Piggott Council Reviews Cost of Service Rate Study

Wednesday, November 25, 2020

An ordinance establishing a new electric rate structure will be introduced at the regular Piggott City Council meeting, set for Tuesday, Dec. 1. The legislation will update the current structure, established in 2003, and will follow some of the guidelines presented at a meeting held Tuesday, Nov. 17.

During the gathering at city hall, Verbal Blakey, P.E., of BHMG Consulting Firm presented a study which had been approved at a meeting earlier this year. The 14 page draft included a review of electric costs, costs of service to customers and compared the rates for different levels of service. The firm also suggested an increase over the current rates, as they advised the city-owned utility to increase its annual profits and cash reserves.

“We feel the report is a little misleading, since it was based on 2019 numbers, as rates have been different in 2020,” utilities administrator and city controller Ted Bellers offered. “We feel we can accomplish the goals without an across-the-board rate increase.”

In addition to a restructure of the rates, and the addition of a meter charge, the firm also advised the closure of the city-owned power plant—which they say will save some $120,000 a year in expenses.

“That's something we'll be looking at in the future, if we can save those operating expenses and just designate it for standby power only,” he added.

According to the study, it was designed to “examine the effectiveness of Piggott's present electric rates in supporting the Utility's cost to provide service to its customers.” It was designed to analyze “system revenues and expenses as they are incurred in the provision of service to the Utility's residential, small power, economic development and large power customers.”

It noted that during the most recent fiscal year, ending Dec. 31, 2019, the electric department had an operating income of $374,605 on revenue of $4,215,413.

The report outlined the system operation, and compared it to others in Arkansas and Missouri, in noting average revenue per kilowatt hour. The study indicated the department was highest among 31 entities reporting in Arkansas, and would have ranked 58th in the 76 reporting providers in Missouri. It also noted modest inflation is expected to push costs higher during the current fiscal year, and in years to come.

The summary closed in summarizing, “Piggott's Municipal Light, Water and Sewer (MLWS) feels that the system margin, while slightly positive, is not adequate for the near term. We recommend eliminating the seasonal rates for all customer classes, restructuring the rates to include meter charges and reassigning portions of customers to different customer classes based on their load profile.”

The study noted most municipal electric utilities seek a rate of return of 12 to 18 percent after expenses, after accounting for fund transfers of up to five percent of operating income, if any.

According to the study, the local utility had a rate of return of less than 10 percent. The net income, $45,165, was then transferred into the city general fund, which is common among municipals. But, the study indicated the amount being transferred is larger than the operating income, putting the utility at a deficit.

The report estimated projected results on income of just over $200,000 in 2020, on revenue of around $4,215,000. This would mean a net income of around $185,000 after accounting for transfers to city funds-or slightly more than five percent. This also reflects recent changes to the operating expenses, which included a reduction in staff members due to attrition.

Based on projections for 2021, the study estimates slightly more than six percent. These projections also take into account planned cuts in operating expenses, including the removal of those costs related to the power plant.

The study also addressed the differences among the customer classes, pointing to the problem of becoming over-reliant on one particular customer or class for its revenue needs. It also noted there were some subsidies made by other rate payers for some of the classes as residential customers were paying a higher rate than commercial entities.

The report also looked at non-energy operating expenses, and found the local utility is operating efficiently. It also noted system losses for 2019 were 4.49 percent, offering “This is remarkably low, indicating that the utility is doing an exceptional job at accounting for wholesale purchases, by minimizing non-metered accounts.”

The report also included a copy of the original ordinance from 2003, and outlined the various particulars.

Ordinance 513, of February 2003, set the rates for the various customers with different ones for residential, small power and large power. Later, a special rate was added for Piggott Community Hospital as it is city-owned and purchases power at near cost. The report also provided an overview of energy costs, usage and rates for a variety of entities provided to the Department of Energy.

In making recommendations, the report noted there is no “standard” for earnings, as levels of net income and cash reserves are determined at the local level. “There are, however, ranges of earnings that are typically sought by utility managers, boards and councils.”

According to BHMG, they suggest the 12 to 18 percent range, with unencumbered cash reserves in the range of six months to one year of revenue. For Piggott, this would require an annual operating income of $481,762 with cash reserves of $2,000,000 to $4,000,000.

