PURPOSE

Staff presents the revised Electrical Services Agreement (Revised Agreement) between Burbank Water and Power (BWP) and the Burbank Unified School District (BUSD) for the Burbank City Council�s (Council�s) consideration.

BACKGROUND

In 1992, the Council had cut the electric and water rates to BUSD by half. BUSD had ailing finances and cutting utility rates was one of the few ways that our city government could provide assistance to the local school district. BUSD saved hundreds of thousands 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 electric utility industry expected deregulation to bring. Along with other measures intended to make BWP more competitive, Council authorized BWP to end the $400,000 annual electric rate subsidy to BUSD. (The 50% water rate subsidy continues to this day.)

BWP ended the subsidy by entering into a 14-year Electric Service Agreement with BUSD (Original Agreement, attached) per Council Resolution 25079 dated June 24, 1997. Under the Original 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).

Under the Original Agreement, BUSD also receives a 10% discount ($70,000) on part of its electric rates (the equivalent of the generation portion) during the first seven years of the Original Agreement (FY 1997-98 through FY 2003-04), and faces a 10% premium during the last seven years of the Original 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 deregulation was to have created. Under that assumption, 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 energy prices instead of lowering them. Under Section 5 of the Original 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. Note that this provision does not compel the Council to revise the Original Agreement.

At a joint meeting between the Council and the BUSD Board in July 2003, BWP staff made it clear that rates were not going to drop by July 2004, and the BUSD Board made it clear that they intended to reopen negotiations. Under the Council�s direction, BWP had reopened negotiations with BUSD well before July 2004 in order to allow a revised agreement to take effect beginning July 1, 2004. After several meetings, BWP and BUSD staffs have arrived at a Revised Electrical Services Agreement (Revised Agreement, attached) that they believe will work to their mutual benefit.

ANALYSIS

The Revised Agreement ties BUSD�s benefits to how successfully they lower their energy costs through their own internal efforts. At the same time, the Revised Agreement also gives BUSD the opportunity to develop the internal ability to generate energy savings. BWP staff believes that this approach honors the Council�s desire to build in greater energy accountability on BUSD�s part while providing BUSD with positive incentives to achieve this accountability.

The salient features of the Revised Agreement are:

• The term renews for 14 years: July 1, 2004 through June 30, 2018. (Section 5.1) 

• BUSD agrees to continue purchasing all of its electrical needs from BWP during the term of the Revised Agreement. Exceptions are: testing emergency generators for 50 hours or less per year and using emergency generators when service from BWP is unavailable. (Section 4.4) 

• BWP discontinues the 10% premium on the equivalent of the generation rate that would otherwise take effect for seven years beginning July 1, 2004. However, there is no longer to be an automatic electric rate discount. BUSD will pay the appropriate standard rates. (Section 4.1.) 

• BUSD can earn a percentage discount on the energy portion of its electric bill if it operates passive solar heating systems for one or both of its two high school swimming pools before June 30, 2006. (Section 4.2)

• For FY 2004-05, BUSD can earn a 10% discount for the entire fiscal year if it takes care of one swimming pool; a 20% discount applies to FY 2004-05 and FY 2005-06 if it takes care of both swimming pools within the fiscal year. (Section 4.2.1)

• For FY 2005-06, BUSD can earn a 10% discount for the entire fiscal year if it takes care of one swimming pool; a 20% discount applies if it takes care of both swimming pools within the fiscal year. (Section 4.2.2)

• BWP will rebate 25% of the installed cost of each passive solar heating system, not to exceed $95,000. This rebate is in addition to the $50,000 rebate offered to BUSD through BWP�s Energy Solutions business rebate program. (Section 4.2.3)

• The City and BUSD may meet and mutually agree on BUSD capital improvement projects that will generate annual resource savings. Should BUSD find it difficult to finance the capital improvements despite their economics, the City will consider financing these capital improvements if the savings are expected to service the City�s loan and provide a significant net present value to BUSD. (Section 4.2.4)

• For five years, to a limit of $160,000 dollars per year, BWP will pay for a BUSD Resource Conservation Manager (RCM), who is to facilitate the conservation of electricity, natural gas, water, solid waste, and other resources used by BUSD. (Section 4.3)

• For the first two years, FY 2004-05 and FY 2005-06, BWP will guarantee the cost of the RCM. (Section 4.3.1)

• For the next three years, FY 2006-07 through FY 2008-09, BWP will continue to guarantee the cost of the RCM, but will first deduct one-half the cost of any savings to BUSD before doing so. In FY 2006-07 only, BWP will also match, on a dollar-for-dollar basis not to exceed $50,000 per year, the amount by which the RCM Savings exceed the RCM Retention Costs. (Sections 4.3.2 and 4.3.3)

• From July 1, 2009 onwards, BUSD will bear all of the costs of the RCM, or may elect to discontinue using an RCM. (Section 4.3.4)

• BUSD agrees to integrate the RCM into its operation, providing full access to all resource-consuming activities of BUSD in order to provide the maximum possible opportunity for the achievement of economic savings. (Section 4.3.5)

• For the period up to June 30, 2009, BUSD will make the RCM available to the City at reasonable times for consultation up to a maximum of 200 hours per year. (Section 4.3.6)

• Yearly on or before March 31, 2005 through 2008, the City and BUSD will review the RCM�s services and jointly make a recommendation to the City Council and Board of Education regarding the continuation of the RCM�s services for the subsequent fiscal year. (Section 4.3.7)

With the exception of the RCM provisions, the main features of the Revised Agreement are probably familiar to both Council and the BUSD Board from earlier public discussions:

• In view of the failure of deregulation to produce lower rates, it seemed fair to eliminate the 10% premium, especially when considering that the City never intended it to result in an increased BUSD electric bill compared to that in 1997.

