; thus, the recommendation was based on individual building blocks that were refined as low as possible. Chair Prielipp conveyed that the cost of running the utility is in there; and if those costs are not passed on, the utility will not be a healthy business. He added that the utility is currently embarking on some well-conceived power projects, and money must be invested to move forward. Commissioner Prielipp expressed support for the 8.7% rate increase. Referring to Council Member Dahl's and Commissioner Barzin's suggestion to separate the cost of recent regulation from other costs, Commissioner Prielipp said that is the cost of doing business and one should either separate all those costs out or not. Commissioner Prielipp stated that whoever uses electrical energy should pay their share and the matter of development costs being picked up by developers should be reconsidered. Electric Utility Commissioner Potter stated that the Electric Utility should be run like a business. Commissioner Potter referenced Commissioner Gandy's statement about the declining capital account balance and pointed out that staff has advanced computer models capable of making accurate projections. On the basis of these projections, staff recommended an 8.7% rate increase. Commissioner Potter stated that how those dollars are found--by rate increase, adjusting transfers to the general fund, or transferring costs to development, is up to Council. The underlying fact remains is that for the utility to remain viable, a certain amount of income is needed. Commissioner Potter cautioned that the City does not need bond counsel to institute a rate increase at some future point. 3 11/19/92 Electric Utility Commissioner Gelonek said these are complex issues and there are many factors that affect the cost of power and the cost of doing business. Commissioner Gelonek pointed out that only 14% of the total budget is under their control. He reiterated that the utility has experienced diminishing returns during the last few years. Commissioner Gelonek said it must be recognized that growth in the community is costing the utility money. He noted that the rate mechanism adjustment was carefully considered, and its intent was to provide long-term benefit to the consumer. The utility should avoid rate shocks, and it must make its payments, maintain operating reserves, and provide energy at costs which are competitive. Commissioner Gelonek said he wants a healthy utility and, therefore, supports a 8.7% rate increase. Electric Utility Operations Manager Russell presented information on the service policy and transferring infrastructure costs from the utility to new development. Mr. Russell recalled that approximately two years ago, staff presented information to Council regarding transferring those costs. He indicated that over the last six to eight years, those costs have amounted to approximately $6 million to $8 million. Mr. Russell reviewed the recommendation of staff to transfer, over a five-year period, all infrastructure costs in the approximate amount of $2,335 per lot. The Commission recommended a modified plan to capture only those costs inside the developer's project and distribution facilities to get to the project in the approximate amount of $1,590 per lot. Mr. Russell indicated that if all costs were transferred to developers, the rate would be reduced by about 2%. Council Member Anderson asked if PG&E and other utilities transfer these costs to the development community. Mr. Russell stated that the cost of transmission lines, etc., are included in the electric rates. The customer is required to pay the cost of distribution lines up-front and a portion of the cost of transformers and cable are refunded to the customer as new customers connect over a period of ten years. Council Member Arness stated that if electric infrastructure charges were transferred to the developer, it would parallel Water and Sewer utility policy. Mayor Moss pointed out that the rate payer pays for a commodity, it is not a tax or a fee. He said the utility's rates are competitive; and even with an 8.7% increase, the rates are under 60% of PG&E rates. Mayor Moss conveyed that the utility is committed to long-term projects to produce electricity; therefore, it is essential to be financially strong. Council Member Anderson reviewed several rate increase options developed by staff. He questioned the reason for adopting an 8.7% increase this year and a 6% increase for each of the following four to five years. He explained that today's ratepayer would build a reserve which would benefit ratepayers two or three years from now. Council Member Anderson recommended adopting a 6% rate increase this year recognizing that a 7.9% increase may be necessary next year. He emphasized that his recommendation includes recognizing some economies in the Electric Department. He noted that personnel costs comprise only 11% of the budget; however, that amounts to $5.6 million. He recommended that department overtime be looked at to find some savings. Council Member Dahl stated that the evidence overwhelmingly points to the need for a rate increase. He recalled that Council avoided addressing the service policy in the past, but it should be addressed during the next budget deliberations. Council Member Dahl recommended that Federally-mandated costs be segregated on the utility bill, and he asked staff to present an alternative to Council at the next meeting. Council Member Dahl recalled that Council compromised the Commission's and staff's recommendation last year. Mayor Moss agreed with Council Member Dahl that Federally-mandated costs be a line item on the bill. Mayor Moss recommended that either an 8.7% increase be adopted this year followed by a 6% increase for each of the following four years or a 7.1% increase be adopted for the next five years. He said he would not prefer to increase rates 6% this year and 7.9% next year. Council Member Arness stated that if Council were to adopt a service policy, to be phased in over three to five years, it would be consistent with Council 4 11/19/92 policy and a 6% or 7.1% rate increase would be possible. He noted that there are areas Council has control over, and not addressing items such as the formula and development policy does not do justice to the wide range of customers. Council Member Arness said he does not support a 6% rate increase. Noting that Council has received reams of material from the Electric Department, Council Member Kehoe stated that this material must be tempered by the experience of everyday life. He said these are tough times for business and individuals, and there are people on fixed incomes that cannot afford a major increase in utility rates. Council Member Kehoe expressed support for a 6% rate increase with the caveat that during the next several months, three elements be reviewed: (1) the debt service coverage ratio, (2) the service delivery policy, and (3) ways to increase internal efficiencies within the department. He pointed out that power comprises approximately 58% of costs and internal costs comprise about 42%. Thus, there may be opportunities to influence the rates. Council Member Arness said it is inconsistent to be concerned about people on fixed incomes that cannot afford a rate increase when Council has