PURPOSE

Staff is requesting City Council (Council) approval of a long-term Electric Service Agreement (Agreement) between the City of Burbank (City) and Providence Health System Southern California dba Providence St. Joseph Medical Center (St. Joseph).  Staff is also requesting Council to authorize the Burbank Water and Power General Manager (BWP General Manager) to execute the Agreement on behalf of the City.

BACKGROUND

In spite of the failure of electric utility deregulation in California several years ago, there are still good reasons for BWP to enter into long-term Agreements with its largest customers.  Foremost among them is BWP�s commitment to cost-of-service based electric rates that also encourage energy conservation when electric power is especially costly.

BWP has authority to pursue long-term Agreements with its large electric customers.  At its December 15, 1998 meeting, the Council authorized BWP �to pursue developing mutually beneficial, long-term power supply contracts between itself and each of its large electric customers.�  Specific contract proposals were to be brought back to the Council for approval.  These proposals are taking the form of customer-specific Electric Service Agreements with an initial term of seven years.

At first, the threat of deregulation was a motivating factor for pursuing Agreements with BWP�s largest customers. Deregulation gave customers of investor-owned utilities (IOUs) the right to choose their own provider of electric generation services. (Public-owned utilities like BWP did not have to grant this right, and all utilities retained their monopolies over the local delivery of electric power.)  This right of �direct access� would presumably stimulate the construction of state-of-the-art power plants that generate power at a much lower cost than the traditional utilities could generate it.  Enough of these plants were to be built, it was supposed, so that competition would keep the price of power close to this new, lower cost of producing it.  The hoped-for result: lower rates for everyone.

During its first year or so, deregulation looked credible.  Natural gas and energy prices remained stable, new power plants were being engineered, and an army of marketers was urging customers to switch from their old utility to one of the new power providers.  Large customers were the most attractive targets because of the economies of scale in servicing them. By the end of 1999, about 20% of the IOUs largest customers had chosen direct access (as compared with just 3.6% of small commercial customers and 1.8% of residential customers).

Although the City did not have direct access, that didn�t stop the marketers from telling BWP�s large customers how much they could save on their electric bills if only the Council were to grant them direct access. The marketers paid particular attention to BWP�s four largest customers: Walt Disney Productions, Warner Bros., NBC West and St. Joseph�s Medical Center.  Individually, these customers contribute 2.5% or more to annual retail electric sales; collectively, they contribute about 18%.  (St. Joseph contributes 2.5%.)

BWP responded by developing long-term Agreements that would move its largest customers toward lower, cost-of-service based rates in return for them not agitating for or otherwise pursuing direct access. (The January 2000 Revised Competitiveness Plan referred to them as �Tier #1 Customers.�)  BWP entered into seven-year Agreements with Warner Bros. (effective July 1, 2000) and NBC West (effective January 1, 2001).

In 2001, deregulation had ceased to be a threat, but power supply markets had become much more volatile.  By the summer of 2001, it became abundantly clear that deregulation in California had failed miserably. New capacity of any significance had not come on line, and a drought in the Pacific Northwest had reduced the amount of available hydroelectric power. The Customers served by the California Independent System Operator (CAISO) suffered rolling blackouts and were bombarded with alerts of possible blackouts. Worse, deregulation had opened the door for unethical marketers to gouge customers and bankrupt IOUs and the California Power Exchange.

The years immediately after California�s deregulation debacle have seen higher and more volatile energy costs than were contemplated by the proponents of California�s attempt at electric deregulation.  During this period BWP concentrated on improving Burbank�s system reliability and cost position by substantially increasing its ability to transfer power into or out of the City and modernizing or replacing its power supply resources making them reliable, clean and economic.  Additionally, BWP:

• continued to develop its recent initiative in wholesale trading activities thus improving the utilization of Burbank�s assets when they are not immediately required to serve the needs of the City of Burbank.  BWP also developed and adopted formal energy risk management policies and increased forward energy and fuel purchasing practices when prices are favorable.

• built the Lake 1 generating unit, which helps provide electric reliability and stabilize power costs during the hot summer months. It rebuilt and retrofitted its Olive 1 & 2 generating units with the best available air emissions equipment, lowering air emissions by over 90%.  And it retired several older inefficient generating units.

• is building the Magnolia Power Project, a state-of-the art, fuel-efficient and ultra-low air emissions combined cycle power plant.

Today, BWP recommends the resumption of offering customers with an electrical demand greater than 4,000 kVA long-term service agreements as part of its commitment to phase in cost-of-service based rates for all its customers and to encourage off-peak energy use through time-of-use rates where feasible.  Large customers cost less to serve than smaller customers; they require less capital investment per unit of capacity. This is true of BWP�s four largest customers, which receive significant service at the higher, �primary� voltages.  BWP does not have to invest in electrical lines and equipment that would otherwise provide these customers with the lower, �secondary� voltages (such as 120 volts) customarily used within residential and commercial buildings. 

