PURPOSE

Staff presents a way to provide an additional $42,000 in savings to the Burbank Unified School District (BUSD) under its current Electrical Services Agreement (Agreement) with Burbank Water and Power (BWP).

BACKGROUND

In 1992, the Burbank City Council (Council) had cut the electric and water rates to the BUSD by half. BUSD had ailing finances, and cutting utility rates was one of the few ways that city governments could provide assistance to their local school districts. BUSD saved hundreds of thousands of dollars each year thanks to these rate subsidies.

By 1997, BWP had become very concerned about its ability to survive in the more competitive business environment that the utility industry expected deregulation to bring. Along with other measures intended to make BWP more competitive, Council authorized BWP to end the electric rate subsidy to BUSD. (The 50% water rate subsidy continues to this day.)

BWP ended the subsidy by entering into a 14-year Agreement with BUSD (per Council Resolution 25079 dated June 24, 1997). Under the Agreement, BWP phased out the subsidy over the first four years (FY 1997-98 through FY 2000-01), so as to lessen the impact on BUSD. As a

further mitigation measure, BWP supported BUSD�s conservation spending at the rate of $100,000 per year for five years (FY 1997-98 through FY 2001-02).

BUSD receives a 10% discount on part of its electric rates during the first seven years of the Agreement (FY 1997-98 through FY 2003-04), and faces a 10% premium during the last seven years of the Agreement (FY 2004-05 through FY 2010-11). BWP had expected to lower its rates considerably by 2004 as a result of the lower-cost power supply market that it expected deregulation to create. Under that scenario, BUSD would have a smaller electric bill after July 2004, even with the 10% premium, than it had before July 2004, even with the 10% discount.

As we know now, deregulation failed. It raised prices instead of lowering them. Under the Agreement, BUSD has the �right to reopen negotiations on or after July 1, 2004, should the average cost of electricity not drop 25% or more� by July 1, 2004. In a recent joint meeting of the Council and BUSD, BWP staff reviewed the Agreement and several ways in which it could be modified. Council directed BWP staff to continue exploring appropriate ways of assisting BUSD with its electric bill.

BWP staff re-examined the Agreement as part of this exploration and refined its method of calculating the 10% discount. As a result, BUSD could realize a present benefit of $42,000 in addition to any benefits it may receive from modifying the Agreement itself.

ANALYSIS

Under Section 4 of the Agreement, BUSD is to receive a �10% discount on the Generation Rate, or its equivalent, through June 30, 2004.�  The reference to a �Generation Rate� reflected BWP�s belief at the time that deregulation would entail unbundled rates. As mentioned earlier, deregulation got derailed. BWP did not have to unbundle its rates and chose not to do so.

BWP did use a rough �equivalent� to an unbundled Generation Rate (Equivalent Rate) back in July 1997, when it needed to establish the 10% discount. However, the Equivalent Rate does not take into account all of the factors that an unbundled Generation Rate would have needed to address. When BWP staff re-examined these factors recently, it concluded that there is room at the policy level to increase the savings to BUSD from the 10% discount.

The Equivalent Rate should recover only those generation-related costs that an unbundled Generation Rate would recover. Generation-related costs generally include:

     �        Fuel for on-site generation, including fuel transportation and storage

     �        Power purchased through long-term contracts

     �        Power purchased through the daily spot market and other short term arrangements

With one or two exceptions, a Generation Rate would not cover the non-fuel costs of BWP�s existing on-site generation. The primary purpose of on-site generation is to help maintain the reliability of BWP�s local distribution system, by being available in case BWP loses off-site power. When on-site generation does run, it does contribute to the power supply and so BWP can legitimately count fuel costs against power generation rather than against power distribution.

The electric rates are made up of the Electric Base Rates (Base Rates) and the Energy Cost Adjustment Charge (ECAC). The Base Rates cover the costs of administration, billing, electric distribution and the non-fuel costs of BWP�s existing on-site generation; none of these would form part of the Generation Rate. The ECAC covers the generation costs mentioned earlier, as well as several additional items:

     �        Water and chemicals for on-site generation

     �        Long-distance transmission

     �        Streetlighting Transfer

     �        In-Lieu Tax

     �        Public Benefits

     �        Costs of funding for competitiveness

The Equivalent Rate results from subtracting the non-generation elements from the ECAC.

