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Home My WebLink AboutD-7. Amend Blanket PO for BBKUB-110 APPROVED UTILITY BOARD 3/26/2018 UB-111 Electric Cost of Service and Rate Design Study City of Azusa, California Azusa Light & Water Project No. 98925 3/16/2018 UB-112 Electric Cost of Service and Rate Design Study prepared for City of Azusa, California Azusa Light & Water Azusa, California Project No. 98925 3/16/2018 prepared by Burns & McDonnell Engineering Company, Inc. Azusa, California COPYRIGHT © 2018 BURNS & McDONNELL ENGINEERING COMPANY, INC. UB-113 9400 Ward Parkway • Kansas City, MO 64114-3319 Tel: 816 333-9400 • Fax: 816 333-3690 • www.burnsmcd.com March 16, 2018 Mr. Yarek Lehr Acting Director of Utilities Azusa Light & Water 729 N. Azusa Avenue Azusa, California 91702 Re: Report on the 2017 Electric Cost of Service and Rate Design Study Dear Mr. Lehr: Burns & McDonnell is pleased to present this report on the Electric Cost of Service and Rate Design Study (the Study) completed on behalf of the City of Azusa, California (the City) for the Azusa Light & Water (AL&W). This report presents the results of the Study, including proposed retail electric rate modifications. The report also provides an explanation of the analyses performed to develop the five-year financial forecast, the test year revenue requirement, and the allocated, unbundled cost-of-service for each of AL&W’s electric rate classifications. It describes, in detail, the data, assumptions, and methodology used in completing the Study. The report also provides Burns & McDonnell’s recommendations for AL&W for retail electric rates. Throughout each phase of the Study, Burns & McDonnell worked closely with AL&W staff to gather the utility staff’s opinions and input. We greatly appreciate the opportunity to work with the City, AL&W and its staff. We specifically wish to thank you, Yarek, for your guidance and input throughout the Study process. Please contact us with any questions or comments you may have regarding this report. Sincerely, Burns & McDonnell Ted J. Kelly Sara Ruckman Senior Project Manager Project Analyst TJK/sr UB-114 Electric Cost of Service and Rate Design Study Table of Contents TOC-1 Burns & McDonnell TABLE OF CONTENTS Page No. 1.0 EXECUTIVE SUMMARY ................................................................................... 1-1 1.1 Overview .............................................................................................................. 1-1 1.2 Study Scope ......................................................................................................... 1-1 1.3 Revenue Requirements Analysis ......................................................................... 1-1 1.4 Cost-of-Service Analysis ..................................................................................... 1-2 1.5 Rate Analysis ....................................................................................................... 1-3 1.6 Recommendations ................................................................................................ 1-4 2.0 INTRODUCTION ............................................................................................... 2-1 2.1 Overview .............................................................................................................. 2-1 2.1.1 Current Rate Classifications ................................................................. 2-1 2.2 Study Scope ......................................................................................................... 2-1 2.3 Method of Analysis .............................................................................................. 2-2 3.0 REVENUE REQUIREMENTS ANALYSIS ........................................................ 3-1 3.1 Overview .............................................................................................................. 3-1 3.1.1 Customer Accounts ............................................................................... 3-1 3.1.2 Energy Requirements ............................................................................ 3-1 3.1.3 Peak Demand ........................................................................................ 3-2 3.2 Financial Forecast ................................................................................................ 3-2 3.2.1 Operating Revenues .............................................................................. 3-3 3.2.2 Operating Expenses .............................................................................. 3-3 3.2.3 Capital Improvement Expenditures ...................................................... 3-5 3.2.4 Debt Service .......................................................................................... 3-5 3.2.5 Projected Cash Flow ............................................................................. 3-6 3.2.6 Projected Revenue Requirements ......................................................... 3-8 4.0 COST-OF-SERVICE ANALYSIS ...................................................................... 4-1 4.1 Overview .............................................................................................................. 4-1 4.2 Revenue Requirement Unbundling ...................................................................... 4-1 4.2.1 Functionalization................................................................................... 4-1 4.2.2 Revenue Requirement Classification .................................................... 4-2 4.2.3 Revenue Requirement Allocation ......................................................... 4-2 4.3 Cost-of-Service Summary .................................................................................... 4-6 5.0 RATE ANALYSIS .............................................................................................. 5-1 5.1 Overview .............................................................................................................. 5-1 5.1.1 Rate Analysis Objectives ...................................................................... 5-1 5.2 Rate Classifications .............................................................................................. 5-1 5.2.1 Existing Rate Schedules ........................................................................ 5-2 5.2.2 Proposed Rate Schedules ...................................................................... 5-6 UB-115 Electric Cost of Service and Rate Design Study Table of Contents TOC-2 Burns & McDonnell 6.0 SUMMARY & RECOMMENDATIONS .............................................................. 6-1 6.1 Summary .............................................................................................................. 6-1 6.2 Recommendations ................................................................................................ 6-1 UB-116 Electric Cost of Service and Rate Design Study Table of Contents TOC-3 Burns & McDonnell LIST OF TABLES Page No. Table 1-1: Test Year Base Rate Revenue Requirement........................................................... 1-2 Table 1-2: Cost-of-Service Summary ...................................................................................... 1-3 Table 1-3: Current Rate Classes and Structures ...................................................................... 1-3 Table 3-1: Projected Customer Accounts ................................................................................ 3-1 Table 3-2: Projected Energy Sales ........................................................................................... 3-2 Table 3-3: Projected System Load ........................................................................................... 3-2 Table 3-4: Projected Base Rate Revenue at Current Rates ...................................................... 3-3 Table 3-5: Purchased Power Expenses .................................................................................... 3-4 Table 3-6: Projected O&M Expenses ...................................................................................... 3-4 Table 3-7: Projected Capital Improvements ............................................................................ 3-5 Table 3-8: Projected Debt Obligations .................................................................................... 3-6 Table 3-9: Base Rate Revenues ............................................................................................... 3-7 Table 3-10: Cash Flow ............................................................................................................... 3-8 Table 3-12: Projected Revenue Requirements ........................................................................... 3-9 Table 4-1: Revenue Requirement Unbundled Assignment Summary ..................................... 