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HomeMy WebLinkAbout8 Attachment 1 - Electric Cost of Service and Rate Study - HDRFebruary 20, 2023 Mr. Joe Horvath Electric Utility Director Truckee Donner PUD 11570 Donner Pass Road Truckee, CA 96161 Subject: Electric Cost of Service and Rate Study Dear Mr. Horvath: HDR Engineering Inc. (HDR) has been assisting the Truckee Donner Public Utility District (District) with water and electric rate analyses for the past 12 years. Recently, the District contacted HDR requesting assistance in the development of an electric cost of service and rate study update. The purpose of this study is the adoption of cost-based and equitable electric rates that provide adequate funding for the District’s O&M and capital needs over the long-term (e.g., five-year period). HDR has extensive experience in establishing cost-based electric rates and is highly qualified to perform this work for the District based on our technical skills and experience in this specialized area of expertise. HDR’s project team specializes in rate and cost of service analyses full time and recently completed electric cost of service studies and rate designs for the District, as well as electric utilities across the U.S. We look forward to discussing our proposed approach to the District’s cost of service and rate study with you. Should you have questions or require additional information or detail regarding this scope of services, please contact Shawn Koorn at (425) 450-6366 or via email at shawn.koorn@hdrinc.com. Should this scope and fee be acceptable to the District, please provide a notice to proceed along with the appropriate contract documentation. Sincerely, HDR Engineering, Inc. Holly Kennedy Shawn W. Koorn Senior Vice President Associate Vice President ATTACHMENT 1 Truckee Donner PUD | Electric Cost of Service and Rate Study hdrinc.com 2379 Gateway Oaks Drive, Suite 200, Sacramento, CA 95833 T 916.679.8700 F 916.679.8701 Goals and Objectives for this Study Understanding the District’s goals and objectives for this study is an important starting point. By gaining an understanding of these goals and objectives, the scope of services can be tailored to meet the District’s needs. Based upon the understanding of the District’s needs, the following goals and objectives for the study have been developed: • Utilize generally accepted electric rate setting techniques and methodologies (i.e., APPA) to establish the District’s rates. • Develop a projected revenue requirement (financial plan) for a five-year projected period that considers the prudent and adequate funding of the District’s operating and capital needs. • Determine appropriate prudent financial management targets (i.e., reserve fund balances, rate funded capital, debt service coverage ratios). • Develop revenue (rate) transition plans, as necessary, which reflect the results of the revenue requirement. • Review the current rate schedules (e.g., customer classes) and identify potential changes to the current customer classes of service. • Develop an average embedded cost of service analysis that equitably allocates the costs of the District to the identified customer classes of service. • Develop three Time-of-Use (TOU) rate alternatives for the customer classes of service based on the results of the cost-of-service analysis. • TOU based on peak demand period • TOU designed to encourage power consumption that reduce power that produce higher Green House Gas (GHG) • TOU arbitrage rate that is designed to bank low-cost power for use during periods of high-cost power. • Review the relationship between the fixed (meter or service availability) and variable (energy) costs. • Provide the District methods for establishing Power Cost Adjustments (PCA). A PCA is a mechanism for adjusting customer rates to account for increases, or decreases, in the District’s increased or decreased purchased power costs. • Provide a comparison of the proposed rates to other similar electric utilities. • Provide a written report that documents the analyses undertaken, along with the findings, conclusions, and recommendations of the study. • Provide effective public presentations of the study. • Work closely with the District project team to increase the value of the study to the District and its customers. Truckee Donner PUD | Electric Cost of Service and Rate Study hdrinc.com 2379 Gateway Oaks Drive, Suite 200, Sacramento, CA 95833 T 916.679.8700 F 916.679.8701 • Develop a rate model for District Staff use. Methodology and Approach The methodology HDR uses for its electric rate studies relies on generally accepted methodologies within the electric utility industry (e.g., APPA). To determine fair cost-based and equitable rates, a comprehensive rate study must be conducted. A comprehensive rate study is generally comprised of three interrelated analyses: a revenue requirement analysis, a cost-of-service analysis, and the design of rates. Figure 1 provides a brief overview of the comprehensive electric rate study process. Figure 1 Overview of the Comprehensive Electric Rate Study Process The above framework or methodology will be utilized to analyze the District’s rates. While Figure 1 provides an overview of the typical components of a comprehensive rate study, an important