• Both the City and BUSD recognize that passive solar heating for the swimming pools promises to generate ongoing energy savings for BUSD. (And the BUSD Board has already approved the design and construction of passive solar heating for both schools at its March 18 meeting.)

The RCM provisions represent a way of creating savings for BUSD that are directly related to BUSD�s conservation efforts.

A RCM for BUSD is an effective means to provide benchmarking and tracking of results. In earlier discussions with Council and the BUSD Board, it was suggested that BUSD�s incentives be tied to how well it kept its electricity usage below an established benchmark. In 2001, the City had adopted a similar approach and achieved an overall reduction of 13% in its energy bill. There had been virtually no investment in energy saving devices; nearly all the savings were due to City employees changing their habits. They turned off their computer monitors at night, did not leave the lights on when they left their offices, and lived with slightly higher temperature settings during the summer.

Although the City�s approach served it very well during a difficult period, it becomes problematic as a long-term approach:

• Variations in weather and school activities would complicate an apples-to-apples comparison of electricity consumption from one year to the next. 

• Even aside from the variations just mentioned, it is difficult to determine a straightforward baseline. Merely using the consumption of a given baseline year could unwittingly reward lax conservation efforts in that year, or on the other hand penalize vigorous conservation efforts in that year.  

• Most BUSD buildings are new and already incorporate cost-effective energy saving features. Some BUSD buildings are still under renovation and could not provide a stable benchmark figure at this time.

Perhaps staff�s strongest misgiving about having BUSD adopt the City�s approach is that it focuses BUSD on meeting BWP�s expectations rather than fostering internal accountability to its own conservation goals. Based on the experiences of other organizations, using an RCM would foster this accountability as well as widen the focus to other resources besides electricity.

The next steps would involve issuing an RFP for an RCM. BWP staff has identified several reputable RCM firms. The San Diego school district, among others, had recently engaged the services of an RCM on an RFP basis and could provide BUSD staff with additional candidates. Issuing the RFP and selecting the firm would probably occupy the summer, with an RCM fully aboard by the early fall. It is expected that the RCM would be able to make significant progress during the remainder of the fiscal year.

FISCAL IMPACT STATEMENT

Despite rising fuel costs, BWP has been lowering its costs and developing new revenue sources in order to establish its fiscal health and to position it to be competitive in volatile energy markets. The Revised Agreement effectively allows BUSD to benefit from BWP�s efforts.

Under the Revised Agreement, BUSD could receive up to $1,672,000 in benefits from BWP: up to $490,000 from the waiving of the 10% premium, up to $95,000 for the installation of solar heating, up to $287,000 from discounted electric rates for the operation solar heated swimming pools, and up to $800,000 from supporting a RCM.

• For the next seven years, BUSD would save up to $70,000 per year as a result of the City discontinuing the 10% premium on the generation portion of BWP�s electric rate, for a total savings of $490,000.  (At an interest rate of 3.33%, the present worth of these savings would be about $325,000.) Depending on the timing and extent of future general rate reductions, the lost revenue could be less. 

• Over the next two years, BWP could pay $42,500 to partially support the cost of installing passive a solar heating system at Burbank High (25% of the estimated $170,000 cost) and $52,500 for Burroughs High (25% of $210,000), for a total estimated cost of $95,000. (In no case would BWP�s support exceed $95,000.)   

• If both solar heating systems were operated before the end of FY 2004-05, BUSD would receive a 20% discount on the generation portion of its electric bill for the next two years, for an estimated savings of $143,500 per year, or $287,000 for the two years. (The energy portion of the ECAC is 7.316 cents per kilowatt-hour (kWh); the 20% discount on this portion is 1.463 cents per kWh. Multiplying this discount by BUSD�s estimated annual consumption of 9,811,000 kWh per year yields the $143,500 estimated annual savings.) 

• For the first five years, BWP would pay between $370,000 and $800,000 for an RCM, depending on the extent to which BUSD realizes savings in the third, fourth and fifth years.

Against these costs can be weighed the guaranteed retention of BUSD as a retail customer of BWP, the benefits of using the RCM for City concerns (up to 200 hours per year) and the public policy benefit of lowering ongoing facility costs for Burbank�s public schools.

RECOMMENDATION

Staff recommends that the Council approve the Revised Agreement, with an effective date of July 1, 2004.

c:          Dennis Barlow, City Attorney

Dr. Greg Bowman, BUSD Superintendent

Joanne Fletcher, Manager, Customer Service

Jeanette Meyer, Marketing Manager

Attachments.

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