4-3 Table 4-2: Allocation Factors by Type .................................................................................... 4-4 Table 4-3: Functional Cost Allocation Summary .................................................................... 4-6 Table 4-4: Cost-of-Service Summary ...................................................................................... 4-7 Table 5-1: Current Rate Classes and Structures ...................................................................... 5-2 Table 5-2: Existing Residential Service Electric Rates ........................................................... 5-3 Table 5-3: Existing Small Business Electric Rates .................................................................. 5-3 Table 5-4: Existing Medium Business Electric Rates ............................................................. 5-3 Table 5-5: Existing Large Business TOU Electric Rates ........................................................ 5-4 Table 5-6: Existing Municipal Accounts Electric Rates .......................................................... 5-4 Table 5-7: Existing Street Lighting and Outdoor Lighting Electric Rates .............................. 5-5 Table 5-8: Proposed Residential Service Electric Rates .......................................................... 5-6 Table 5-9: Proposed Small Business Electric Rates ................................................................ 5-6 Table 5-10: Proposed Medium Business Electric Rates ............................................................ 5-7 Table 5-11: Proposed Large Business TOU Electric Rates ....................................................... 5-7 UB-117 Electric Cost of Service and Rate Design Study List of Abbreviations i Burns & McDonnell LIST OF ABBREVIATIONS Abbreviation Term/Phrase/Name AMI Advanced Metering Infrastructure Burns & McDonnell Burns & McDonnell Engineering Company, Inc. CIP Capital Improvement Plan City City of Azusa, California FARECAL Financing Authority for Resource Efficiency of California FY Fiscal Year kW kilowatt kWh kilowatt-hour AL&W Azusa Light & Water MW megawatt MWh megawatt-hour NEM Net Energy Metering O&M Operating & Maintenance Expense Study Electric Cost of Service and Rate Design Study TOU Time-of-Use WH/SH Water and/or Space Heat UB-118 Electric Cost of Service and Rate Design Study List of Abbreviations ii Burns & McDonnell STATEMENT OF LIMITATIONS In preparation of the Electric Cost of Service and Rate Design Study (the Study), Burns & McDonnell has relied upon information obtained from the City of Azusa, California (the City) WEB portal and provided by the electric division of Azusa Light & Water (AL&W). The information included various analyses, computer-generated information and reports, audited financial reports, and other financial and statistical information, as well as other documents such as operating budgets and current retail electric rate schedules. In addition, input to key assumptions regarding expected future levels of revenue, sales, and expenditures was provided by AL&W staff to Burns & McDonnell. While Burns & McDonnell has no reason to believe that the information provided, and upon which Burns & McDonnell has relied, is inaccurate or incomplete in any material respect, Burns & McDonnell has not independently verified such information and cannot guarantee its accuracy or completeness. Estimates and projections prepared by Burns & McDonnell relating to performance and costs are based on Burns & McDonnell’s experience, qualifications, and judgment as a professional consultant. Since Burns & McDonnell has no control over weather, cost and availability of labor, material and equipment, labor productivity, contractors’ procedures and methods, unavoidable delays, economic conditions, government regulations and laws (including interpretation thereof), competitive bidding, and market conditions or other factors affecting such estimates or projections, Burns & McDonnell does not guarantee the accuracy of its estimates or predictions. For this report, Burns & McDonnell utilized unaudited actuals for fiscal year (FY) 2017 since the audit is not yet available. Revision History Revision Issue Date Author Reviewer Description 0 8-Nov-2017 Kelly Ruckman Initial Draft 1 4-Jan-2018 Judy Tran Initial Draft Edits 1 14-Feb-2018 Yarek Lehr Initial Draft Edits 2 13-Mar-2018 Kelly Ruckman Final Draft UB-119 1.0 – EXECUTIVE SUMMARY UB-120 Electric Cost of Service and Rate Design Study Executive Summary 1-1 Burns & McDonnell 1.0 EXECUTIVE SUMMARY 1.1 Overview To evaluate the adequacy of revenue requirements and to develop recommendations for a financial plan and prepare appropriate rate adjustments and design, Azusa Light & Water (AL&W) retained Burns & McDonnell to prepare a comprehensive Electric Cost of Service and Rate Design Study (the Study). This report provides a review and the results of the Study, which included a revenue requirements analysis, a cost-of-service analysis, and the development of electric rate modification recommendations. The Study provides the basis for updated electric rates and develops updated unbundled rates for customer service, power supply and power delivery. The report describes the development of the five-year financial forecast used to illustrate the financial effects of new customers and load on the system. 1.2 Study Scope This cost-of-service and rate analysis was conducted to address the ongoing changes taking place in the electric industry. AL&W’s directive was to conduct a study that, when completed, meets the following goals: • Provide a five-year financial forecast • Allocate costs to customer classes following industry guidelines • Prepare revisions or recommendations to current rates, as needed • Prepare and provide a financial forecast and rate analysis model for future use by AL&W 1.3 Revenue Requirements Analysis The first phase of the Study completed for AL&W was the determination of the test year net revenue requirement. This net revenue requirement was used as the basis for the subsequent phases of the project, namely the cost-of-service and rate analyses. In order to calculate the test year net revenue requirement, a five-year financial forecast was developed to project the results from the electric operations of AL&W. The financial forecast is modeled on a fiscal year (FY) basis of July 1 through June 30. Following the development of the financial forecast, a comparison of annual revenue and revenue requirements was completed to determine whether sufficient revenue would be available to cover projected operating and capital expenditures or if revenue adjustments would be required. Based on the analysis completed and specific discussion regarding rates, Burns & McDonnell recommends AL&W take no action to raise additional revenue over and above monies generated by current rates. AL&W is UB-121 Electric Cost of Service and Rate Design Study Executive Summary 1-2 Burns & McDonnell maintaining adequate operating income and operating fund cash balances, meeting debt service coverage requirements, and generating sufficient rate base returns. A test year FY 2018 rate revenue and revenue requirement comparison is presented in Table 1-1. The revenue requirement is equal to the annual cost-of-service minus other revenue. The annual cost-of- service consists of total operating expenses, non-operating expenses, transfers, capital improvement plan (CIP), debt service, and net change in operating reserves. The total test year FY 2018 rate revenue requirement was calculated to be $33.2 million. AL&W desires to maintain a revenue-to-cost ratio of at least 1.0. For the test year and beyond this minimum requirement is being met. Table 1-1: Test Year Base Rate Revenue Requirement 1.4 Cost-of-Service Analysis The development of the cost-of-service analysis followed the revenue requirements analysis. The cost-of- service analysis included the assignment, or unbundling, of the various costs included in the test year 2018 revenue requirement to AL&W’s functional services. These unbundled cost components of the revenue requirement were then allocated to the various electric rate classifications to determine cost recovery requirements. The results of the cost-of-service analysis and the allocation of the test year revenue requirement to AL&W’s rate classes are summarized in Table 1-2. The results are expressed in both dollars and ¢/kWh. Unaudited Actuals Test Year Fiscal Year July 1 - June 30 2017 2018 2019 2020 2021 Annual Revenue Requirement ($) Power Supply Expenses 23,408,509$ 18,568,317$ 18,396,300$ 19,347,000$ 20,348,000$ Nonoperating Expenses (FF, PILOT, Transfers, Int. Exp)4,077,320$ 4,495,375$ 4,630,200$ 4,265,260$ 4,316,300$ Transfers out - Other (Fund 33 to Fund 31)2,587,217$ 2,807,870$ 2,892,100$ 2,978,900$ 3,068,300$ Transfer to PCA Stabilization Account -$ 2,892,900$ 3,416,063$ 2,442,463$ 1,417,523$ Operating Expenses 7,677,207$ 8,934,301$ 9,931,600$ 9,478,800$ 9,763,200$ Capital Improvement Plan (Cash Financed)500,000$ 2,965,000$ 5,100,000$ 2,850,000$ 1,100,000$ Debt Service 850,912$ 952,689$ 945,644$ 946,419$ 944,331$ Net Change in Operating Reserves 6,366,951$ 955,843$ (4,477,459)$ (1,429,340)$ (31,288)$ Cost of Service 45,468,117$ 42,572,296$ 40,834,448$ 40,879,501$ 40,926,366$ Less Other Revenues & Income Misc. Billing Revenue 1,298,587$ 1,448,628$ 1,448,628$ 1,448,628$ 1,448,628$ Sales to Public Authorities (Major Only)1,376,120$ 1,376,120$ 1,376,120$ 1,376,120$ 1,376,120$ Sales for Resale 4,017,473$ 3,479,486$ 2,000,000$ 2,000,000$ 2,000,000$ Other Operating Revenues 1,113,825$ 1,113,825$ 1,113,825$ 1,113,825$ 1,113,825$ Nonoperating Revenues 818,811$ 818,803$ 818,803$ 818,803$ 818,803$ Power Cost Adjustment Revenues 3,910,300$ 1,185,134$ 698,472$ 514,525$ 321,990$ Interfund Transfers -$ -$ -$ -$ -$ Total Other Revenues & Income 12,535,115$ 9,421,996$ 7,455,848$ 7,271,901$ 7,079,366$ Net Revenue Requirements 32,933,002$ 33,150,300$ 33,378,600$ 33,607,600$ 33,847,000$ UB-122 Electric Cost of Service and Rate Design Study Executive Summary 1-3 Burns & McDonnell Table 1-2: Cost-of-Service Summary The lines labeled ‘Difference’ in Table 1-2 indicate the extent to which the projected annual revenues generated from the current rates for each class would either exceed or fall short of the corresponding revenue requirement. The table shows some cross subsidization between the rate classes, but not to a significant degree. 1.5 Rate Analysis The final phase of the Study completed for AL&W was the rate analysis. As previously discussed, the financial forecast indicated that AL&W is on sound financial footing and the periodic rate adjustment approach employed to date should sufficiently support the financial health of the utility moving forward. Minimal base rate adjustments are recommended for the utility such as increasing the customer charge, or fixed portion of the rate, and decreasing the energy portion of the rate. A summary of the rate schedule components for each classification is provided below. Table 1-3: Current Rate Classes and Structures Total System Small business (G-1) Medium business (G-2) Large business (T.O.U.) Street Lights (SL-1, SL-2, SL-3) Outdoor Lights (SL-2, OL) Municipal Accounts (MS) Residential (D, WH/SH) Comparison of Revenues ($) Energy Sales - kWh 269,123,473 20,564,666 54,928,246 90,769,909 37,605 94,012 11,992,834 90,736,200 Revenue Requirement 33,150,300$ 2,659,428$ 6,175,517$ 9,214,196$ 10,300$ 17,300$ 1,444,820$ 13,628,739$ Revenue Generated By Existing Rates 33,150,300$ 3,111,000$ 6,950,300$ 10,145,800$ 10,300$ 17,300$ 1,342,500$ 11,573,100$ Difference -$ (451,572)$ (774,783)$ (931,604)$ -$ -$ 102,320$ 2,055,639$ Revenue Adjustment Required 0.00% -14.52% -11.15% -9.18% 0.00% 0.00% 7.62% 17.76% Comparison of Revenues ($/kWh) Revenue Requirement 0.1287$ 0.1351$ 0.1174$ 0.1060$ 0.2861$ 0.1922$ 0.1258$ 0.1569$ Revenue Generated By Existing Rates 0.1287$ 0.1580$ 0.1322$ 0.1168$ 0.2861$ 0.1922$ 0.1169$ 0.1332$ Difference -$ (0.0229)$ (0.0147)$ (0.0107)$ -$ -$ 0.0089$ 0.0237$ Revenue Adjustment Required 0.00% -14.52% -11.15% -9.18% 0.00% 0.00% 7.62% 17.76% Basic/Cust Charge Energy Usage Charge Demand Charge Minimum Monthly Charge Small Business (G-1)X X Medium Business (G-2)X X X Large Busienss (GL)X X X Large Business (TOU + D)X X X Street Lights (SL-1)X Street Lights & Outdoor Lights (SL-2)X Street Lights Customer Owned (SL-3)X Outdoor Lights (OL)X Municipal Accounts (MS)X X Residential (D)X X Residential (WH/SH)X X UB-123 Electric Cost of Service and Rate Design Study Executive Summary 1-4 Burns & McDonnell 1.6 Recommendations Burns & McDonnell recommends a number of actions be taken by AL&W based on the analyses conducted during the Study. The Study recommendations are presented herein. • Based on the analysis completed and specific discussion regarding rates, Burns & McDonnell recommends AL&W take no action to raise additional revenue over and above monies generated by current rates. • Burns & McDonnell recommends adjustments be made to rate structures by increasing the fixed charge portion of the rate and lowering the energy charge portion of the rate. These adjustments are revenue neutral for the system. • AL&W should consider reassessing the PCA to more closely reflect reductions in power supply costs. One approach may be to reassess the PCA base rate and adjust it if significantly different than one currently used. • AL&W should consider implementing the recommended time of use (TOU) seasonal rate adjustments to more accurately reflect time-based power supply costs incurred by the system. • AL&W may consider devising a modified TOU rate, and offer it as an option, whereby energy component of the rate would be closely linked to the ISO wholesale energy prices in the Los Angeles Basin. • Burns & McDonnell recommends consideration of additional rate options once the advanced metering infrastructure (AMI) program is completed and AL&W has a minimum of one year’s worth of usage data on the system. • AL&W should continue to monitor their financial position and revisit a rate analysis in three to five years; or after the AMI system has been in place for at least one year. AL&W should monitor its financial position, including adequacy of cost recovery and cash balances on an on-going basis to help ensure the utility continues to meet its financial requirements. Burns & McDonnell recommends the reexamination of the utility’s financial plan, costs-of-service, and electric rates at most every five years. UB-124 2.0 – INTRODUCTION UB-125 Electric Cost of Service and Rate Design Study Introduction 2-1 Burns & McDonnell 2.0 INTRODUCTION 2.1 Overview Azusa Light & Water (AL&W) is a municipally owned and operated electric utility established by the City of Azusa, California (the City). AL&W provides retail electric services to consumers within the City and the surrounding areas. The utility presently serves over 16,500 electric customers in its service territory. To reevaluate the adequacy of revenue requirements and to develop a financial plan, AL&W retained Burns & McDonnell to prepare a comprehensive Electric Cost of Service and Rate Design Study (the Study). This report provides a review and the results of the Study, which included a revenue requirements analysis, a cost-of-service analysis, and the development of electric rate modification recommendations. The report describes the development of the five-year financial forecast used to illustrate the financial effects of new customers and load on the system. 2.1.1 Current Rate Classifications AL&W customers are charged based on their service application, overall monthly kilowatt-hour (kWh) energy consumption, and/or kilowatt (kW) demand characteristics. AL&W serves the following customer classes: • Small Business – Schedule G-1 • Medium Business – Schedule G-2 • Large Business – Schedule GL • Large Business – Schedule Time-of-Use (TOU) • Street Lights – Schedule SL-1, SL-2, SL-3 • Outdoor Lights – Schedule SL-2, OL • Municipal Accounts – Schedule MS • Residential – Schedule D, Water and/or Space Heat (WH/SH) 2.2 Study Scope This cost-of-service and rate analysis was conducted primarily to address changes in the Azusa supply portfolio and operations resulting from ISO markets/requirements and the ongoing changes and impacts of renewable energy and climate change regulatory policies taking place in the electric industry. AL&W directive was to conduct a study that, when completed, meets the following goals: UB-126 Electric Cost of Service and Rate Design Study Introduction 2-2 Burns & McDonnell • Provide a five-year financial forecast • Allocate costs to customer classes following industry guidelines • Prepare recommendations for revision of current rates, if and as needed • Prepare and provide a financial forecast and rate analysis model for future use by AL&W 2.3 Method of Analysis The Study completed by Burns & McDonnell consisted of three phases. The first phase was the development of a financial plan. The financial plan, and the resulting test year net revenue requirement used in the subsequent phases of the Study, was developed based on a five-year financial forecast of AL&W’s revenues and expenses. The financial forecast includes projections of known changes in annual costs such as power cost projections and is based on information provided by AL&W. Other categories of expenses were forecasted using historical trends or assumed annual rates of inflation. The forecast results for FY 2018 were used as the test year net revenue requirement from which the cost-of-service analysis was based. Section 3.0 of this report describes the development of the five-year financial forecast and net