Like fuel, power plant water and chemicals come into play when the on-site units are operating. They are clear-cut generation costs and the Equivalent Rate should include them. In contrast, long-distance transmission costs are distinct from generation costs and the Equivalent Rate should exclude them. The Equivalent Rate developed in FY 1997-98, the first year of the Agreement, did take these first two factors into account:

ECAC                                                     6.73   cents per kWh

Less: Transmission                                (0.93) cents per kWh

Equivalent Generation Rate                   5.80   cents per kWh

10% discount                                        0.58   cents per kWh

The discount of 0.58 cents per kWh is still in use today. Staff proposes that the calculation of the discount also take into account the following factors:

�        The Streetlighting Transfer (currently set at 1.25% of retail revenues) strictly addresses streetlighting costs, and should not be a part of the Equivalent Rate. Neither should the In-Lieu Tax (currently at 5.0% of retail revenues), which is also not a generation cost.

�        In January 1998, the electric rates uniformly increased by 1.0%, including the ECAC. This increase was to help BWP meet its Public Benefits Program spending obligation, a cost item distinct from generation and therefore one that the Equivalent Rate should continue to exclude. (The Equivalent Rate remained at 0.58 cents per kWh even after the 1.0% increase.)

�        In July 1998, both the Base Rates and the ECAC increased by 5.00% to build up a �Rate Stabilization Fund� to help BWP achieve competitive power generation costs in the future. However, costs of funding for competitiveness, though recoverable from the ECAC, are distinct from generation costs and should remain outside the Equivalent Rate.

The three modifications just described have the effect of lowering the Equivalent Rate. However, there are also adjustments that have the effect of raising the Equivalent Rate:

�        In July 1999, the Base Rates and the ECAC increased a further 3.47%, this time to meet increased current-year costs, including those for generation. (No rate increase occurred in FY 1999-00.)

�        In July 2001, the Base Rates and the ECAC increased by 10%; and in October 2001, only the ECAC increased by an additional 15%. The 2001 rate increases were needed to help BWP meet sudden increases in power supply costs owing to a severe Pacific Northwest drought and what had become dysfunctional deregulation. (For example, BWP was forced to make forward gas purchases in order to hedge against catastrophic price increases in natural gas or purchased power.)

The Equivalent Rate should take into account the rate increases in 1999 and 2001. Arguably, the Equivalent Rate could include the entire dollar amount of these rate increases, not just the amount associated with the ECAC increases. But staff could also argue that the Base Rate increases were covering rises in non-generation costs. (Staff has taken the conservative approach of considering only the ECAC increases as eligible for inclusion in the Equivalent Rate.)

BWP staff can adjust the Equivalent Rate to take into account factors that were not considered initially. The new algorithm would still involve adjusting the ECAC. For each fiscal year since the inception of the Agreement:

     �        Start with the actual ECAC(s).

     �        Remove the In-Lieu Tax, the Streetlighting Transfer, the Public Benefits rate increase and the July 1998 rate increase by

           using the appropriate percentage multiplier.

     �        Then subtract out the transmission costs, expressed in cents per kWh. This gives the New Equivalent Rate. 

     �        Multiply the New Equivalent Rate by 10% to get the discount.

The computational details are available.

About $42,000 in extra savings results when BWP applies the New Equivalent Rate from July 1, 2001 through June 30, 2004. Under the Agreement, BWP provides utility service in accordance with its Rules and Regulations for Electric Service. Applying the New Equivalent Rate has the effect of changing the current billing to BUSD. Billing adjustments typically go back one year or, when warranted, at BWP�s discretion. For BUSD, it would be equitable to make the adjustment back to July 1, 2001; by this date, all of the adjustment factors are in place.

From July 1, 2001 to June 30, 2003, the New Equivalent Rate will provide about $26,748 more in savings from the 10% discount as compared with the current Equivalent Rate.

Taking the FY 2002-03 data as a guide, the New Equivalent Rate would provide an additional $15,000 in savings from July 1, 2003 to June 30, 2004. The total savings from the New Equivalent Rate through the end of the discount period would therefore be about $42,000.

FISCAL IMPACT

Regarding the current Agreement, the fiscal impact of recalculating the discount savings, using the refined New Equivalent Rate, is $42,000. Funds are available within BWP�s budget.

Any further savings to BUSD from renegotiating the Agreement would come at the expense of other customers or BWP�s ability to support the City�s General Fund.

RECOMMENDATION

Staff recommends that BUSD receive an additional $42,000 as the result of a more refined calculation of the dollar savings from the 10% discount currently specified by the Agreement. This adjustment would cover the period from July 1, 2001 through June 30, 2004, when the discount is scheduled to end. Staff also seeks direction from Council regarding possible Agreement renegotiations for the period beyond July 1, 2004.

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