not adopted a service policy that would transfer costs subsidized by the ratepayer to the developer. He conveyed that it may not be possible to ask for changes in the bond coverage ratio; and with regard to finding internal efficiencies, Council Member Arness said he hoped that practice was already universal throughout City departments. Noting that costs driving the rate increase are primarily from the $50 million bond indebtedness coming on line two years from now, Council Member Anderson questioned why the ratepayer should be hit hard during these tough economic times when things may be better in a year or two. MOTION: Made by Council Member Anderson, seconded by Council Member Kehoe, to adopt a 6% electric utility rate increase. Voting was follows: Ayes: Council Members - Anderson and Kehoe Noes: Council Members - Arness, Dahl, and Moss Absent: Council Members - None Council Member Dahl pointed out that Council avoided running the utility like a business last year; and although Council could compromise again with a 6% increase, Council would be back next year with a 9% increase. He said the service policy should be discussed at a different time because there are many variations and the discussion will be lengthy and complex. Council Member Dahl said he would support a 7.1% increase. Lance Frederiksen, 6640 Waterford Drive, Executive Director of the Shasta Business Council, referred to a document dated October 27, 1992, from Electric Utility Director Lindley which detailed the cost of purchasing and producing power during the five-year period 1991 to 1996 from $25 million to $34.77 million. During this same period, operation and maintenance, administrative, and general expenses are projected to increase from $6.6 million to $13.5 million. Mr. Frederiksen conveyed that what caught his interest were interdepartmental charges and in-lieu tax payments. Taxes and interdepartmental charges for 1991 through 1996 are projected to increase beyond the 50% parameter set up to purchase/produce power. He stated that these costs are considered uncontrollable; however, he opined that they are within the political parameter Council has power to deal with. Mr. Frederiksen outlined the increases in total interdepartmental and in-lieu payment charges from 1988 to 1992-93 and expressed his concern about those increases. Mayor Moss asked Mr. Frederiksen if he was aware that the utility invested close to $80 million in plant equipment subject to this fee during that time; and thus, did he still find the figures astounding. Mr. Frederiksen responded yes, the projected 6,400% increase from 1988 to 1998 was enough to peak his interest and it warrants a second look. He clarified he is not saying it is incorrect or improper. Mr. Frederiksen noted that Electric Utility Director Lindley also believes it warrants a second look as he stated in the 1992 proposed Electric Utility rate increase reduction Alternative Number Four, "limit future increases in-lieu of tax transfers made 5 11/19/92 from Electric Utility to City general fund to a percentage of prior years electric utility rate increase." Council Member Anderson asked what the accounting relationship of the electrical income to these increases is. He said the theory behind these increases is in-lieu taxes are based upon the property and should be measured against the property of the utility, not upon a rate increase. Mr. Frederiksen said he is not an expert in tax assessment matters, he is simply raising the issue. Council Member Arness conveyed that this issue has been discussed at both the Council and Commission level. He said there are in-lieu charges on water, sewer, and electric utilities, and the method of defining the value of the system is traceable. Council Member Arness pointed out that cost increases may have been driven by the fact that $6 million was cut out of the general fund budget and staff began looking under every rock for income. Russell Hunt, 2558 Sonoma Street, noted that electric rates will increase over 30% during the next two years under the existing policy of subsidizing real estate developers. He opined that big developers of shopping centers and major subdivisions take money out of the community, and they subcontract work to people from Modesto and Sacramento. Therefore, very few jobs are provided by subsidizing real estate developers. Mr. Hunt stated that Council's number one priority should be to keep utility rates as low as possible and that is not occurring. He opined that no rate increase would be necessary for approximately three years if development subsidies ended; and until this problem is in order, there is no justification for a rate increase. Paul Edgren, local developer, stated that it is not the developers that pay the fees, it is the people who eventually buy the home. He cautioned that many people are not qualifying for loans in an amount sufficient to purchase homes any more, and it is the young home buyer who will be pushed out of the market. Mr. Edgren conveyed that the developer is responsible for digging the ditch, providing sand, furnishing and installing street lights, furnishing and installing all secondary conduit and conductors, junction boxes, and lids. He explained that developers install gas lines for PG&E, and PG&E reimburses the developer as homes are hooked up. The phone company also utilizes this method. Mr. Edgren noted that it is cheaper for the City to amortize the cost of those facilities through the monthly user charge than to require the money up front. Seventy cents to $1.00 per month is not an exorbitant amount of money. Kent Dagg, Executive Director of the Shasta Builder's Exchange, recalled that the Builder's Exchange is revisiting the service policy issue. Mr. Dagg asked what role the Builder's Exchange and Board of Realtors can play concerning meeting with staff and generating options and proposals for the Electric Utility Commission's consideration. Council Member Arness said he would be glad to hear their ideas on this matter. Steve Dryden, citizen, stated that if the electric utility needs a rate increase, it should be justified; and then alternatives, such as charging for installation and hookup, may be considered. Mr. Dryden stated that citizens have not had wage increases in a long time, and they cannot afford a rate increase. He noted that Redding electric consumers pay a rate two-thirds of other rates throughout the State; however, that is too much since people in Redding only make half as much money as other people in the State. MOTION: Made by Council Member Dahl, seconded by Council Member Arness, that Resolution No. 92-473 be adopted, a resolution of the City Council of the City of Redding establishing the electric utility rates for service to customers 6 11/19/92 within the corporate limits of the City of Redding, and approving a 7.1% rate increase effective November 23, 1992. Voting was as follows: Ayes: Council Members - Arness, Dahl & Moss Noes: Council Members - Anderson & Kehoe Absent: Council Members - None Resolution No. 92-473 is on file in the office of the City Clerk. ADJOURNMENT There being no further business, at the hour of 7:23 p.m., Mayor Moss declared the meeting adjourned. APPROVED: _________________________________ Mayor ATTEST: ______________________________ Assistant City Clerk