revenue requirement. The second phase of this Study consisted of the cost-of-service analysis which included the assignment, or unbundling, of the various costs and margins included in the test year revenue requirement to AL&W’s functional services (e.g. power supply, distribution, customer service, etc.). These unbundled cost components of the test year revenue requirement were then allocated to the various electric rate classifications. The resulting allocated cost-of-service for each rate classification was compared to the adjusted annual revenues for each class in the FY 2018 test year to assess the projected cost recovery provided by the existing retail rates. These steps and the corresponding results are explained in Section 4.0 of this report. The results of the financial forecast and cost-of-service analysis provided a basis for the third phase which was the development of recommendations pertaining to electric service rates to be considered by AL&W. Section 5.0 of this report discusses the implications of the financial plan and cost-of-service results on AL&W’s current electric rates and describes the proposed modifications to those retail rates. Section 6.0 summarizes the results of the Study and Burns & McDonnell’s recommendations for AL&W moving forward. Throughout this report, references are made to various tables that detail specific aspects of the analyses completed. UB-127 3.0 – REVENUE REQUIREMENTS ANALYSIS UB-128 Electric Cost of Service and Rate Design Study Revenue Requirements Analysis 3-1 Burns & McDonnell 3.0 REVENUE REQUIREMENTS ANALYSIS 3.1 Overview The first phase of the Study completed for AL&W was the determination of the test year net revenue requirement. This net revenue requirement was used as the basis for the subsequent phases of the project, namely the cost-of-service and rate analyses. In order to calculate the test year net revenue requirement, a five-year financial forecast was developed to project the results from the electric operations of AL&W. 3.1.1 Customer Accounts Table 3-1 presents the projected numbers of electric customer accounts for AL&W from FY 2018 to FY 2021. Over the past few years, AL&W has experienced moderate growth in customer accounts. Table 3-1: Projected Customer Accounts 3.1.2 Energy Requirements For the analysis, AL&W provided historical actuals, by class, through FY 2017. The energy sales projections assume relatively unchanged use of kWh per customer, with customer count increasing at a rate slightly below one percent on average. As presented in Table 3-2, annual energy sales total 225,975,406 kWh in FY 2017 and are projected to increase to 263,018,182 kWh in FY 2021. Projected energy sales include all municipal energy requirements. CUSTOMERS Small business (G-1)1,332 1,353 1,375 1,397 1,419 Medium business (G-2)278 278 278 278 278 Large business (T.O.U.)34 34 34 34 34 Street Lights (SL-1, SL-2, SL-3)65 54 45 37 31 Outdoor Lights (SL-2, OL)42 46 50 55 60 Municipal Accounts (MS)137 147 158 169 181 Total Commercial 1,888 1,912 1,940 1,970 2,003 Residential (D, WH/SH)14,667 14,765 14,863 14,963 15,063 Total Customers 16,555 16,677 16,803 16,933 17,066 UB-129 Electric Cost of Service and Rate Design Study Revenue Requirements Analysis 3-2 Burns & McDonnell Table 3-2: Projected Energy Sales Forecast energy requirements were calculated assuming a system loss factor of 4.27 percent from FY 2018 through FY 2021, which is equal to the average system loss factor from FY 2015 to FY 2017. As presented in Table 3-3, annual AL&W energy purchases are projected to increase from 267,387,041 kWh in FY 2017 to 274,743,791 kWh in FY 2021. 3.1.3 Peak Demand The basis for projecting annual system peak demands from FY 2018 through FY 2021 were determined by dividing the total annual energy requirement by the annual system load factor multiplied by 8760. Table 3-3 summarizes the annual system peak demand for each year of the analysis. Table 3-3: Projected System Load 3.2 Financial Forecast The financial forecast was developed to estimate AL&W’s annual revenue requirements and included projections of annual operating revenues, operating expenses, net non-operating income, and the resulting net income, as well as projections of plant investment, debt service, and other cash flows from FY 2017 Unaudited Actuals Fiscal Year July 1 - June 30 2017 2018 2019 2020 2021 ENERGY SALES (kWh) Small business (G-1)19,381,913 19,687,000 20,008,000 20,328,000 20,648,000 Medium business (G-2)52,584,411 52,584,000 52,584,000 52,584,000 52,584,000 Large business (T.O.U.)86,896,074 86,896,000 86,896,000 86,896,000 86,896,000 Street Lights (SL-1, SL-2, SL-3)43,301 36,000 30,000 25,000 21,000 Outdoor Lights (SL-2, OL)82,464 90,000 98,000 108,000 118,000 Municipal Accounts (MS)10,699,604 11,481,000 12,340,000 13,199,000 14,136,000 Total Commercial 169,687,767 170,774,000 171,956,000 173,140,000 174,403,000 Residential (D, WH/SH)86,287,639 86,863,730 87,443,667 88,027,475 88,615,182 Total Energy Sales (kWh)255,975,406 257,637,730 259,399,667 261,167,475 263,018,182 Forecast Unaudited Actuals Fiscal Year July 1 - June 30 2017 2018 2019 2020 2021 Energy Sales and Supply Billed Energy Sales (kWh) [1]255,975,406 257,637,730 259,399,667 261,167,475 263,018,182 Line Losses, Electric Dept, Street Lighting (kWh)11,411,635 11,485,743 11,564,292 11,643,102 11,725,609 Total Energy Requirement (kWh)267,387,041 269,123,473 270,963,958 272,810,578 274,743,791 Purchased Power (kWh) [2]267,387,041 269,123,473 270,963,958 272,810,578 274,743,791 Sales (%)95.73%95.73%95.73%95.73%95.73% Line Losses, Electric Dept, Street Lighting (%)4.27%4.27%4.27%4.27%4.27% Total Requirements (%)100.00% 100.00% 100.00% 100.00% 100.00% Average System Billing Demand (MW)65.3 65.8 66.2 66.7 67.1 System Load Factor (%) [4]46.75%46.71%46.71%46.71%46.71% Forecast UB-130 Electric Cost of Service and Rate Design Study Revenue Requirements Analysis 3-3 Burns & McDonnell and forecast FY 2018 through FY 2021. The forecast considered annual levels of internally generated funds from operations and AL&W’s projected capital expenditure requirements. These estimates are typically used to forecast the need for additional funds through retail rate adjustments, transfers from reserves, and/or external capital financing. The projections developed were summarized in a cash flow statement. The annual revenue requirements were determined from this financial statement. The basis of the projections and the assumptions used in the development of each component of the forecast are described herein. 3.2.1 Operating Revenues 3.2.1.1 Base Rate Revenues Burns & McDonnell projected annual base rate revenues from current rates based on the average revenue per kWh for each class and annual billing determinants from the projected energy sales. Table 3-4 presents projected base rate revenue for each year of the analysis period. Table 3-4: Projected Base Rate Revenue at Current Rates 3.2.2 Operating Expenses 3.2.2.1 Power Supply Expense Purchased power cost projections were developed based on projected energy and distribution costs provided by AL&W. Table 3-5 presents an annual forecast of purchased power expenses. The cost of purchased power for FY 2017 was based on unaudited actuals provided by AL&W and was projected for each of the subsequent years in the forecast. The cost of purchased power is estimated to decrease from $23.1 million in FY 2017 to $20.3 million in FY 2019. The primary reason for this drop in Purchased Unaudited Actuals Fiscal Year July 1 - June 30 2017 2018 2019 2020 2021 BILLED REVENUES ($) Small business (G-1)3,061,227$ 3,111,000$ 3,161,700$ 3,212,200$ 3,262,800$ Medium business (G-2)6,950,329$ 6,950,300$ 6,950,300$ 6,950,300$ 6,950,300$ Large business (T.O.U.)10,145,766$ 10,145,800$ 10,145,800$ 10,145,800$ 10,145,800$ Street Lights (SL-1, SL-2, SL-3)12,369$ 10,300$ 8,600$ 7,100$ 6,000$ Outdoor Lights (SL-2, OL)15,837$ 17,300$ 18,800$ 20,700$ 22,700$ Municipal Accounts (MS)1,251,142$ 1,342,500$ 1,443,000$ 1,543,400$ 1,653,000$ Total Commercial 21,436,671$ 21,577,200$ 21,728,200$ 21,879,500$ 22,040,600$ Residential (D, WH/SH)11,496,331$ 11,573,100$ 11,650,400$ 11,728,100$ 11,806,400$ Total Billed Revenue ($)32,933,002$ 33,150,300$ 33,378,600$ 33,607,600$ 33,847,000$ Forecast UB-131 Electric Cost of Service and Rate Design Study Revenue Requirements Analysis 3-4 Burns & McDonnell Power cost is the retirement of the San Juan resource as part of the power supply portfolio and replacing it with a lower cost resources. Table 3-5: Purchased Power Expenses 3.2.2.2 Operation and Maintenance Expense In addition to purchased power expenses, the AL&W electric utility incurs operating and maintenance expenses (O&M) from its distribution and general plant, maintenance work, customer accounts, and administrative operations. Including purchased power, O&M