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2014-05-07 Electric Rate Committee MinutesMINUTES OF THE SPECIAL AD HOC ADVISORY COMMITTEE ON ELECTRIC RATES MEETING HELD MAY 7, 2014, IN THE COUNCIL CHAMBER OF CITY HALL LOCATED AT 4305 SANTA FE AVENUE, VERNON, CALIFORNIA ________________________________________________ MEMBERS PRESENT: Greg Longstreet, Robert Gutterman, Peter Corselli, Stan Stosel, and Mark Whitworth MEMBERS ABSENT: Martin Perez Chairperson Longstreet called the meeting to order at 8:04 a.m. Member Whitworth led the flag salute. Chairperson Longstreet confirmed that there are no changes to the agenda. PUBLIC COMMENT Chairperson Longstreet announced that this was time allotted for public comment and inquired whether anyone in the audience wished to address the Committee. No one responded. OLD BUSINESS 1. Further review and discussion of Electric Rate Study conducted by Crossborder Analysis. Recommendation. Receive updates from Light & Power Staff on the current and future status of the City of Vernon’s electric rates and conditions which impact such changes. This will include a presentation by consultant Mike Bell on electric rates. No action is required at this time. Chairperson Longstreet announced that this is a follow-up to the previous Committee meeting in which Committee members requested additional information as a result of the proposed electric rate increases. Director of Light and Power Carlos Fandino advised that staff will be reporting and presenting on all the various requests and questions raised by the Advisory Committee. Ad Hoc Advisory Committee on Electric Rates May 7, 2014 Special Meeting Minutes Page 2 of 10 Fandino reported on the Department’s reliable and competitive service; Vernon is ranked in the top 10% for outage recovery nationwide. In response to the Committee’s inquiry on what does the rate adjustment achieve, Fandino explained that the rate adjustment allows the Department to be fiscally sustainable, meet its debt service coverage, prepares for the increase in funds capacity payment for the Power Purchasing Tolling Agreement (“PPTA”) in fiscal year (“FY”) 2017, and maintains system reliability by allowing the necessary upgrades to the aging infrastructure. In response to the Committee’s concerns on why the forecasted revenues for FY 2015 drops, Fandino explained that there are two reasons. First, there is a change to revenue reporting which now accounts for the voltage and interruptible service discounts. Fandino reported on the discounts and noted that the City will continue to subsidize a portion of the discounts for FY 2015. Second, future load growth is projected at less than 1%. Finance Director William Fox further advised that the low growth is due to outside forces beyond the City’s control which impact customers and result in loss of load. Vice Chairperson Corselli additionally noted that the energy efficiency influence has also affected power usage. Fandino reported that the City is permitting solar energy which also impacts power usage. In response to Vice Chairperson Corselli, Fandino explained that the City does not get renewable portfolio standards (“RPS”) credit for customers’ solar use and installation; rather, the benefit is incurred solely by the customer. Pursuant to the Advisory Committee’s request, Fandino presented a comparison between the 2012 and 2014 rate studies which also displayed how the studies compare to staff’s current proposed rate adjustment for FY 2015. In response to Member Stosel, Fandino confirmed that reserve funds will be used to subsidize voltage and interruptible service discounts for FY 2015. Fandino additionally reported and presented the forecasted expense differentials between the two studies. He further Ad Hoc Advisory Committee on Electric Rates May 7, 2014 Special Meeting Minutes Page 3 of 10 explained the debt service coverage requirements pursuant to both studies. Fox provided additional detail on the data. Chairperson Longstreet inquired on the actual revenue received as a result of the various rate increases. He explained his concern as there is a disconnect between the data and the revenues experienced; Vernon businesses are paying more than what was originally proposed. Longstreet recommended that the figures be tracked. Fox reported on the forecasted revenue requirements and debt service coverage based on staff recommended 5% rate adjustment. Chairperson Longstreet commented that the Light and Power Department is paying for sins of the past. In response to the Advisory Committee’s request, Fandino provided excerpts from previous presentations that provided information on future rate adjustment. In response to the Advisory Committee’s request for history on the rate stabilization account use, Fandino reported that since 2006, the City has subsidized electric rates with said fund. Fund proceeds have been used to fund system improvements and are forecasted to be depleted in two years. Pursuant to the Committee’s request, Fox presented on the rate stabilization fund from FY 