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Home My WebLink About2003/03/19 - Agenda Packet - Special (utility) CIAL ME MARCH 19TM,) CITY COUNCIL RANCHO CUCAMONGA MUNICIPAL UTILITY UPDATE STRATEGY ~ AGENDA RANCHO CUCAMONGA CITY COUNCIL Special Meeting March 19, 2003 - 3:00 p.m. Rancho Cucamonga Civic Center Training Room 10500 Civic Center Drive Rancho Cucamonga, California 91730 A. CALLTO ORDER 1. Pledge of Allegiance 2. Roll Call: Alexander , Gutierrez , Howdyshell , Kurth __., Williams __ B. COMMUNICATIONS FROM THE PUBLIC This is the time and place for the general public to address the City Council. State law prohibits the Council from addressing any issue not previously included on the agenda. The Council may receive testimony and set the matter for a subsequent meeting. Comments are to be limited to five minutes per individual. C. ITEM(S) OF BUSINESS 1. RANCHO CUCAMONGA MUNICIPAL UTILITY STRATEGY UPDATE D. ADJOURNMENT I, Debra J. Adams, City Clerk of the City of Rancho Cucamonga, hereby certify that a true, accurate copy of the foregoing agenda was posted on March 13, 2003, per Government Code 54954.2 at 10500 Civic Center Drive, Rancho Cucamonga, California. R A N C H O C U C A M O N G A ENGINEERING DEPARTMENT Staff Report DATE: March 19, 2003 TO: Mayor and Members of the City Council Jack Lam, AICP, City Manager FROM: William J. O'Neil, City Engineer BY: Robert Lemon, Assistant Engineer SUBJECT: RANCHO CUCAMONGA MUI~ClPAL UTILFFY STRATEGY UPDATE RECOMMENDATION: It is recommended the City Council continue to pursue the Rancho Cucamonga Municipal Utility Strategy, direct staff to provide a recommendation for the award of a purchase contract for two 66/12 kV transformers, and further direct staff to place an item on the City Council and Redevelopment Agency Agendas for the meeting of April 4, 2003 to consider an award of such contract to the successful bidder for the required transformers. BACKGROUND/ANALYSIS: The City's Municipal Utility Strategy has continued to be explored and implemented on an incremental basis since the City Council formed the Rancho Cucamonga Municipal Utility on August 30, 2001. At that time, the City took this action to preserve its future rights as it related to the future prevision of utilities and to keep options open regarding strategies to limit the impact of the energy crisis on the City and its current and future residents and business owners. After investigating several alternative energy options, including power plant construction, direct access, community aggregation, and solar panel projects, it was determined that positioning the Municipal Utility as a wholesale distributor of power to the commercial development within the Victoria Arbors Master Plan area was the most viable option. The City authorized the filling of a Wholesale Distribution Access Tariff (VVDAT) Application with Southern California Edison on August 21, 2002. This initiated the full-depth exploration and implementation of the wholesale distribution option. City staff, with the assistance of Astrum Utility Services, has continued to pursue the implementation of this strategy in a manner that allowed the City to limit its expenditure of "hard dollars" and full commitment to this path, while ensuring that it did not get "locked out" of this option due to time constraints. As previously mentioned, this was accomplished by employing consultant CITY COUNCIL STAFF REPORT RANCHO CUCAMONGA MUNICIPAL UTILITY UPDATE MARCH 19, 2003 PAGE 2 services in an incremental fashion, obtaining City Council or Redevelopment Agency approval for each step, while continuing to refine the financial model included in the initial Public Policy Analysis prepared by Astrum as key assumptions were confirmed when more detailed information became available. The Municipal Utility Project is now approaching a critical milestone (approval of the purchase of two power transformers) that will represent the first expenditure of "hard dollam" and full commitment by the City to pursue the Municipal Utility Strategy to its natural conclusion of placing the Rancho Cucamonga Municipal Utility as the electricity service provider for the Victoria Arbors commemial developments. In view of this significant milestone and the important decision the City must make regarding future commitments, staff believes this is the appropriate time to provide all Council members with a comprehensive update on the Municipal Utility Strategy. The update will provides an overview of the Strategy and discussion of four key areas: · Operating Structure · Economic and Financial Analysis · Legal and Regulatory Issues · Project Timeline and Future Required Actions Als0 included will be a discussion of the risks and benefits of the