expenses for FY 2017 are estimated to be $31.1 million, and future O&M expenses are projected to range from $27.5 million in FY 2018 to $30.1 million in FY 2021 as illustrated in Table 3-6. Table 3-6: Projected O&M Expenses Unaudited Actuals Fiscal Year July 1 - June 30 2017 2018 2019 2020 2021 Purchased Power Expense Total Energy Cost ($)23,329,856$ 17,459,287$ 16,319,840$ 16,319,840$ 16,319,840$ Total Resource Energy (kWh)267,387,041 269,123,473 270,963,958 272,810,578 274,743,791 Total Energy Cost ($/kWh) 0.0873$ 0.0649$ 0.0602$ 0.0626$ 0.0651$ Escalation (%)4.0%4.0% Energy Cost ($)23,329,900$ 17,459,300$ 16,319,800$ 17,088,300$ 17,897,800$ Total Transmission Cost ($)3,353,558$ 4,018,411$ 3,506,411$ 3,506,411$ 3,506,411$ Total Transmission Energy (kWh)267,387,041 269,123,473 270,963,958 272,810,578 274,743,791 Total Transmission Cost ($/kWh)0.0125$ 0.0149$ 0.0129$ 0.0135$ 0.0140$ Escalation (%)4.0%4.0% Transmission Cost ($)3,353,600$ 4,018,400$ 3,506,400$ 3,671,500$ 3,845,400$ Total Purchase Power Expense ($)26,683,500$ 21,477,700$ 19,826,200$ 20,759,800$ 21,743,200$ Scheduling, System Control and Dispatching Services.433,641$ 570,103$ 570,100$ 587,200$ 604,800$ RESALE (Excess wholesale+ Balancing/optimization)(4,017,473)$ (3,479,486)$ (2,000,000)$ (2,000,000)$ (2,000,000)$ Total Purchase Power Expense ($)23,099,668$ 18,568,317$ 18,396,300$ 19,347,000$ 20,348,000$ Total Purchase Power Expense ($/kWh)0.0864$ 0.0690$ 0.0679$ 0.0709$ 0.0741$ Forecast Unaudited Actuals Fiscal Year July 1 - June 30 2017 2018 2019 2020 2021 Operating Expense Summary ($) DISTRIBUTION PLANT EXPENSES ($)890,000$ 890,000$ 916,700$ 944,400$ 972,800$ GENERAL PLANT EXPENSES ($)357,849$ -$ -$ -$ -$ POWER SUPPLY EXPENSES ($)23,099,668$ 18,568,317$ 19,125,400$ 19,347,000$ 20,348,000$ DISTRIBUTION EXPENSES (MAINTENANCE) ($)3,503,932$ 3,975,790$ 4,095,100$ 4,217,900$ 4,344,400$ DISTRIBUTION EXPENSES (OPERATION) ($)31,615$ 40,565$ 41,900$ 43,200$ 44,500$ DISTRIBUTION EXPENSES (MAINTENANCE) ($)418,241$ 418,241$ 430,800$ 443,700$ 457,000$ CUSTOMER ACCOUNT EXPENSES ($)2,780,162$ 3,605,455$ 3,713,600$ 3,825,100$ 3,939,900$ ADMINISTRATIVE AND GENERAL EXPENSES ($)4,250$ 4,250$ 4,400$ 4,500$ 4,600$ Total Operating Expenses ($)31,085,716 27,502,618$ 28,327,900 28,825,800 30,111,200 Forecast UB-132 Electric Cost of Service and Rate Design Study Revenue Requirements Analysis 3-5 Burns & McDonnell 3.2.3 Capital Improvement Expenditures A forecast of capital expenditures for the electric system was developed by AL&W. The capital expenditures forecast was incorporated into the financial model and utilized to determine the forecasted annual plant in service and depreciation expense. AL&W funds its capital expenditures through a combination of cash financing, debt financing and operating fund transfers. The largest of these capital expenditures is the advanced metering infrastructure (AMI) upgrades, and substation facility improvements. The electric system’s total estimated cost for the AMI project is $6.3 million in the next 3 years, and the estimated cost for the substation improvements totals to $5.1 million for FY 2018 through FY 2021. Table 3-7 presents a summary of projected capital improvements for the forecast period. Table 3-7: Projected Capital Improvements 3.2.4 Debt Service Currently the electric utility pays annual payments on two series of revenue bonds, with one issued by the Financing Authority for Resource Efficiency of California (FARECal) and the other issued by the City. The bonds were issued to finance the acquisition, construction and installation of certain capital improvement projects for the City of Azusa’s electric system. The projections of outstanding debt service obligations from FY 2018 through FY 2021 are based on debt service schedules provided by AL&W. Table 3-8 presents annual projections of outstanding debt service obligations of the electric utility. Unaudited Actuals Fiscal Year July 1 - June 30 2017 2018 2019 2020 2021 Capital Improvements ($) Department Equipment AMI 500,000$ 2,500,000$ 2,500,000$ 750,000$ -$ Underground Electric Line Replacements & Line Extensions -$ 100,000$ 600,000$ 100,000$ 100,000$ Electric Substations Facility Improvements -$ 100,000$ 2,000,000$ 2,000,000$ 1,000,000$ Todd & 10th Street Electric Line Extension and Equipment -$ 150,000$ -$ -$ -$ LED Street Lights Fixture Retrofit -$ 115,000$ -$ -$ -$ Total Capital Improvements ($)500,000$ 2,965,000$ 5,100,000$ 2,850,000$ 1,100,000$ Revenue Financed Capital Improvements 500,000$ 2,965,000$ 5,100,000$ 2,850,000$ 1,100,000$ Debt Financed Capital Improvements -$ -$ -$ -$ -$ [1] Capital improvements for 2018 through 2021 are based on a 5 year capital plan provided by Azusa Forecast UB-133 Electric Cost of Service and Rate Design Study Revenue Requirements Analysis 3-6 Burns & McDonnell Table 3-8: Projected Debt Obligations 3.2.5 Projected Cash Flow The projection of cash flow for each year provided the basis for determining if the revenue generated from operations sufficiently covered costs. Ultimately, the cash flow was used to establish AL&W test year rate revenue requirement for FY 2018. Annual base rate revenues were projected using the average retail rate revenue for each class and annual billing determinants from the load forecast. Annual base rate revenues from base or customer charges, energy usage charges, and demand charges were generated from the following classes: Small Business, Medium Business, Large Business, Street Lights, Outdoor Lights, Municipal Accounts, and Residential Service. In total, base rate revenues are projected to total $33.2 million in FY 2018 and reach $33.8 million in FY 2021 as seen in Table 3-9. Other types of electric revenues include revenue from sales to public authorities, power cost adjustments, sales for resale, miscellaneous billing revenues and other operating and non-operating revenues. Adding all these sources of revenues together with revenue from retail sales produced total revenues in FY 2017 of $45.5 million. Total revenues are projected to decrease to $40.9 million by 2021. This decrease, starting in FY 2018, can mainly be attributed to lower overall power supply costs after the completion of San Juan divestiture in December and replacement with lower cost forward contracts. This is shown in Table 3-10. Electric expenses were projected for each year of the financial forecast. Expenses include purchased power expenses, allocations to Fund 31 for customer related services, transfers to the PCA stabilization account (including the stabilization requirement) and operating and maintenance expenses. Franchise Fees, Payments in Lieu of Taxes (PILOT), and interest expense are included in non-operating expenses. Expenses are projected to increase from $37.7 million in FY 2017 to $38.9 million in FY 2021. Unaudited Actuals Fiscal Year July 1 - June 30 2017 2018 2019 2020 2021 Outstanding Debt ($) Principal Outstanding - Beg. Bal.6,600,000$ 5,950,000$ 5,170,000$ 4,375,000$ 3,555,000$ Principal -$ 780,000$ 795,000$ 820,000$ 845,000$ Sinking Fund 650,000$ -$ -$ -$ -$ Interest 25,344$ 3,621$ -$ -$ -$ Total Payment 675,344$ 783,621$ 795,000$ 820,000$ 845,000$ Debt Issue Cost Amort-Outstanding Debt -$ -$ -$ -$ -$ Principal Outstanding - End. Bal.5,950,000$ 5,170,000$ 4,375,000$ 3,555,000$ 2,710,000$ Forecast UB-134 Electric Cost of Service and Rate Design Study Revenue Requirements Analysis 3-7 Burns & McDonnell Net income before capital infrastructure plan (CIP) and debt service was $7.7 million in FY 2017, and decreases to $2.0 million by FY 2021. This decrease is a result of the drop in total revenues while total expenses increase slightly. After CIP and debt service are accounted for, cash and cash reserves remain at a healthy level of $29.6 million in FY 2017 and $24.6 million in FY 2021. After deducting the $12.6 million minimum reserve requirement, unrestricted funds were at $17.0 million in FY 2017 and $12.0 in FY 2021. Table 3-9: Base Rate Revenues Unaudited Actuals Fiscal Year July 1 - June 30 2017 2018 2019 2020 2021 System Operations ($)($)($)($)($) Annual Energy Sales (kWh)255,975,406 257,637,730 259,399,667 261,167,475 263,018,182 Average Electric Rate ($/kWh)0.1701$ 0.1577$ 0.1500$ 0.1491$ 0.1483$ Base Rate Revenues Commercial Electric Sales 21,436,671$ 21,577,200$ 21,728,200$ 21,879,500$ 22,040,600$ Residential Electric Sales 11,496,331$ 11,573,100$ 11,650,400$ 11,728,100$ 11,806,400$ Revenue from Retail Sales - Existing Rates 32,933,002$ 33,150,300$ 33,378,600$ 33,607,600$ 33,847,000$ Forecast UB-135 Electric Cost of Service and Rate Design Study Revenue Requirements Analysis 3-8 Burns & McDonnell Table 3-10: Cash Flow 3.2.6 Projected Revenue Requirements A summary of the test year FY 2018 rate revenue requirement is presented in Table 3-11. The annual cost-of-service consists of total operating