2005 AGN DEC 06 I04 - Laserfiche WebLink

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ITEM #4 CITY OF COLTON AGENDA REPORT FOR COUNCIL MEETING OF DECEMBER 06, 2005 TO: Honorable Mayor and Council Members FROM: Jeannette Olko, Electric Utility General Manager SUBJECT: Request for Approval of Electric Rate Increase DATE: November 23, 2005 BACKGROUND: At the Electric Utility Workshop on February 8, 2005, a five-year business plan for the electric utility was presented to council. The purpose of the business plan is to help management assess the existing condition of the utility, establish goals and objectives, create a plan to achieve those goals, and provide a tool to communicate with the City Manager, City Council, Utilities Commission, and the community. One of the first goals set forth in the business plan was to complete a cost-of-service/rate design study. There are several reasons for the study: (1) an independent cost -of -service study has not been performed since 1994; (2) the utility has been unable to build adequate cash reserves in recent years, thus creating conflicts with the city's adopted financial policy and placing the utility at greater financial risk; (3) the mix of resources in the utility's resource portfolio has changed significantly since 1994; and (4) it is good business practice to review and adjust rates every few years, and the utility's base rate has not been adjusted since 1994. On January 18, 2005, the City Council approved the award of a contract to Navigant Consulting, Inc. ("Navigant"), to perform a cost-of-service/rate design study for the electric utility. The purpose of the study was to determine if the existing rate structure was appropriate given the current cost structure, and to recommend new rates, if necessary, that are equitable, fair, nondiscriminatory, based on the cost of providing service, produce sufficient revenues to meet revenue requirements, and provide overall rate stability for the utility. Navigant worked closely with staff in evaluating the utility's operating costs, load data, large customer contracts, and developed annual revenue requirements for three fiscal years. The utility's budget and accounting data was converted into a functionalized revenue_ requirement that is consistent with the rate setting methods and approaches discussed in the National Association of Regulatory Utility Commissioners (NARUC) cost -of -service manual. DISCUSSION/ANALYSIS: A joint workshop with the City Council was held on September 13, 2005, that offered a short course on electric utility revenue requirements and electric rate development. The results of the cost -of -service study were also presented to everyone attending the workshop. The results revealed that the current rate structure does not allow the electric utility to fully recover its revenue requirement; in fact, the electric utility is projected to under -collect its revenue requirement by $2.66 million for fiscal year 2005-2006. This means that the utility is not charging enough in its base electric rates to recover the cost of providing electric service to its customers. Therefore, an