2010 through 2014. Fox additionally presented and reported on the electrical system debt service which included a graph for all the various bonds in detail. Fox advised that the City is exploration options to smooth out the debt service and has solicited the help from its financial advisor, Public Financial Management, Inc., to provide assistance. In response to Member Stosel, Fox explained that the data is a total payment schedule and explained the increase to the 2012B bonds in 2023 due to the interest rate only set up for the first initial years. He additionally confirmed for Member Gutterman, that the 2009A bonds were for the hedging of the natural gas commodity. In response to Member Gutterman, Fandino advised that the 2008A bonds were for the purchase of the Jawbone Canyon property. Ad Hoc Advisory Committee on Electric Rates May 7, 2014 Special Meeting Minutes Page 4 of 10 In response to Chairperson Longstreet’s and Member Gutterman’s concerns and inquiries, Fox advised that future presentations will reflect data retroactively to 2008. In response to Vice Chairperson Corselli, Fox advised that the 2009A bond series do not have a prepay penalty. Fox further explained the data presented. Chairperson Longstreet advised that the business community cannot be responsible for all the debt service. The City needs to find a balance. Fox acknowledged the comments and advised that the City is reviewing options on ways to smooth out and refinance debt, and intends to use new money for capital expenses. Fox confirmed for Member Gutterman that the swap agreement is a separate contract, it’s a notional agreement. Member Gutterman reasoned that while the bond itself may not have a prepay penalty, the underlying swap agreement continues. He advised staff that all factors have to be considered and balanced. Fox acknowledged the need to balance the debt, provide rate relief for the customers, while not being overly burdensome. The situation is complex. The City knows what direction it needs to go but needs to review how to best approach the situation. For future presentations, Member Gutterman requested a slide presenting data from 2008 forward that combines the Light & Power Department debt service, the swap notional agreement, and the increase in the Bicent PPTA. In response, Fox advised that he would review the information and determine if it makes sense to present the information all together. Chairperson Longstreet opined that there is room for a legal charge against Citi Group for selling the City a reckless or faulty instrument. Alternatively, legal charge against the people that convinced the City to enter into this agreement. Fandino advised that the City did consider this option and unfortunately there is no recourse that the City can take now. In response to the Advisory Committee’s request for projection for 3, 4, and 5% rate adjustments for the next three fiscal Ad Hoc Advisory Committee on Electric Rates May 7, 2014 Special Meeting Minutes Page 5 of 10 years, Fandino presented on the data and debt service coverage. He concluded that said rate adjustments would not allow the City to meet its debt service coverage, nor maintain its reliability. In response to the Advisory Committee’s inquiry on what the City has done to address the pending increase to the PPTA with Bicent, Fox reported on the factors the City has considered. He further presented on the PPTA restructuring option that was proposed by Bicent. Fox concluded that the proposal is not a good option for the City at this time. Member Gutterman recalls that approximately two years ago, Bicent approached the City seeking the City’s approval for refinancing. The request was brought to the Advisory Committee, and at the time staff had indicated that the City simply needed to comply with the request. He is disappointed that now the City is in need and Bicent is not cooperative. Chairperson Longstreet advised that he appreciates the transparency, and inquired whether the City has any leverage. Fandino advised that the existing PPTA ends in 2028, terminating the relationship. Member Gutterman added that the PPTA is one component, the lease on the Malburg Generating Station (“MGS”) is separate. Electric Resources Planning & Development Manager Abraham Alemu confirmed that at the term of the lease the MGS reverts back to the City. The current lease is for 40 years. Gutterman suggested that staff remind Bicent that the City has negotiated in good faith. In approximately 30 years, the land lease will end. Michael Bell of Michael Bell Management Consulting conducted the presentation on the utility provider rate comparison for commercial users. Data for medium, large and industrial commercial users was presented from various Southern California Public Power Authority (“SCPPA”) members, the Los Angeles Department of Water and Power (“LADWP”) and Southern California Edison (“SCE”). Bell noted that SCE is facing several challenges including the closure of the San Onofre Nuclear Generating Station (“SONGS”) and the effects of the