expenses, non-operating expenses, transfers, CIP, debt service, and net change in operating reserves. Based on the revenue requirements analysis completed and specific discussion regarding rate revenues and requirements, Burns & McDonnell recommends AL&W take no action to raise additional revenue over and above monies generated by current rates and to go forward with the approved PCA Stabilization Plan adjustments. Unaudited Actuals Fiscal Year July 1 - June 30 2017 2018 2019 2020 2021 System Operations ($)($)($)($)($) Beginning Balance - Cash & Cash Reserves 23,229,032 29,595,983 30,551,827 26,074,368 24,645,027 Revenues: Commercial Electric Sales 21,436,671 21,577,200 21,728,200 21,879,500 22,040,600 Residential Electric Sales 11,496,331 11,573,100 11,650,400 11,728,100 11,806,400 Sales to Public Authorities (Major Only)1,376,120 1,376,120 1,376,120 1,376,120 1,376,120 Power Cost Adjustment Revenues 3,910,300 1,185,134 698,472 514,525 321,990 Revenue from Retail Sales - Existing Rates 38,219,421 35,711,554 35,453,192 35,498,245 35,545,110 Sales for Resale 4,017,473 3,479,486 2,000,000 2,000,000 2,000,000 Misc. Billing Revenue 1,298,587 1,448,628 1,448,628 1,448,628 1,448,628 Total Electric Sales Revenues 43,535,481 40,639,668 38,901,820 38,946,873 38,993,738 Other Operating Revenues 1,113,825 1,113,825 1,113,825 1,113,825 1,113,825 Nonoperating Revenues 818,811 818,803 818,803 818,803 818,803 Total Revenues 45,468,117 42,572,296 40,834,448 40,879,501 40,926,366 Expenses: Power Supply Expenses 23,408,509 18,568,317 18,396,300 19,347,000 20,348,000 Nonoperating Expenses (FF, PILOT, Transfers, Int. Exp)4,077,320 4,495,375 4,630,200 4,265,260 4,316,300 Transfers out - Other (Fund 33 to Fund 31)2,587,217 2,807,870 2,892,100 2,978,900 3,068,300 Transfer to PCA Stabilization Account - 2,892,900 3,416,063 2,442,463 1,417,523 Operating Expenses 7,677,207 8,934,301 9,931,600 9,478,800 9,763,200 Subtotal Expenses 37,750,253 37,698,763 39,266,263 38,512,423 38,913,323 Net Income/(Expense) Before CIP & Debt Service 7,717,864 4,873,533 1,568,185 2,367,078 2,013,043 Plant Capital Expenditures (Cash Financed)500,000 2,965,000 5,100,000 2,850,000 1,100,000 Annual Debt Service 850,912 952,689 945,644 946,419 944,331 Subtotal Capital Improvements and Debt Service 1,350,912 3,917,689 6,045,644 3,796,419 2,044,331 Net Increase/Decrease in Cash & Reserves 6,366,951 955,843 (4,477,459) (1,429,340) (31,288) Ending Balance - Cash & Cash Reserves 29,595,983 30,551,827 26,074,368 24,645,027 24,613,739 Minimum Reserve Requirement 12,600,000 12,600,000 12,600,000 12,600,000 12,600,000 Unrestricted Funds 16,995,983 17,951,827 13,474,368 12,045,027 12,013,739 Debt Service Coverage Net Revenues Available for Debt Service 7,717,864 4,873,533 1,568,185 2,367,078 2,013,043 Debt Service 850,912 952,689 945,644 946,419 944,331 Reserves Available for Debt Service Net Revenues and Reserves Available for Debt Service 7,717,864 4,873,533 1,568,185 2,367,078 2,013,043 Debt Service Coverage Based on Net Operating Revenues & Reserves 9.07 5.12 1.66 2.50 2.13 Forecast UB-136 Electric Cost of Service and Rate Design Study Revenue Requirements Analysis 3-9 Burns & McDonnell Table 3-11: Projected Revenue Requirements Unaudited Actuals Test Year Fiscal Year July 1 - June 30 2017 2018 2019 2020 2021 Annual Revenue Requirement ($) Power Supply Expenses 23,408,509$ 18,568,317$ 18,396,300$ 19,347,000$ 20,348,000$ Nonoperating Expenses (FF, PILOT, Transfers, Int. Exp)4,077,320$ 4,495,375$ 4,630,200$ 4,265,260$ 4,316,300$ Transfers out - Other (Fund 33 to Fund 31)2,587,217$ 2,807,870$ 2,892,100$ 2,978,900$ 3,068,300$ Transfer to PCA Stabilization Account -$ 2,892,900$ 3,416,063$ 2,442,463$ 1,417,523$ Operating Expenses 7,677,207$ 8,934,301$ 9,931,600$ 9,478,800$ 9,763,200$ Capital Improvement Plan (Cash Financed)500,000$ 2,965,000$ 5,100,000$ 2,850,000$ 1,100,000$ Debt Service 850,912$ 952,689$ 945,644$ 946,419$ 944,331$ Net Change in Operating Reserves 6,366,951$ 955,843$ (4,477,459)$ (1,429,340)$ (31,288)$ Cost of Service 45,468,117$ 42,572,296$ 40,834,448$ 40,879,501$ 40,926,366$ Less Other Revenues & Income Misc. Billing Revenue 1,298,587$ 1,448,628$ 1,448,628$ 1,448,628$ 1,448,628$ Sales to Public Authorities (Major Only)1,376,120$ 1,376,120$ 1,376,120$ 1,376,120$ 1,376,120$ Sales for Resale 4,017,473$ 3,479,486$ 2,000,000$ 2,000,000$ 2,000,000$ Other Operating Revenues 1,113,825$ 1,113,825$ 1,113,825$ 1,113,825$ 1,113,825$ Nonoperating Revenues 818,811$ 818,803$ 818,803$ 818,803$ 818,803$ Power Cost Adjustment Revenues 3,910,300$ 1,185,134$ 698,472$ 514,525$ 321,990$ Interfund Transfers -$ -$ -$ -$ -$ Total Other Revenues & Income 12,535,115$ 9,421,996$ 7,455,848$ 7,271,901$ 7,079,366$ Net Revenue Requirements 32,933,002$ 33,150,300$ 33,378,600$ 33,607,600$ 33,847,000$ UB-137 4.0 – COST-OF-SERVICE ANALYSIS UB-138 Electric Cost of Service and Rate Design Study Cost-of-Service Analysis 4-1 Burns & McDonnell 4.0 COST-OF-SERVICE ANALYSIS 4.1 Overview The second phase of this Study was the development of the cost-of-service analysis. The test year revenue requirement for FY 2018 developed from the financial forecast, described in Section 3.0 of this report, was used as the basis for the cost-of-service analysis. Section 4.0 explains the basis of the functionalization, classification and allocation efforts of the cost-of-service analysis. Tables showing the assignment of the test year revenue requirement among functional services, as well as the development of allocation factors and the allocation of the test year revenue requirement to AL&W’s rate cl assifications, are presented in the following subsections. 4.2 Revenue Requirement Unbundling The first step in the development of the cost-of-service analysis was the unbundling of the various components of the test year revenue requirement by functional utility service. To a certain degree, the electric service AL&W provides its customers is sold as a bundled product. However, this bundled product involves the provision of multiple functional services. Utilities such as AL&W have a need to unbundle the costs of providing the component services making up this bundled product. AL&W will benefit from this separation of costs and providing its services at a functional level. New information, provided by the AMI system currently being deployed, will aid AL&W in the overall management of its costs and in the communication of service costs with its customers. The unbundling of AL&W’s costs also allows separate pricing of individual services to be easily implemented if desired. 4.2.1 Functionalization Four functional services were identified while analyzing AL&W’s three cost categories: Power Production, Power Delivery, and Customer Services. Each cost category and its subordinate functional services are summarized below. • Power Production o Demand – kW o Energy – kWh • Power Delivery o Distribution – DIST • Customer Service – CUST UB-139 Electric Cost of Service and Rate Design Study Cost-of-Service Analysis 4-2 Burns & McDonnell 4.2.2 Revenue Requirement Classification The test year cost for each component of the revenue requirement was assigned to one or more of the unbundled services. The unbundled assignment of each amount was based on the utilization of specific data to estimate the portions of each item attributable to the various functional services. The amount for each item was assigned using one of the following approaches: • Direct Assignment – to one or more specific functional services due to the nature of the account/element. For example, customer records and collection expenses under the Customer Accounts cost category were assigned to the CUST functional service due to the nature of these positions which are typically customer service or support oriented. • Percentage Utilization – based on estimated level of activities within the account/element, costs were assigned to multiple functional service categories. • Composite Ratio Assignment – involves the assignment of costs based on the ratio of costs by functional service, whose percentage allocations have already been established, to the associated functional services for the test year. For example, interest income was assigned to functional services based on the percentage distribution of all other system costs. The manner in which each component was assigned to the functional services varied based on the nature of the item. Burns & McDonnell developed the proposed unbundling of the components of the FY 2018 revenue requirement based on its understanding of the types of associated costs. A summary of the assignment of each detailed component of the test year revenue requirement is shown in Table 4-1. In Table 4-1, the assignment of the components of the test year revenue requirement for FY 2018 shows that $16.7 million, or 50.33 percent, of AL&W’s test year revenue requirement was related to the power supply energy – kWh functional service. 