Basing Rate and Investment Decisions on Long-Term Financial Planning

Facing declining electric fund balances, officials of the City of Wadsworth, Ohio, felt concern. Significant capital expenditures had been made, and the debt impacts of those decisions, along with billing challenges, suggested the need for an external review of the electric fund. The City brought in the consulting team from Utility Financial Solutions LLC in order to develop independent, longer term projections that look beyond their more typical two-to-three year planning time-frame.

To help public power utilities obtain professional financial analysis and guidance, Hometown Connections has allied with Utility Financial Solutions LLC. UFS specializes in financial planning, cost of service and rate designs for municipal electric, water, wastewater, and telecommunications services. UFS officials are recognized experts and frequent instructors for the American Public Power Association courses on financial planning, electric unbundling, and developing financial plans.

According to John C. (Chris) Easton, Director of Public Service, “UFS came highly recommended by the finance staff of our joint action agency, American Municipal Power.” The City of Wadsworth requested initially that UFS provide an electric fund projection and rate recommendation. However, after examining the projections, the City Council and administration agreed to hire UFS to provide a cost of service study and other rate analyses, as well as establish a cash reserve policy for the electric fund.

“Mark Beauchamp and his staff at UFS looked not only at our numbers and what they implied; they were able to explain how we compared to other municipalities and industry practice,” said LeeAnn Dunkle, Assistant Auditor. “UFS has been very professional and timely in the delivery of financial services to Wadsworth.”

Chris Easton emphasized, “The most direct benefit provided by UFS is to diversify knowledge within our organization. With access to the clear and concise reports from UFS, the administration, City Council, finance division, and electric division have a much higher level of understanding of the operations, debt, and health of the electric fund. That knowledge has led to new policy decisions on investments in capital and operations. Currently, UFS is in the preliminary stages of designing time-of-use (TOU) rates for the City of Wadsworth. Their work will likely be the basis of a draft TOU rate ordinance for Wadsworth in the 1st quarter of 2012. They seem to tailor their work for our specific environment, and that helps us convey information to policy makers and City Council.”

Easton added, “UFS has broad experience in the municipal electric utility environment. The firm understands smaller systems, has a reasonable rate structure, and should be included in all APPA member requests for qualifications for financial services and rate design.”

For Rochester Public Utilities in Minnesota, a primary challenge is change in its power supply situation. Prior to 2000, RPU worked under a full-requirements agreement with its joint action agency. In 2000, RPU ended the full-requirements arrangement and agreed to a contract-rate-of-delivery (CROD) arrangement, which capped the utility’s supply at a specific MW level. The utility conducted a cost of service/rate study in 2003, but the load at that time did not significantly exceed the amounts supplied under CROD. However, since then, RPU’s load has grown to where more of the load exceeds the CROD limit and is purchased on the open market.

By Susan Ryba

 

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