For all of its failures, deregulation did create an increasingly competitive utility industry and a customer expectation that electric rates be based on reasonable evaluations of the costs of serving each particular class of customers.  BWP�s January 2000 cost-of-service study revealed that the cost of delivering electric power to residents and small businesses was being subsidized by the largest customers.

BWP continues to be committed to implementing electric rates that are cost-of-service based for all customer classes.  It is equally committed to achieving this in a manner that does not create an increase in the total electric bill for any customer class.  By phasing in cost-of-service based rates BWP is able to meet both of these goals.   For those customers whose rates have been the most out of balance, the very largest ones, a long-term agreement is a well-suited mechanism for this phasing in of balanced rates.

Together with the Standby Service Charge, Agreements can discourage self-generation based upon false economies. With or without direct access, customers have always had the option to generate their own power; for example, by using diesel generators. Many customers who self-generate choose to remain connected to the local utility so that it can serve as a source of back up power when needed.  In June 2004, the Council adopted a Standby Service Charge that generally assures BWP will be recovering the costs of being able to deliver power to self-generating customers who remain connected to the utility. (At present, there are no self-generating customers.)

The Standby Service Charge discourages self-generation based on false economies; however, there are still cases where self-generation may be economically attractive. For example, if exhaust heat from a customer�s generating unit could be used in lieu of heating from natural gas (cogeneration) then the customer enjoys natural gas as well as electricity savings. Cogeneration can be attractive for large hospitals like St. Joseph, where the heating requirements of sterilization and patient care are substantial and relatively consistent.

BWP has invested substantial funds in equipping all of its generating units with the best available air emissions equipment.  Even the low emission self-generation equipment has substantially higher air emissions.  So even assuming all of the customer�s service needs would be met by BWP�s local generating units, providing customers with an inappropriate incentive to self generate would not only be unfortunate from an economic perspective it would result in substantially higher local air emissions.

St. Joseph is ready to enter into an Agreement with the City.  For all of the reasons just mentioned, staff pursued a long-term service agreement with St. Joseph which would provide savings to the hospital and allow the City to retain St. Joseph as a full requirements customer and avoid uneconomic air emissions. A copy of the Agreement is attached for the Council�s review.  Council authorization is needed before the BWP General Manager can execute the document.

ANALYSIS

The major commercial terms of the Agreement are:

• Term

• Electric Rates

• Uncontrollable Force

• Public Benefits

The initial term is for seven years.  The initial term is to begin January 1, 2005, and remain in effect through December 31, 2011. The term of the Agreement is not affected by any decision about direct access.

St. Joseph�s electric rates are unbundled and based upon Time of Use. The rate elements separately capture the cost of providing power delivery and power supply services:

• The Power Delivery Service Rates cover all distribution costs, administrative costs, and other costs related to delivering electric power once it leaves the local power plants or reaches Burbank from the outside world.

• The Power Supply Service Rates cover all the costs of generating power and bringing it to Burbank.

The intent of these electric rates is to move St. Joseph to cost-based delivery rates and provide St. Joseph with incentives to install equipment which will improve off-peak energy utilization.  The economic result is a 9.9% (about $292,000) savings per year on their electric bill for the first three years of the Agreement. This assumes that St. Joseph continues to have an energy use pattern similar to that during Fiscal Year 2003-04. Changes in usage levels or patterns (in response to time-of-use rates, for example) will vary the actual savings.

In addition to the electric rates just mentioned, St. Joseph would see two other billing items:

• The Street Light Charge is set by the Council. The current rate is 1.25% of the total bill amount (1.29% of subtotal before the Street Light Charge and Public Benefits Charge).

• The Public Benefits Charge is also set by the City Council. The current rate is 1.85% of the total bill (1.909% of subtotal before the Street Light Charge and Public Benefits Charge).

Power Delivery Service Rates.  The Delivery Service Rates consist of a Service Charge ($/meter) and a Billing Demand Charge. The Service Charge Rate is $100 per meter for the entire term of the Agreement. The monthly Service Charge is the Service Charge Rate multiplied by the number of meters.

The Billing Demand Rate ($/kVA) is fixed for the first three years, and then escalates at 2% per year for the final four years:

The monthly Billing Demand Charge is the Billing Demand Rate multiplied by the actual kVA demand for the month, but not less than 4,000 kVA.

Power Supply Rates, first three years. The Power Supply Rates consist of a Reliability Service Rate and a seasonal time-of-use Energy Rate. The Reliability Service Charge ($/kVA) covers the fixed costs of local peaking generation (Lake 1, Olive 3, and Olive 4) and reserve units (Olive 1 and Olive 2). The Energy Charge ($/kWh) covers all the costs of baseload power supply resources like MPP, power purchases, and fuel and transmission charges.

The Reliability Service Rate is fixed at $6.05/kVA for the first three years of the Agreement. The Reliability Service Charge is the Reliability Service Rate multiplied by the actual kVA demand for the month, but not less than 4,000 kVA.