In making the recommendation they pointed to having the funds needed to meet emergency needs, such as tornado or ice storm. The report also noted the 2019 audit indicated cash reserves around $1,100,000 which was “well under the bandwidth of healthy reserves.”

The study also calls for restructuring the rate levels, as “each customer class has distinguishing characteristics such as size and load factor that cause differences in earnings. It is for these reasons that the rates are different for each customer class. It is generally desirable for each to have a similar rate of return in order to avoid problems related to cross-subsidies.”

This has been addressed in years past, as the city's industrial base has diminished leaving a larger burden on smaller businesses and residential customers. To address the matter they offered, “when rates among various classes are set with similar rates of return, downturns in the general economy will have a much less negative effect on the utility and its customers.”

In an effort to simplify the present rate structure, they recommended eliminating the current declining block structure and moving to a new fixed rate with a meter charge. This was suggested as a way of making rates “more equitable between all customers and customer classes.”

“That system was the way they did things years ago, no one uses that type of system anymore,” Bellers offered.

The study also indicated there are several customers who are being charged demand as large power customers, who would be a better fit as a small power customer.

“For Piggott, three phase customers with less than 45 KW are more appropriate to be charged as a small power customer,” they added.

This disparity is addressed by reclassifying customers based on usage, and according to Bellers will mean savings for many.

“With the new meter charge, and the lower rates, many customers will see lower bills,” he explained. “I've run the numbers for several residential customers and businesses and a lot of them will see lower bills each month.”

Those who will face higher bills are those with multiple meters, as each will be charged the monthly fee. This, according to Bellers will offset the reduction of rates for the other customers.

“I'm sure there are some people who may choose to drop their second meter, if they have one out on their shop building or such,” he added.

He also indicated those who were paying a lower rate, but did not meet the criteria, would also be paying a bit more each month.

Under the plan, the city would also add a Purchase Cost Adjustment (PCA) which takes into account the actual cost of power, and makes automatic changes when the cost of purchased power rises or declines. They also suggested the addition of an Operating Expense Adjustment (OEA) which is an automatic rate adjustment to offset the effects of inflation as it impacts such things as local wages, benefits, materials and supplies. Some common methods include using the Consumer Price Index (CPI), which has been utilized by the city utility in the past.

The summary noted, “our analysis of the cost of service for the utility's electric system as a whole, and for each of the customer classes, indicated that the present level of revenue is inadequate to meet the utility's overall needs. The recommended rate changes will provide for competitive and simplistic rates. Several of the recommendations, if implemented, will require modifications to the existing rate ordinance.”

Those recommendations included—restructure of the rates to remove the seasonal and blocked rates, and add a meter charge; raise revenue requirements to increase cash reserves with an initial target of $70,000; assign three phase customers with less than 45 KW to the small power customer class; revise the existing PCA to be based on the proposed rates and implement the OEA to offset the effects of inflation.

Following the review, and discussion, council voted to have an ordinance drafted to make many of the changes. It will be introduced at their regular meeting, set for 6 p.m. on Tuesday, Dec. 1, at city hall. According to Bellers the proposed rates are as follows—residential customers would pay a $15 meter charge and 10.42 cents per kilowatt hour. Small power would pay a $25 meter charge for single phase, or $35 for three phase, with a rate of 10.94 cents per kilowatt hour. Large power would pay a meter charge of $50, a rate of 8.64 cents per kilowatt hour and a demand charge of $11 a KW. Meanwhile, PCH would pay a $100 meter charge under the special contract rate, and about nine cents per kilowatt hour.

“We continue to look for ways to reduce costs of energy and costs of operations for our customers,” Bellers added. “We are also continuing to seek ways to either reduce our load or sell-off the excess and I'm currently trying to work with other utilities in forming a pool to address the summer load.”

Bellers also noted a spreadsheet has been developed, allowing the department to forecast impact on individual bills and indicated that information is available through the MLWS administration office in city hall.

The new structure should be welcome relief for many customers of the utility, as fluctuations in the power market have caused a repeated rise-and-fall in the cost of energy the past several years.

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