aspect of this study is incorporating and tailoring those analytical elements into an overall scope of services that will provide the work products being requested by the District. Revenue Requirement Analysis Compares the revenues to the expenses of the utility to determine the overall adjustment to rates. Cost of Service Analysis Distributes the total revenue requirement to the various customer classes of service in a “fair and equitable” manner. Rate Design Analysis Designs rates to yield the total revenue requirement and meet the rate design goals and objectives of the study. Truckee Donner PUD | Electric Cost of Service and Rate Study Scope of Services To provide the services being requested by the District, the following detailed scope of services has been developed. Task 1—Project Management To provide the study in a timely manner, and within the stated budget, HDR will provide a monthly progress report and invoice which discusses the progress of the study, identify study issues or concerns, and provide a status of the budget compared to the overall project progress. EXPECTED DISTRICT STAFF SUPPORT FOR TASK 1: • Review progress reports. Discuss issues or concerns about the study. DELIVERABLES AS A RESULT OF TASK 1: • Monthly progress reports and invoices. Task 2—Initial Project (Kick-Off) Meeting and Data Collection The initial project (kick-off) meeting is used as a starting point in the project. The HDR project team and District staff will discuss the overall goals and objectives for this project, while at the same time discussing issues and concerns that the parties may have. It is proposed that the initial project meeting be held virtually for approximately one hour. Prior to the initial kick-off meeting, HDR will provide the District with a written data request detailing the data and information necessary to conduct the study. The data request can be discussed during the initial kick-off meeting. The data and information requested for this study should be readily available information (e.g. financial, statistical, customer, etc.). EXPECTED DISTRICT STAFF SUPPORT FOR TASK 2: • Participate in a one-hour virtual kick-off meeting. • Provide the data as outlined in the written data request. DELIVERABLES AS A RESULT OF TASK 2: • Identification of objectives, issues, and concerns. • Initial data request detailing the information necessary to carry out the study. • One-hour virtual meeting to get the study off to a positive start. Task 3—Revenue Requirement Analysis The development of the revenue requirement analysis is the first major analytical portion of the rate study process. This portion of the study entails reviewing the revenues and comparing them to the expenses of the District. This task considers the prudent and proper funding for O&M and capital expenditures for the District, and determines the need for revenue (rate) adjustments over the time period reviewed. A more detailed discussion of the various steps involved in developing the District’s revenue requirement is provided below. STEP 1 – SELECTION OF A TEST PERIOD – The first step in the development of the revenue requirement is the selection of a test period. A test period refers to a time frame of reference for the accumulation of revenues, expenses, and consumption data. In this case, a five-year projected time Truckee Donner PUD | Electric Cost of Service and Rate Study period is proposed. By reviewing costs over this extended time frame, the District can determine if major rate impacts are on the horizon and potentially take steps today to help reduce future impacts (e.g., rate adjustment transition, accumulation of capital reserves, etc.). STEP 2 – METHOD OF ACCUMULATING COSTS – Once the “test period” has been determined, the next decision is to determine the basis or method of accumulating costs. The “cash basis” approach is commonly used by public utilities for determining and setting their revenue requirement since this closely follows their budgeting process. STEP 3 – ACCUMULATION OF REVENUES AND EXPENSES – The revenue requirement is composed of two major types of costs: operational and capital expenses. The following discussion will provide an overview of the revenue requirement analysis. Operating and Maintenance Expenses – The operational costs are generally projected from historical or budgeted costs, using assumed escalation factors, and adjusted for known changes in operations (e.g., additional personnel, growth/expansion, change in wholesale power costs, etc.). The O&M expenses will be projected for a five-year period based on current budget or actual year-end financial documents. HDR will collaborate with the District to review the forecasted expenditures to develop a reasonable estimate of future operating expenses. Purchased Power – The development of the projected purchase power costs is a critical aspect of the analysis for many reasons. First, it represents one of the largest annual expenses for the District. HDR will work with District staff to develop the forecast of purchased power based on current wholesale rates and the District’s current projections. Future years purchased power will be escalated based on projected wholesale rate increases. Capital Expenses – Within this study, the starting point for projecting capital