Energy Resource Recovery Account, which will most likely impact their rates substantially. Bell further Ad Hoc Advisory Committee on Electric Rates May 7, 2014 Special Meeting Minutes Page 6 of 10 reported on SONGS Order Instituting Investigation and its implications. He reported on potential rate increases for SCE. Information on LADWP was additionally provided. Chairperson Longstreet requested that a model be developed to chart the changes rather than presenting data for one point in time. In response, Fox confirmed that a model will be developed and that the rates will be tracked seasonally, and will also include data on charges to residents versus businesses. Is response to Member Stosel, Bell advised that historically electric rate adjustments have been born by the residents; however, due to Proposition 26, the burden has started to change. In further response to Member Stosel, Bell advised that a pass-through is common. Bell presented on projected rate increases for LADWP and SCE for fiscal years 2015 through 2017. Chairperson Longstreet advised that it would be helpful to see Vernon in the comparison. Member Stosel requested that residential rates also be included. Bell reported on regional utility challenges and on factors influencing future rates. He concluded that Vernon’s rates are competitive with other local utilities, but no longer reflect historical margins. Fandino reported that the Crossborder study recommends a rate adjustment of 6.3%, but advised that staff is recommending a 5% rate adjustment effective July 1, 2014, which will include an approximate $1.8 million subsidy from operating reserves. He noted that only the 2014-2015 FY is being addressed as staff will revisit electrical rates to address FY 2016. Member Gutterman thanked staff for the additional information. He sought clarification on whether the Committee serves as an advisory or transparency committee. In response, Fandino clarified that staff is not looking for a recommendation from the Committee; but rather, make the information available. Fandino reported that staff will be presenting their proposed rate adjustment to the City Council. All are welcomed to attend and state their recommendation or comments. Chairperson Longstreet advised that the Committee has attended Council meeting in the past to voice comments and recommendations. The Committee is here to represent the Ad Hoc Advisory Committee on Electric Rates May 7, 2014 Special Meeting Minutes Page 7 of 10 consensus of the constituency of its citizens, businesses and labor, as they need to be represented. Longstreet stated that Vernon has to be a place for savings or efficiencies. The City must find better solutions to financial challenges. He is disappointed that Vernon is a high cost provider for utilities. Fandino advised that the services in Vernon are extraordinary. However, Longstreet advised that if companies can not make money, they can not do business. Longstreet opened for public comment. Greg Whitton Plan Manager at Pactiv, a high electric user in Vernon, agrees that the information shared today was much more detailed and responsive than the previous meeting. To illustrate the comparison of electric rates in Vernon to other utilities, Whitton reported on an operation in Santa Fe Springs that produces similar products, but is more cost effective under SCE. Whitton offered Bell access to the data, so that a month-to- month comparisons can be conduct. He additionally inquired whether the incentives that SCE and LADWP provide are reviewed and incorporated into the rate comparison as he has taken advantage of these incentives in the past and found them to be beneficial. Whitton further inquired why the City is not more aggressive in smoothing out the demands of the system debt service. He advised that it appears that the City is in a better position to negotiate now than it was, for example, two years ago. In response, Fox advised that the City’s intention is to address the bond debt and look at different options within the next fiscal year. In response to Whitton’s inquiry on whether there could be some relief to the rate payers in the future, Fox explained that as the City addresses the bond debt issue, if there is a significant savings, staff could then recommend a rate adjustment but cautioned that there are a number of different steps in bond financing and that the process will take time. Whitton advised that Pactiv works hard on energy efficiency, and intends to continue on this path. Other businesses will do the same and it will affect electric rate revenues. Ad Hoc Advisory Committee on Electric Rates May 7, 2014 Special Meeting Minutes Page 8 of 10 Steve L’Ecluse of Bandini Truck terminal, Inc. thanked all for their hard work. The Committee asked the right questions. The electric service revenue is decreasing because businesses are trying to cut costs. L’Ecluse inquired whether the City is restricted from selling to SCE. In response, Fandino reported that SCE conducted a request for quotes (“RFQ”) last year seeking power