project and an accompanying recommendation the City continue to pursue the Rancho Cucamonga Municipal Utility Strategy, direct staff to provide a recommendation for the award of a purchase contract for two 66/12 kV transformers, and further direct staff to place an item on the City Council and Redevelopment Agency Agendas for the meeting of April 4, 2003 to consider an award of such contract to the successful bidder for the required transformers. Respectfully Submitted, William J. O'Neil City Engineer R A C H O C U C A M O N G A ENGINEERING DIVISION DATE: March 27, 2003 TO: Mayor and Members of the City Council Jack Lam, AICP, City Manager /~j FROM: William J. O'Neil, City Engineer BY: Robert Lemon, Assistant Engineer SUBJECT: CORRECTION TO STAFF REPORT OF MARCH 19, 2003: RANCHO CUCAN~NGA MUNICIPAL UTILffY STRATEGY BRIEFING Please be advised that, due to typographical errors, the March 19, 2003 staff report regarding the Rancho Cucamonga Municipal Utility Strategy update erroneously referenced a City Council and Redevelopment Agency meeting date of April 4, 2003 in the first and last paragraph of the report. The correct meeting date is April 2, 2003. Presentation to: City of Rancho Cucamonga Public Policy Analysis Workshop - New Utility Services March I9, 2003 ISQ Edison Municipal Victoria Utility Arbors Bulk and Peakin9 Power Financial Flow i · Retail 2,5z, ~:00 495 Commercial Office 544000 199 Food Market 157,500 3 ........ Restaurant/Fast Food 85000 26 Public Facilities 1_ Q~5 50._.. Q ~ Total 3,419700 725 The study' area is west of Interstate !5 sou h of Babe Line Road. east of Day Creek and north of Foothill Boulevard, plus the development south of Foo h I Bouievard (Leggio Development) SCE Interconnection Application Systems Impact Study Facilities study Developers Electric Service Agreement Issued Electric Senvice Agreement Met with developers · Revised electric sen, ace agreement Distribution Design and Construction Preiimina~ desgn of Victoria Gardens mall facilities Final design of Victoria Galdens mall facilities Preliminary design of offsite facilities Completed preiim~na~,,' site design I nterconnection / Substation Received bids for transformers Coordination with Edison Desgn of facilities Financial Analys~s Sens tivity analysis SCE / market input Assumptions and Methodology Issues Agreement Electricity Sales Electricity Demand CEC Rate Forecast Operating and Maintenance Expense Capital Expenditures Line Losses CEC Gas Forecast Franchise Fees Constant Dollars Impact of 1 0% Higher Natural Gas Prices Impact of CTC Obligations Impact of CDWR Obligations Issues Outstanding Unresolved Issues Applicability of CTC Obligations - RDA Deferred Debt Payments ~ Interest Rates $1,5OO ~1,20O $900 $600 $$00 $o ~ Funds Available for Public Services f~ Rate Stabilization Fund ~ Capital Reserve Fund From 2003 to 2019, the municipal utility cumulative results: $11.8 million ir} fur~ds available for public services $ 2.5 million in rate stabilization reserves $ 1.9 mitlion in capital reserves $16.3 millior~ in funds available for public services + reserves $1,600 $1,200 $800 $400 $0 Funds Available for Public Services 4- Reserves + Additional RDA Financning Funds Available for Public Se~'¢ices + Reserves + Additional RDA Financning ~ Contingencies From 2003 to 2019, the municipal utility cumulative results: $16.3 miltion in funds available for public services + reserves $ 2.4 miition in additional RDA financin9 {$ 9,7) million in regulatoW obligations, higher energy prices & contingencies _$=~._Q million in funds available for public services + reserves + additional RDA financing .- contingencies 2003 Apr May Jun Jul Aug Sept Oct Nov Dec Developers Electric Service Aflreement SC~ .Int~(g~8 n~9~ip0 Authorize Agreements pistl'ibution Desiq_n & Construction Design ' Construction Documents Construction / installation Interconnection / Substation Long Lead Equipment RFP Design & Engineenng Construction ~Hire Additional Staff ~' $11.8 million in funds available for public service (PPA) ~ $2.8 million in funds available for local energy programs ~: Contingency plans provide for the flexibility to address the possibilities of 10% higher energy prices and additional regulatory fees (decreases Funds Available to $9.0 million) ?? City Council would have direct control over the municipal utility,, :~: Developers will incur lower costs ?:~ Planned timelines will meet the Developers' December 2003 in- service date Presentation to the City of Rancho Cucamonga Updated Anatysis On the Public Po/icy Analysis Victoria Arbors Municipal Utility Conducted by Astrum Utility Services, August 2002 E!DI N March 19, 2003 What's the Objective Today? To evaluate the costs, benefits and risks of proceeding with