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Home My WebLink About8 Consideration to Approve Agreement with HDRAGENDA ITEM #8 Page 1 of 4 MEETING DATE: March 1, 2023 TO: Board of Directors FROM: Joe Horvath P.E., Electric Utility Director/Assistant GM SUBJECT:Consideration of a Professional Services Agreement with HDR, Inc., for an Electric Cost of Service Analysis and Rate Study APPROVED BY______________________________ Brian C. Wright, General Manager RECOMMENDATION: Authorize the General Manager to execute a Professional Services Agreement with HDR, Inc., in an amount of $52,590, plus a ten percent change order allowance for a total authorization not to exceed $57,900 for consulting services to perform an Electric Cost of Service Analysis and Rate Study. BACKGROUND: The District’s electric retail rates are set by the Board of Directors and adopted by Ordinance. The Board has adopted 3 Ordinances since 2016 for changes to electric rates. In 2016, the Board adopted Ordinance 2016-01 increasing electric rates for FY17-19. In 2019, the Board adopted Ordinance 2019-01 increasing electric rates for FY20-21. In 2021, the Board adopted Ordinance 2021-03 increasing electric rates for FY22-23. Prior to 2016, electric rates remained unchanged for a five year period from 2012 to 2016. The customer average rate increases by Ordinance are summarized in the following table: Fiscal Year FY17 FY18 FY19 FY20 FY21 FY22 FY23 Increase 2%3%3%2.7%3%8.5%6.5% The electric rate increases for FY22 and FY23 were based on a Cost of Service Analysis (COSA) and rate design study (Rate Study) completed in late 2021. Since then, there have been significant changes in energy markets due in part to the impacts of western drought, increased natural gas prices, and growing consumer demand. Staff will be preparing the proposed FY24-25 budget for the Board’s review in 2023, and plan to update the COSA and Rate Study. In advance of the efforts to prepare the next two-year budget, staff anticipates the need for consultant assistance with developing a COSA and Rate Study. HDR, Inc. (HDR) has extensive experience in providing financial consulting Page 2 of 4 services including COSA and rate design services for many Publically Owned Utilities (POUs). This includes many studies for the District and POUs of similar size to the District, across California and other western states. Although the most recent COSA and Rate Study, completed in late 2021, was performed by another consultant, staff has determined that the best fit for financial consulting services is HDR based on their past work for the District. Staff received a Proposal (Attachment 1) from HDR to perform a COSA and Rate Study for the Electric Department and the District’s Professional Services Agreement is Attachment 2. HDR has successfully performed several cost of service, rate design, and related financial studies for the District since 2010 including:  Electric Utility rate structure design review - 2010;  Water Utility rate study - 2013;  Water Utility rate study update - 2015;  Electric Utility limited rate structure design review - 2016;  Electric Utility rate structure design review - 2018;  Water Utility rate study-2020; and  Electric Utility electrification analysis study - 2021. ANALYSIS AND BODY: The purpose of the COSA and Rate Study is the adoption of cost-based and equitable electric rates that provide adequate funding for the District’s operation and maintenance (O&M), capital expenditure, and reserve requirement needs over the long-term. The COSA and Rate Study process will determine the District’s total revenue requirement and how the revenue requirement may best be allocated to rates over the next two years. There are three interrelated steps to the process: determine the revenue requirement, or total cost of service; allocate the revenue requirement among customer classes; and design rates to recover costs. HDR’s Proposal includes the following key services to accomplish this effort:  Meet with District staff to discuss study goals and collect financial information;  Develop a projected five-year revenue requirement;  Review rate classes and identifying potential changes;  Develop cost-based rate design alternatives for each rate category;  Develop three alternative Time-of-Use (TOU) rates;  Develop a proposed method for establishing a Power Cost Adjustment (PCA) factor for retail rates to mitigate the impact to the District when the cost of market energy exceeds a threshold amount; and  Present the Cost of Service and Rate Study to the Board. The TOU scope of work is somewhat new for the District. Historically, the District did not have significant demand charges (based on time of day, day of the week, or season) due to the fact that the District is a winter, weekend, and holiday peaking utility and has relatively flat transmission charges. However, the 2023 ‘heat dome’ and December freeze have demonstrated that the District is more exposed to overall western electric markets when using electricity during peak times which can have significant cost impacts. This, combined with a developing summer peak, are changing the District’s costs with Page 3 of 4 increased demand charges likely. TOU rates are one way to match the costs during peak usage times to the rates charged to the customer. TOU rates can also be a powerful tool to send a price signal so customers can choose to modify their usage patterns and save money. HDR has extensive experience in establishing cost-based electric rates and is highly qualified to perform this work for the District. Their project team specializes in rate and cost of service analyses full-time and has successfully completed rate studies for electric utilities nationwide, including the District. Their proposed schedule to perform the Rate Study also aligns with staff’s requirement to prepare the FY24-25 Budget for the Board’s review and consideration by November 2023. The COSA and Rate Study results will inform and be an integral component of the proposed FY24-25 Budget. Therefore staff recommends the Board authorize the General Manager to execute a Professional Services Agreement with HDR, Inc., in an amount of $52,590, plus a ten percent change order allowance for a total authorization not to exceed $57,900 for consulting services to perform an Electric Cost of Service Analysis and Rate Study. Goals and Objectives: This item is in support of the following goals and objectives: District Code1.05.020 Objectives: 1. Responsibly serve the public. 4. Provide reliable and high-quality electric supply and distribution system to meet current and future needs. 6. Manage the District in an effective, efficient, and fiscally responsible manner. Strategic Goals: 1. Manage for Financial Stability and Resiliency 4. Take the best of private sector thinking to modernize the utility and add value to our communities. FISCAL IMPACT: HDR’s fee estimate to perform the work includes $49,860 in labor and $2,730 for travel and other expenses for a total estimated cost of $52,590, plus a ten percent change order allowance for a total authorization not to exceed $57,900. Funds for this work will come from existing budgets for professional services, specifically GL accounts 1.6.928.00.740 & 748, which combine for a FY23 Budget amount of $57,436. Including all forecasted costs for GL account 1.6.928.00, the FY23 forecast expense is estimated to be $25,000 over budget, which will decrease the Electric utility’s operating reserve balance of $5.5 million by 0.4%. There is the potential the Electric utility’s non-purchased power expense accounts combined will be under budget in FY23 to sufficiently offset the estimated $25,000 overage, thereby not reducing operating reserves. However, it is too early in the fiscal year to forecast this outcome with a high degree of certainty. Page 4 of 4 ATTACHMENTS: Attachment 1 – Electric Cost of Service and Rate Study Proposal, HDR, Inc. Attachment 2 – Professional Services Agreement with HDR, Inc.