4.2.3 Revenue Requirement Allocation Following the unbundling of the various components of the test year revenue requirement to the functional utility services, the unbundled test year revenue requirement was allocated to AL&W’s retail rate classifications. These allocations were developed to reflect the relative impact each rate class will have on the level of each component of the test year revenue requirement. UB-140 Electric Cost of Service and Rate Design Study Cost-of-Service Analysis 4-3 Burns & McDonnell Table 4-1: Revenue Requirement Unbundled Assignment Summary AL&W currently bills its retail electric customers based on rate schedules that became effective in July 2017. The test year revenue requirement was allocated based to these categorizations. The test year FY 2018 rate classifications examined for the cost-of-service analysis are as follows: • Small Business – Schedule G-1 • Medium Business – Schedule G-2 • Large Business – Schedule GL, TOU • Street Lights – Schedule SL-1, SL-2, SL-3 • Outdoor Lights – Schedule SL-2, OL • Municipal Accounts – Schedule MS • Residential – Schedule D, WH/SH 4.2.3.1 Allocation Factors Burns & McDonnell utilized billing history data and projections of future sales and loads to develop a series of allocation factors. The allocation factors were developed based on billing determinants, estimates of the contributions of each rate classification to AL&W’s total annual system energy requirements, average monthly coincident system peak demand, and average monthly non-coincident system peak demand. In addition, the total number of customers in each rate category was determined. Test Year 2018 kW kWh DIST CUST TOTAL O&M EXPENSE 31,997,993$ 4,720,975$ 18,166,632$ 4,929,198$ 4,181,188$ Cost of Service Ratio 14.75% 56.77% 15.40% 13.07% OTHER REVENUE REQUIREMENTS Debt Service 952,689$ 238,172$ -$ 666,882$ 47,634$ Transfers out - Other (Fund 33 to Fund 31)2,807,870$ 701,968$ -$ 1,965,509$ 140,394$ Interfund Transfers Out - Surplus Fund -$ -$ -$ -$ -$ Transfer to PCA Stabilization Account 2,892,900$ 426,818$ 1,642,423$ 445,643$ 378,016$ Plant Capital Expenditures (Cash Financed)2,965,000$ 437,455$ 1,683,358$ 456,750$ 387,437$ Net Change in Operating Reserves 955,843$ 141,025$ 542,673$ 147,245$ 124,900$ Total Other Revenue Requirements 10,574,303$ 1,945,438$ 3,868,454$ 3,682,029$ 1,078,382$ Cost of Service 42,572,296$ 6,666,413$ 22,035,086$ 8,611,227$ 5,259,569$ Cost of Service Ratio 15.66% 51.76% 20.23% 12.35% OTHER OPERATING REVENUES Misc. Billing Revenue (Fees (1,448,628)$ (213,730)$ (822,448)$ (223,157)$ (189,293)$ Other Sales to Public Authorities (Major Only)(1,376,120)$ (203,032)$ (781,282)$ (211,987)$ (179,818)$ Sales for Resale (3,479,486)$ (513,362)$ (1,975,453)$ (536,005)$ (454,665)$ Other Revenues (1,113,825)$ (164,333)$ (632,366)$ (171,582)$ (145,544)$ Power Cost Adjustment Revenues (1,185,134)$ (174,854)$ (672,851)$ (182,566)$ (154,862)$ Miscellaneous Revenues (Fees, Reimb., Collections)(554,703)$ (81,841)$ (314,929)$ (85,450)$ (72,483)$ Interest revenue (264,100)$ (38,965)$ (149,941)$ (40,684)$ (34,510)$ Interfund Transfers -$ -$ -$ -$ -$ Total Other Revenues (9,421,996)$ (1,390,119)$ (5,349,271)$ (1,451,431)$ (1,231,175)$ Net Revenue Requirements 33,150,300$ 5,276,294$ 16,685,815$ 7,159,796$ 4,028,394$ 15.92% 50.33% 21.60% 12.15% UNBUNDLED COSTS Description UB-141 Electric Cost of Service and Rate Design Study Cost-of-Service Analysis 4-4 Burns & McDonnell Ratios were calculated of each class’s contribution for each statistic to the corresponding total. These ratios were used as cost allocation factors to allocate each unbundled component of the test year revenue requirement to the rate classes. These allocation factors are presented in Table 4-2 and the basis for their development are provided in the following sections. Table 4-2: Allocation Factors by Type 4.2.3.1.1 Energy Allocation An energy allocation factor was developed for use in the apportionment of all energy-related expenses. Based on the billing data provided, energy sales to each of AL&W’s rate classes were determined. The energy sales for each class were factored up to the system level. System losses were assumed to occur between three voltage levels, from power supply to transmission, from transmission voltage to primary distribution voltage, and from primary distribution voltage to secondary distribution voltage. All customer classes receive service at secondary distribution voltage levels, so for the analysis, each class shared proportionally equal losses based on energy sales. The ratios of the resulting estimated contributions of each class to the total system energy requirements represented the energy allocation factor. 4.2.3.1.2 Demand Allocation The determination of system demand contributions for each rate class was more complex than the development of the energy allocation factors for two reasons. First, the normal operation of an electric utility does not require maintaining the same amount of demand-related data as it does energy-related data. Therefore, there was not an equal amount of data from which to base the analysis. The second reason is that there are a variety of methodologies that may be used in allocating the demand costs of an electric utility. Ideally, hourly demand meters and load profile information would be available for all AL&W customers from which accurate coincident and non-coincident peak demand data could be Total System Small business (G- 1) Medium business (G-2) Large business (T.O.U.) Street Lights (SL- 1, SL-2, SL-3) Outdoor Lights (SL-2, OL) Municipal Accounts (MS) Residential (D, WH/SH) Energy Allocations Total Energy Requirement 269,123,473 20,564,666 54,928,246 90,769,909 37,605 94,012 11,992,834 90,736,200 Energy Allocation Factor 1.000 0.076 0.204 0.337 0.000 0.000 0.045 0.337 Demand Allocations Contribution to Coincident Peak 65,768 6,010 15,224 18,239 0 0 3,856 22,440 Coincident Peak Alloc. Factor 1.000 0.091 0.231 0.277 0.000 0.000 0.059 0.341 Contribution to Non-Coin. Peak 56,114 4,515 11,612 16,447 9 21 2,794 20,716 System NCP Allocation Factor 1.000 0.080 0.207 0.293 0.000 0.000 0.050 0.369 Customer Allocation Number of Customers 16,677 1,353 278 34 54 46 147 14,765 Unweighted Customer Allocation Factor 1.000 0.081 0.017 0.002 0.003 0.003 0.009 0.885 Relative Weight 1.0 1.0 3.0 0.5 1.0 1.0 1.0 Weighted No. of Customers 16,718 1,353 278 102 27 46 147 14,765 Weighted Customer Allocation Factor 1.000 0.081 0.017 0.006 0.002 0.003 0.009 0.883 UB-142 Electric Cost of Service and Rate Design Study Cost-of-Service Analysis 4-5 Burns & McDonnell obtained. If data is compiled from a statistically valid sample of each classification, load profile results obtained from each sample could be analyzed and applied to entire classes in the future. In the future, once the AMI installations are complete, data will be available for all customers. Burns & McDonnell refined proxy load research data to develop representative coincident peak and non- coincident peak load data for each of AL&W’s customer classes. Since the test year system peak is expected to occur in the afternoon hours of the summer season, it was assumed that the Street Lighting classes would have no load on the system at that time and, therefore, would not contribute to the system coincident peak demand. For each class, maximum demands were estimated based on load factors from the proxy load data available to Burns & McDonnell from a comparable electric utility in Southern California. The load factors were applied to the corresponding test year energy sales for each class to determine the average non-coincident peak for each class. Ratios of each class’s non-coincident peak demands to the total for all classes were calculated. These ratios represented the factors to be used in allocating the system demand costs among the various rate classes. 4.2.3.1.3 Customer Allocation Customer allocation factors were developed to allocate the costs of metering, billing, call center, and other administrative costs to the various rate classifications. Customer allocation factors were based on relative weighting of the number of customers included in each rate class served by AL&W. Relative weights were estimated to reflect differences in the effort required and the cost incurred to provide customer services to customers in the different rate classes. 