municipal electric service to Victoria Arbors SCE recommends that the project be evaluated on its own merits before considering the impact of special financing by the Redevelopment Agency Look at the "payback" for municipal electric service compared to other projects that could be funded with Redevelopment Agency funds Update Assumptions SCE used revised Appendices provided by Astrum on March 13, 2003 ~ Appendices have been updated by Astrum 4 times since August 2002 as a result of input from SCE or the City SCE has met with City Staff and Astrum several times to review assumptions and methodologies, SCE has used industry-accepted practices and principles for its review Astrum has included SCE's recommendations on: > Current SCE rates ~ Rate Forecasts (CEC's 2003-2013 rate projections were used) Franchise Fees ~ Line Losses Astrum and SCE agree on the dollar impact of issues such as CTC and CDWR stranded costs, but apply them differently 3 Discuss]on items CEC historic and forecast natural gas prices CTC stranded cost responsibilities Impact of subsidized interest rate Impact of deferred debt payment Impact of additional costs Energy cost sensitivities CDWR stranded costs responsibilities Summary of financial impacts Conclusion CEC H]stor~c and Forecas~ Natura~ Gas Prices 2 O0 Figure 13: Htstorica~ arid Projected U~ility End. Use Prices i~ Caltfor~ta - Annua~ Averages CTC Stranded Cost ResponMMfities Competition Transition Charge (CTC) Recovery Section 369 of the Public Utility Code (AB1890) gives SCE the right to collect CTC ~ In addition, Section 369 states the following: "However, the obligation to pay the competitive transNon charges cannot be avoided by the formation of a local pubficly owned electrical corporation on or after December 20, 1995, or by annexation of any portion of an electrical corporation's services area by an existing local publicly owned electrical utility." 2003 CTC charges are approximately 1.1 cents per kWh as indicated in current CPUC proceedings, declining to 0.64 cents per kWh in 2004 and 0.13 cents per kWh by 2008 CTC has a negative impact on Funds Available for Public Services of $1,1 million impact of subsidized interest rate The Report's 2.1% interest rate Impact of a subsidized (0% effective interest rate) is unrealistic, interest rate on debt based on conventional lending practices and forgone opportunity costs payment schedule Debt repayment begins in 2008; therefore a 6.178% domestic municipal bond rate, as stated in Global Insight's* .. CONTROL0203 Forecast, February o 2003, subtracting inflation and properly deflated, is the appropriate realization of ~ s~0r> i incurred debt. This results in a negative ~ ~(~o~ impact of $4.7 million over the17-year Q planning horizon ,<~oo~ Taking into account the $2.5 million of ,<2so i debt service interest expense captured in the Report's Rate Stabilization Fund, this results in a negative net impact of $2.2 million Interest rate subsidy results in a negative impact of $2.2 million impact of deferred debt payment Impact of deferred debtImpact of Debt Deferral payments and interest $1000 forgiveness results in a $0 negative impact of ${100 O) $2.3 million ~ The Report indicates no re- $~:,00~ payment of debt during the first 5 years $~o. $(5O00~ The yearly costs associated with the deferred debt payments and the forgiveness of interest~70o0~ payments must be considered in the viability of the Project This cost must be borne by either Debt forgiveness results in a the City, RDA, or the Projectnegative impact of $2.3 million Impact of add]t]ona costs Impact of debt acquisition costs > Industry-accepted Underwriters Fees of 1% and Bond Insurance of '1.25% of debt seN'ice were not included in the Report >. This would result in a negative impact of $204,000 > Not included in SCE's summary of financial impacts Impact of CDWR costs in 2019 In prior discussions, CDWR charges for 2019 were not included ~- The result of CDWR charges in 2019 would have a negative impact of $260,000 > Not included in SCE's summary of financial impacts Energy cost sensitivities Energy (generation / power Other ~Transmission supply) costs represents 63% 5 3% of the total electric rate Distribution 29% No financial sensitivities were conducted around the cost of power Each 10% increase in the cost of energy would have a Bas¢d on SCE's est/mated 2004 negative impact of $1.8 million system average net in energy cost Sensitivity impacts for increases in Natural Gas Costs ($ millions) Ir~crease in Gas Costs 10% 20% 30% 40% 50% Impact on City -$29 -$59 -$88 -$117 -$14.7 1 Less impact on SCE $12 $23 $35 $46 $58 Net Impact of City -$18 -$36 -$53 -$71 Recent Gas Price increases La The California Energy Commission (CEC) gas price forecast dated