costs (expenditures) will be the capital improvement plan, and other relevant capital planning, and capital budgeting documents. In the financial planning process, consideration is given to maximizing the capital improvements (expenditures) for the system, while minimizing rates to customers. This is accomplished in a variety of ways. However, the important aspect of this discussion is that there are multiple methods of financing capital expenditures, and it is through this process that rates can be minimized. HDR’s general approach is to list the capital projects by year and determine the various outside funding sources for each of the projects. These outside funding sources may be low-interest loans, grants, customer capital contributions, etc. The balance of projects not funded by the available sources of funds must be financed from a combination of long-term debt and rates. It is the balancing of the use of long-term debt to the impact upon rates, which is critical to the analysis. In summary, given a better understanding of the overall magnitude of the needed capital projects, a final financing plan can be developed which meets the District’s goals and objectives, while attempting to reduce rates to the degree possible. After development of the initial draft of the revenue requirement, HDR will meet with the District project team to review the assumptions used in the study to confirm or adjust the assumptions and estimates used within the study. Incorporation of District comments will result in a final revenue requirement. In the course of conducting the revenue requirement, HDR will review key financial planning criteria (e.g., appropriate reserve fund balances, adequate rate funded capital, debt service coverage) and recommend additional financial tests as necessary. Truckee Donner PUD | Electric Cost of Service and Rate Study EXPECTED DISTRICT STAFF SUPPORT FOR TASK 3: • Provide as needed assistance to explain the District’s data and information for the development of the revenue requirement. • Provide as needed additional data refinements or needs as determined during the development of the revenue requirement. • Have the District’s project team participate in half-day project meeting to review the draft revenue requirement analysis. DELIVERABLES AS A RESULT OF TASK 3: • A revenue requirement for a five-year period that considers the necessary operating and capital needs of the District. • A capital financing plan within the revenue requirement analysis, utilizing the comprehensive plans or capital budgets of the District. • As needed, a rate transition plan to phase-in needed adjustments over the five-year period. • Recommendations regarding key financial indicators (debt service coverage, capital replacement levels, reserve ending balances, etc.). • A half-day project meeting at the District’s office with the HDR project manager and technical lead to review the draft revenue requirement analysis (combined with the Task 4 project meeting). Task 4—Cost of Service Analysis The revenue requirement developed in Task 3 will be distributed to the various customer classes of service using an average embedded cost of service methodology. In simplified terms, a cost of service study equitably distributes the revenue requirement between the various customer classes of service (e.g., Permanent and Non-permanent residential, small commercial, medium commercial, large commercial). A brief discussion of the major steps associated with cost of service analysis is provided below. STEP 1 – SELECTION OF TEST PERIOD – The first step of a cost of service is to select test year for the allocation of costs. A cost of service analysis typically reviews a one year time period, or the period over which rates will ultimately be set. In the District’s case, distributing the 2024 revenue requirement, for cost of service purposes, would appear to be appropriate. HDR and the District project team can discuss the appropriate time period during the initial project meeting. STEP 2 – DETERMINATION OF CLASSES OF SERVICE – Development of the cost of service begins with determining the classes of service that will be used for purposes of establishing cost allocations and rates. HDR will review the District’s current rate classes (schedules) and discuss with the District recommended changes to the customers classes. The process of establishing classes of service is to group customers into homogeneous groups. That is, customers with similar power and/or facility requirements. STEP 3 – ALLOCATION OF EXPENSES – The next step in the cost of service analysis is to functionalize the data. Functionalization refers to the arrangement of cost data into its basic cost categories (e.g., generation (power supply), transmission, distribution, etc.). Given functionalized costs, the costs are then allocated to their various cost components. Allocation involves determining whether each specific cost or account item was incurred to meet a consumer’s demand, energy, or customer- Truckee Donner PUD | Electric Cost of Service and Rate Study related need. Allocation will be based upon generally accepted cost of service techniques for electric utilities. STEP 4 – DISTRIBUTION OF EXPENSES – Once the classes of service have been determined, the process of developing