plant proposals from enterprises. Vernon’s joint proposal with Bicent was not accepted. Chairperson Longstreet inquired whether Vernon has the ability to generate revenue from the sale of existing capacity. In response, Fandino explained that options are being considered in order to position the utility to be able to provide service to others. However, he advised that the majority of the capacity is used to service the native load. The City is limited because it has fixed power and does not have an additional power plant to provide more power. Alemu added that the City bids capacity into the California Independent System Operator (“ISO”); however, sales depend on how much the ISO needs. The City makes excess load available to the market. In response to Chairperson Longstreet, Alemu reported on average load use versus the load capacity. He noted that all power plants bid/sell into the ISO; sales depend on the demand. Marisa Olguin of the Vernon Chamber of Commerce thanked staff. For future meetings, she requested detailed information on the forecasted revenue and on the actual figures. She requested information on the interruptible service discount cost and inquired whether there is an opportunity to make adjustments. Olguin advised that the structural transfer to the General Fund allows approximately 11%, but requested information on the actual figures. She further inquired how the General Fund transfer affects and factors into projections and the recommendation to increase electric rates by 5%. In response, Fandino explained that the interruptible service rate provides for a positive cash flow to the City. The City experiences a savings by providing the discount, otherwise the City would have to go and procure the resource adequacy in the market. Ad Hoc Advisory Committee on Electric Rates May 7, 2014 Special Meeting Minutes Page 9 of 10 Fandino further advised that the revenue projections include a low load growth. Outside pressures not related to the utility that are causing businesses to close down. However, Fandino noted that the City is still seeing new customers; the load usage has remained flat and it is projected that it would remain stable. In response to Olguin’s inquiry, Fox advised that if the utility is doing less well than what was anticipated, the transfer to the General Fund is less. The General Fund does not take more than what is budgeted, but does take less as appropriate. In response to Chairperson Longstreet, Fandino advised that the next step is to present the 5% rate adjustment to the City Council and the use of the rate stabilization fund to subsidize expenses. It is anticipated that the recommendation will be presented during the 1st Council meeting in June. Additionally, Fox advised that the Council will be briefed on the strategies that were discussed today regarding the bond debt. As part of future meetings, Chairperson Longstreet requested information on the strategies to reduce the bond serve debt, and their viability so that businesses can experience rate relief. Vice Chairperson Corselli recommended that staff compare the electric rates to those throughout country. He cautioned that businesses might not stay if they do not see some rate relief on the future. Member and City Administrator Mark Whitworth advised that the City intends to make the state aware of the struggles to attract and retain businesses. State is aware of their need to be a facilitator of manufacturers or be faced with difficult decisions. The City is dedicated to ensuring that the state fulfills this commitment. Member Stosel stated that there is a light at the end of the tunnel; however, there is a risk that some businesses will not make it to the end. Stosel requested information on the City’s options to mitigate the debt. He encourage staff to engage the community, and requested earlier notification of when rate adjustments are being considered. In response to Member Stosel, Fox advised that initially staff was considering rate adjustments for the next three fiscal years. However, in consideration of the bond serve debt Ad Hoc Advisory Committee on Electric Rates May 7, 2014 Special Meeting Minutes Page 10 of 10 uncertainty, only one year is being considered. This will allow staff time to address the bond service debt and make a determination on how to move forward. If a solution allows, staff will make recommendations to either stabilize the rates or provide some relief. Additionally, Fox noted that the proposed 5% rate adjustment is less than what was recommended by the Crossborder study. The City wants to demonstrate to the businesses that they are being heard and that they are considered in the recommendations. The City is taking a conservative approach. The City wants to remain competitive as it moves forward. With no further business, at 10:33 a.m., it was moved by Corselli and seconded by Gutterman, to adjourn the meeting. Motion carried, 5-0. ________________________ W. Michael McCormick Mayor ATTEST: ______________________________ Ana Barcia Deputy City Clerk