December 2002 ranges from $3.54 per mmbtu in 2003 to $5.25 per mmbtu in 2022 when using 2003 constant dollars La NYMEX futures for September 2003 deliveries closed at $5.24 per mmbtu on March 18, 2003, an increase of almost 50% in just the last 3 months La In the last two weeks, prices have ranged 25-50% higher than the tevelized price of $4.t3 per mmbtu used in the original Report La Gas prices are expected to stay high due to war concerns and increased construction of natural gas-fired power plants La SCE's rates will experience a much smaller impact from fluctuations in natural gas prices due to our diversified power portfolio of Iow-cost coal, nuclear and hydro energy sources CDWR Stranded Cost CDWR charges may apply based on the outcome of current CPUC proceedings ,~ CDWR charges may apply to Municipal Departing Load based on the outcome of a current CPUC proceedings (R.02-01-011 ) Expected CDWR charges increase to 2,89 cents per kWh in 2004, then decline to 1.88 cents per kWh in 2008 CDWR obligations have a negative impact on Funds Available for Public Services of $6.7 million* * the additional CDWR impact of $260,000 in 2019 was not ¢nctuded. refer to page 9 Summary of financial impacts Cas~ A- 10% Natural Gas Cost Sensitivity ($000) $15 000 Impact of CTC Impact of $11,800 obligation subsidized E -$1,114 I interest rate Impact of j deferred debt Net $10,000 ~$2,177 payment Impact of 10% ~ [ higher Impact ~$2,299 gas costs Impact of without = $6,2 m/I/ion - --'---~ CDWR $5.000 Sensitivities -~$1 ,'780 ~0% [ obligation 53,5L~0 @ 20% $:1) 34,3 @ 30% $_ impact of Sensitivities = - $2.3 million $(5000) Summary of financial 'mpacts Case B - 50% Natural Gas Cost Sensitivity $15,000($000) impact of OTC Impact of $11,800 obligation subsidized [ ,~$1,I'~4 ] interest rate Impact of deferred debt Net $10,000 ,$2,177 payment impact of 50% ~ ~ higher /lT~pact ~$2,~99 gas costs without = $6.2 m/fi/on $5,0o0 Sensitivities $0 Impact of CDWR obligation $(5,000) Impact of Sensitivities = - $9,4 million $(10,0o0) Several factors reduce the Funds Available for Public Services ~ -$1 114,000 Impact of CTC obligation - Impact of subsidized interest rate ~ $2 299,000 Cost impact of deferred debt payment - $5,590,000 Subtotal of impacts -, Report's Funds Available for Public Services .~ $6210,000 Potential Funds Available for Public Services must also be 50 ?o higher energy cost (net of SCE impact) Impact of CDWR obligation Potential liability to the City appears to provide limited net over the life of the pro,iect and the City at risk Significant gas risk exists in today's market and you must account for them. costs are affeady up by' 50% over the December 2002 ast. gas and ele( RFPs are completed and sig , costs will remain is not the time to "loc long--term gas prices. Rate of Return (tRR) calculation, without even the downside risk, would show the municipal utility as over the 17-year planning horizon. Most businesses would not consider such a/ow return on their capital This is not the best use of RDA funds The mall is already use RD funds to attract more [ l ~ ~ S ( ) Page Victoria A,rbors Municipal Utility (VAMU) N(s~¢ ges reex~ec~edtblssummc~byt e(a-S)an( hc(,lffor Energ}, ( ommisskm tbrecasts adequate power supplies tb~ se~eraI years Rates to commercial cuslomers, like Victoria Arbors, are expected to S(E t lectrk: decrease by 20 - 30% Stabibly Ra~es se'v ce temtory o[ Southern ( alifornia lrd~son S( E Distribution costs represent onl> 29% of an ax erase S( E customer's electric bill The study fails to address i~ any detail the largest issue, power suppl) costs, ~hich 'epresent at pr ximately 63% of an average electric bill. ~ ........... o .... S(['s malysis demonstrales that ibrming a utilit5 to serxe a Ihnited area *: s could result in a large financial loss of up to $9.4 million based on recent increases of up to 50% in the cost of natural gas serx ice, m~d does not increase rdiabihty and service. S ~ling a new utility in a xolatile natural gas markel is not a prudent s VAM[ 's pox~er procurement portR¢[[o is no~ dix ers~fieck 100% ()fits poiliBlio will be subject to fluctuations m Ibc price of natural gas. S(TE Ires a diversified po~ er procuremen~ port~blio ~ ifl~ only 40( , subiect volatility. decrease in 2003 Fhe 2000-2001 (ahfbmia euergy crisis demonstrated ~hat power ~ ~ ~ procm'ement was the real problem, not distribution ~i~ The (ity does nol have to start [ municipal utility and own & operale a ,4 i5 s distribution system to receive fl~e benefits of [o~er cost energy SCE's S eiaw on ( ommunity (bocce Aggregation (AB I ~ 7) allows cilies to ~ ~ dislribme it at no additiomd charge ~ SC E would normally pro~ ide electricalsci-x, lccs,, under oui CPi l(' approxed tariflk Ufilit3 Costs