distribution factors is undertaken. In developing the distribution factors, HDR will develop factors that are equitable to customers and rely upon District system and customer specific data. STEP 5 – SUMMARY OF THE COST OF SERVICE – Given the development of the distribution factors, the final task distributes the allocated revenue requirement to each class of service. From this process, a summary page of the cost of service study is provided. The summary page for the cost of service study compares the difference between the current level of rate revenues received from each class of service, and the distributed cost of service for each class. The cost of service will also provide average unit costs, or cost-based rates, which are important to the development of final rate designs. Average unit costs provide the District with an understanding of the cost/rate relationship between demand, energy and customer related costs. Average unit costs provide a $/kW, ¢/kWh and $/customer/month average cost. In summary, these average unit costs will provide “cost of service” based units that will be used as the starting point for the development of the final proposed rates. It should be noted that the proposed cost of service is not an un-bundled analysis. At the conclusion of the development of the draft cost of service analysis HDR will meet with the District project team to review the results of the cost of service analysis, along with results of Tasks 3. EXPECTED DISTRICT STAFF SUPPORT FOR TASK 4: • Provide additional data, or data refinements, as determined during the development of the draft cost of service analysis. • Participate in a half-day project meeting to review the results of the draft cost of service analysis. DELIVERABLES AS A RESULT OF TASK 4: • Review of the customer classes of service. • An equitable distribution of the revenue requirement to the various classes of service. • A summary of the average unit costs (cost-based rates) for the various customer classes of service. • A review of the draft cost of service results with Department staff at a half day meeting (combined with the Task 3 project meeting). Task 5—Rate Design Analysis A starting point for the rate design process is to gain an understanding of the rate design goals and objectives the District is striving for in this study. These objectives may include ease of administration, simplicity, revenue stability, efficient use (conservation), etc. Understanding the District’s rate design objectives at the onset will assist HDR in the development of alternative rate designs. The specific rate design options requested by the District are variations of Time of Use (TOU) rates. The TOU rate options requested are as follows: • Traditional, higher rates during summer peak. • Reduce GHG, higher rates when generation is coming from GHG emitting sources. Truckee Donner PUD | Electric Cost of Service and Rate Study • Energy Arbitrage, TOU rate structure that encourages customers to charge batteries during low demand and lower rate, discharge when demand is high and rate is higher. In designing the rate options, the cost of service information and average unit cost information will be utilized as a starting point. Up to three rate designs will be developed for each class of service identified in the cost of service analysis. HDR will review the rate design objectives of the District and provide rate structure alternatives that are designed to meet those objectives. For each rate design alternative developed, a bill comparison and graph will be provided that shows a comparison between the present bill and the proposed bill at various levels of usage. Bill comparisons are useful in assessing the potential impacts to a wide variety of customers. As part of the rate design task, HDR will provide alternatives for implementing a Power Cost Adjustment (PCA). A PCA is an adjustment to the rates to increase or decrease rate revenue to verify purchased power costs are not excessively higher than or lower than actual costs. HDR will work with the District to provide options that are compatible with their billing system. At the conclusion of this Task, HDR will meet with the District project team to review the alternative rate designs to select the preferred rate alternative to present for implementation. EXPECTED DISTRICT STAFF SUPPORT FOR TASK 5: • Discuss with HDR the District’s rate design goals and objectives. • Assist, as necessary, in the development of the TOU rate structure alternatives and bill comparisons. • Attend a two-hour virtual project meeting to review and discuss the rate structure alternatives. • Selection of the preferred rate structure alternative. DELIVERABLES AS A RESULT OF TASK 5: • Up to three rate structure alternatives for each customer class of service identified in the cost of service analysis. • Bill comparisons for each of the rate structure alternative developed. • A two-hour virtual project meeting at the District’s offices to review and discuss the rate structure alternatives. Task 6—Study Documentation At the completion of the analysis HDR will provide the District with a written report detailing the development of the cost of service and rate study. The report will review the development of the study methodology, key assumptions, recommendations, and