The seasonal time-of-use Energy Rate consists of a Summer On-Peak Rate, a Mid-Peak Rate, and an Off-Peak Rate. The Energy Rate is designed to yield a $0.0717/kWh average based on FY 2003-04 billing determinants. The Summer On-Peak Rate is 1.626 times this average, the Mid-Peak Rate is 1.100 times this average, and the Off-Peak is 0.813 times this average (making it half of the Summer On-Peak Rate). 

Depending on the hospital�s response to these time-of-use rates, the actual average cost under the Agreement may be greater or lower than the average based on FY 2003-04 use patterns.

The time-of-use periods are the same as those in the Agreements with other larger-than-4,000 kVA customers (Warner Bros. and NBC West):

            On-Peak:         Noon to 6:00 p.m. summer weekdays except holidays

            Mid-Peak:        8:00 a.m. to Noon and 6:00 p.m. to 11:00 p.m. summer weekdays,

except holidays, and 8:00 a.m. to 9:00 p.m. winter weekdays, except

holidays.

            Off-Peak:         All other hours.

Holidays are New Year's Day (January 1), President�s Day (third Monday in February), Memorial Day (last Monday in May), Independence Day (July 4), Labor Day (first Monday in September), Veterans Day (November 11), Thanksgiving Day (fourth Thursday in November), and Christmas (December 25). When any holiday falls on Sunday, the following Monday will be recognized as an off-peak period.  No change will be made for holidays falling on Saturday.

The summer season commences at 12:00 a.m. on the first day of June and continues until 12:00 a.m. of the first day of November of each year.  The winter season commences at 12:00 a.m. on the first day of November and continues until 12:00 a.m. of the first day of June of the following year.

The time-of-use Energy Rates are designed so that St. Joseph is charged more for its electric power in the summer than in the winter, and more during the business day than at other times.  While it is problematic to implement time-of-use rates right away for all customers, BWP has readily implemented them for Warner Bros. and NBC West.  And like them, St. Joseph is a very large customer that is in the best position to respond to time-of-use price signals; it has the resources to invest in systems and equipment that reduce energy use during hot summer afternoons and other on-peak (read costly to serve) periods.

Power Supply Rates, next four years. Beginning January 1, 2008 and continuing through December 31, 2011, the Power Supply Rates shall be equal to the power supply component of the tariff rate of general application for large, primary voltage, general service customers.  If the tariff rate of general application does not include time-of-use provisions at that time, BWP will scale the Reliability Service Rate and the time-of-use Energy Rates so that St. Joseph retains savings that result from load shifts it may have achieved in response to the time-of-use Energy Rates.

Not withstanding circumstances related to time-of-use rate impacts, under no circumstances shall the sum of Reliability Service Charge and the Energy Charges for St. Joseph exceed the level of charges for power supply charged to large primary voltage customers on the tariff rate of general application for these customers. 

Uncontrollable Force may apply under certain power market conditions.  BWP may suspend the rate provisions of the Agreement temporarily if at least one of the following occurs:

• The price of natural gas for delivery at Topock exceeds an average of $9.00 per million Btu for any three-month period.

• The on-peak price of energy at Palo Verde or NOB exceeds an average of $90 per megawatt-hour for any three-month period.

• An outage or curtailment of the Magnolia Power Plant, Intermountain Power Authority coal-fired power plant, or Southern Transmission System occurs that is projected to, or does exceed 90 days.

Note that BWP is not required to take advantage of the Uncontrollable Force provision of the Agreement.  It may be that, in spite of the circumstances just mentioned, BWP is still in a position to continue the rate provisions of the Agreement by mitigation measures or activity.  In the event that the rate provisions in this contract are suspended under this clause, the customer will revert to the tariff rate of general application for large primary voltage customers until the Uncontrollable Force condition ends.

Energy Efficiency Assistance:  BWP will make a grant of $150,000 available to St. Joseph for cost-effective energy efficiency and/or load management purposes.  Measures with a simple payback period shorter than the contract term will be deemed cost-effective. 

FISCAL IMPACT

The fiscal impact of the Agreement is positive for both the City and St. Joseph. It offers lower rates to St. Joseph that reflect cost-of-service and encourages conservation and lower local air emissions, but does not require a rate increase for other customers.

RECOMMENDATION

Staff recommends that the City Council approve the Agreement between the City and St. Joseph, and authorize the BWP General Manager to execute the Agreement on behalf of the City.

If the Council concurs, the appropriate action would be a motion to adopt the Resolution entitled �A RESOLUTION OF THE COUNCIL OF THE CITY OF BURBANK APPROVING AND AUTHORIZING EXECUTION OF AN ELECTRICAL SERVICES AGREEMENT BETWEEN THE CITY OF BURBANK AND PROVIDENCE HEALTH SYSTEM�SOUTHERN CALIFORNIA dba PROVIDENCE ST. JOSEPH MEDICAL CENTER�

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Attachment

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