detail of the technical analyses completed for the District’s study. Included within the report will be a Technical Appendix which will include the technical analysis used to develop the proposed rates. The draft report will be provided to the District for review and comment in electronic form. District comments and edits will be incorporated into the final report and provided to the District electronically. EXPECTED DISTRICT STAFF SUPPORT FOR TASK 6: • Review and comment on the draft rate study report. Truckee Donner PUD | Electric Cost of Service and Rate Study DELIVERABLES AS A RESULT OF TASK 6: • An electronic version of the draft rate study report. • An electronic version of the final rate study report. Task 7—Public Presentations As part of the cost of service and rate study HDR will participate in up to two meetings with the District Board. The first meeting will be a workshop setting to present the information to the Board and request policy input to finalize the study. The second meeting will be the public hearing to present the final results of the study to the Board for implementation. HDR will provide the District with the presentation information prior to the meeting for review. EXPECTED DISTRICT STAFF SUPPORT FOR TASK 7: • Review the draft presentation materials. • Coordinate with HDR on the timing of the presentations. DELIVERABLES AS A RESULT OF TASK 7: • Up to two public presentations of the rate study results and recommendations. Task 8—Computer Model At the conclusion of the study, HDR will provide the District with the final cost of service and rate model. The rate model will be developed in Microsoft Excel specifically around the District’s budgeting and customer characteristics. EXPECTED DISTRICT STAFF SUPPORT FOR TASK 8: • N/A. DELIVERABLES AS A RESULT OF TASK 8: • Final cost of service and rate model. The above tasks conclude the proposed scope of services to develop the cost of service and rate study. If District staff requests additional services, they will be provided on a time and material basis at current hourly billing rates. This proposed scope of services can be modified to meet the specific needs of District. Key Project Team Members Provided below is a brief discussion of each of the project team members for District’s analysis. Shawn Koorn, Project Manager – Shawn will provide overall project management, review of the analyses, as well as provide analytical support and guidance for the development of rate study. Shawn will also provide public presentation to the District Board. Shawn provided a similar role on the prior studies completed for the District by HDR. Kevin Lorentzen, Task Lead – Kevin will develop the rate model for the District’s study. Kevin assisted in the prior electric rate studies for the District as well as prior water rate analyses. Josiah Close, Financial Analyst – Josiah will provide QA/QC for the study. In this role he will review the project deliverables. Josiah previously assisted in water analyses completed for the District. Truckee Donner PUD | Electric Cost of Service and Rate Study Project Timeline The District has developed a project time schedule for the study with a start date in March 2023 and a completion of the technical analysis in September of 2023 and public presentations in October and November of 2023. Based on the outline provided by the District, the following time schedule has been developed. Please note, this timeline is compressed given the technical analyses necessary to perform the study and develop proposed rates. HDR will work with the District to meet the District’s schedule. Key to meeting the schedule is the timely receipt of the data, the quality of the data, and ability to schedule project meetings with the District team. Project Fee Estimate Our proposed hourly rate schedule by job classification is provided below. These rates will be in effect through December 31, 2023. HDR ENGINEERING, INC. HOURLY RATE SCHEDULE Project Manager $315/Hour Senior Financial Analyst $240/Hour QA/QC $185/Hour Admin./Clerical $135/Hour The billing rates shown cover payroll cost, employee benefits, and HDR overhead and profit. Based on the hourly billing rates, and the previous scope of services, provided below is a summary of the estimated fees for the services discussed above. Truckee Donner PUD | Electric Cost of Service and Rate Study Summary of Estimated Fees Cost of Service and Rate Study Task Total Labor Task 1 - Project Management $2,730 Task 2 - Initial Project Meeting/Data Collection 1,990 Task 3 - Revenue Requirement Analysis 9,240 Task 4 - Cost of Service 10,960 Task 5 - Rate Design 12,560 Task 6 - Written Reports 5,300 Task 7 - Meetings/Presentations 7,080 Task 8 - Computer Models 0 Task Totals $49,860 Expenses (Travel, Printing, etc.) $2,730 Total Fee $52,590 The above fee estimate is based upon the scope of services previously developed. Should the District request additional out of scope services under this contract, the out of scope services will be provided at the hourly billing rates stated above. HDR is willing to negotiate a final fee based on a final scope of services. Portions of this proposal can be expanded or reduced in conformance with scope adjustments and as mutually agreed upon in writing by the District and HDR.