4.2.3.2 Cost Allocation Each component item of the test year revenue requirement, which was classified and assigned to the various functional utility services, was allocated to the appropriate customer rate classifications using the corresponding allocation factors. The allocated amounts were summarized for each rate class. Table 4-3 presents a summary of the allocation of the net revenue requirement to the rate classifications by the unbundled functional services. The total amounts in Table 4-3 for each unbundled service within each component of the test year revenue requirement were carried forward from Table 4-1. UB-143 Electric Cost of Service and Rate Design Study Cost-of-Service Analysis 4-6 Burns & McDonnell Table 4-3: Functional Cost Allocation Summary 4.3 Cost-of-Service Summary The results of the cost-of-service analysis and the allocation of the test year revenue requirement to AL&W’s rate classes are presented in Table 4-4. The results are broken out into energy-related costs, expressed in both dollars and cents per kWh; peak demand-related costs, expressed in both dollars and cents per kW of system power supply billing demand per month; distribution-related costs, expressed in both dollars and dollars per kW of system power supply billing demand per month; and customer-related costs, expressed in dollars per customer per month. The total cost-of-service is expressed in both dollars and cents per kWh. AL&W’s rate revenue requirement of $33.2 million and the total projected system sales of 269,123 MWh translates to an average cost of 12.87¢/kWh. Table 4-4 also shows the net requirement of providing service to each class. For example, the cost allocated to the Residential Service rate class in FY 2018 totals $13.6 million. Based on the total energy sales from Residential Service customers of 90,736 MWh, the base rate requirement to provide service to the Residential Service customer class is 15.69¢/kWh. Table 4-4 includes a Revenue Comparison that compares the net revenue requirement to the projected revenue that would be generated by current rates. This analysis indicates the extent to which the test year revenues generated from existing rates for each class would either exceed or fall short of the corresponding revenue requirement. The results show the current conditions of how revenues are generated in comparison to how costs are incurred among classes. For example, the Residential class is receiving the largest subsidy under current rates. Conversely, the Small Business class is recovering more cost than it has been allocated, and therefore, is subsidizing more cost than any other class. Since AL&W wants to continue providing low cost rates to the Residential class, no changes to current rates are recommended to mitigate this slight subsidization. UB-144 Electric Cost of Service and Rate Design Study Cost-of-Service Analysis 4-7 Burns & McDonnell Table 4-4: Cost-of-Service Summary Total System Small business (G-1) Medium business (G-2) Large business (T.O.U.) Street Lights (SL-1, SL-2, SL-3) Outdoor Lights (SL-2, OL) Municipal Accounts (MS) Residential (D, WH/SH) Summary of Cost of Service Energy Cost: Energy Sales (kWh)257,637,730 19,687,000 52,584,000 86,896,000 36,000 90,000 11,481,000 86,863,730 Total Cost 16,685,815$ 1,275,022$ 3,405,584$ 5,627,788$ 2,332$ 5,829$ 743,563$ 5,625,698$ Dollars/kWh 0.06476 0.06476 0.06476 0.06476 0.06476 0.06476 0.06476 0.06476 Demand Cost (Peak): Contribution Coincident Peak (kW)65,768 6,010 15,224 18,239 0 0 3,856 22,440 Total Cost 5,276,294$ 482,192$ 1,221,318$ 1,463,231$ -$ -$ 309,323$ 1,800,231$ $/kW-mo 6.69 6.69 6.69 6.69 0.00 0.00 6.69 6.69 Demand Cost (Distribution): Contribution Non-Coincident Peak (kW)56,114 4,515 11,612 16,447 9 21 2,794 20,716 Total Cost 7,159,796$ 576,031$ 1,481,594$ 2,098,595$ 1,095$ 2,739$ 356,495$ 2,643,248$ $/kW-mo 10.63 10.63 10.63 10.63 10.63 10.63 10.63 10.63 Demand Cost (Total): Contribution Non-Coincident Peak (kW)56,114 4,515 11,612 16,447 9 21 2,794 20,716 Total Cost 12,436,090$ 1,058,222$ 2,702,912$ 3,561,826$ 1,095$ 2,739$ 665,818$ 4,443,478$ $/kW-mo 18.47 19.53 19.40 18.05 10.63 10.63 19.86 17.87 Customer Service Cost: Number of Customers 16,677 1,353 278 34 54 46 147 14,765 Total Cost 4,028,394$ 326,022$ 66,988$ 24,578$ 6,506$ 11,084$ 35,422$ 3,557,794$ $/Customer/Month 20.13 20.08 20.08 60.24 10.04 20.08 20.08 20.08 Revenue Requirement Before Adjustments33,150,300$ 2,659,266$ 6,175,483$ 9,214,192$ 9,933$ 19,652$ 1,444,802$ 13,626,971$ Lighting Adjustment -$ 162$ 33$ 4$ 367$ (2,352)$ 18$ 1,768$ Total Revenue Requirement ($)33,150,300$ 2,659,428$ 6,175,517$ 9,214,196$ 10,300$ 17,300$ 1,444,820$ 13,628,739$ Total Revenue Requirement ($/kWh)0.1287 0.1351 0.1174 0.1060 0.2861 0.1922 0.1258 0.1569 Total System Small business (G-1) Medium business (G-2) Large business (T.O.U.) Street Lights (SL-1, SL-2, SL-3) Outdoor Lights (SL-2, OL) Municipal Accounts (MS) Residential (D, WH/SH) Comparison of Revenues ($) Energy Sales - kWh 269,123,473 20,564,666 54,928,246 90,769,909 37,605 94,012 11,992,834 90,736,200 Revenue Requirement 33,150,300$ 2,659,428$ 6,175,517$ 9,214,196$ 10,300$ 17,300$ 1,444,820$ 13,628,739$ Revenue Generated By Existing Rates 33,150,300$ 3,111,000$ 6,950,300$ 10,145,800$ 10,300$ 17,300$ 1,342,500$ 11,573,100$ Difference -$ (451,572)$ (774,783)$ (931,604)$ -$ -$ 102,320$ 2,055,639$ Revenue Adjustment 0.00% -14.52% -11.15% -9.18% 0.00% 0.00% 7.62% 17.76% Comparison of Revenues ($/kWh) Revenue Requirement 0.1287$ 0.1351$ 0.1174$ 0.1060$ 0.2861$ 0.1922$ 0.1258$ 0.1569$ Revenue Generated By Existing Rates 0.1287$ 0.1580$ 0.1322$ 0.1168$ 0.2861$ 0.1922$ 0.1169$ 0.1332$ Difference -$ (0.0229)$ (0.0147)$ (0.0107)$ -$ -$ 0.0089$ 0.0237$ Revenue Adjustment 0.00% -14.52% -11.15% -9.18% 0.00% 0.00% 7.62% 17.76% UB-145 5.0 – RATE ANALYSIS UB-146 Electric Cost of Service and Rate Design Study Rate Analysis 5-1 Burns & McDonnell 5.0 RATE ANALYSIS 5.1 Overview The third and final phase of the Study completed for AL&W was the rate analysis. The cost-of-service analysis described in Section 4.0 of this report served as one input into the rate analysis and rate recommendations. Input from AL&W was also taken into consideration in the development of the recommendations. As discussed in Section 3.0 of this report, the financial forecast indicated that AL&W is on sound financial footing and the periodic rate adjustment approach employed to date should sufficiently support the financial health of the utility moving forward. While no overall rate revenue adjustments are recommended for the utility, a discussion of the rates for each classification is presented below. 5.1.1 Rate Analysis Objectives The rate recommendations submitted to AL&W for consideration and adoption were developed in order to continue to meet the following electric utility rate criteria for service provided by municipally owned utilities: • Electric rates should be based on a policy which calls for the lowest possible price consistent with meeting customer energy requirements, efficient and reliable operations, and sufficient cost recovery by AL&W to provide service. • Electric rates should be simple and understandable. • Electric rates should be equitable among classes of customers and individuals within classes, taking into consideration the cost-of-service analysis. • Electric rates should be designed to encourage the most efficient use of power and discourage unnecessary or wasteful use of electricity. • Electric rates should comply with the applicable orders and requirements of local and state regulatory authorities that have jurisdiction. 5.2 Rate Classifications AL&W customers are charged based on their service application, overall monthly kWh energy consumption, and/or kW demand characteristics. AL&W serves the following customer classes: • Small Business – Schedule G-1 • Medium Business – Schedule G-2 • Large Business – Schedule GL, TOU UB-147 Electric Cost of Service and Rate Design Study Rate Analysis 5-2 Burns & McDonnell • Street Lights – Schedule SL-1, SL-2, SL-3 • Outdoor Lights – Schedule SL-2, OL • Municipal Accounts – Schedule MS • Residential – Schedule D, WH/SH AL&W also offers a Net Energy Metering tariff. The Net Energy Metering program offers eligible renewable energy generators compensation for net surplus energy injected into the system. No adjustment to the net energy metering tariff is proposed at this time. 5.2.1 Existing Rate Schedules Table 5-1 summarizes the current classes and associated charges. Table 5-1: Current Rate Classes and Structures Residential Service customers are billed a monthly basic charge on a $/month basis for electric service. Residential Service customers are not billed an unbundled monthly demand charge. Small and Medium Business customers are billed a monthly customer charge on a $/month basis for electric service. Energy usage is billed on an inclining block basis based on the deviation of current customer usage from a baseline. Small Business customers are not billed an unbundled monthly demand charge, while Medium Business customers are. The large Business non-TOU rate is similar to the Medium Business rate with the exception of the minimum charge and power factor adjustment. UB-148 Electric Cost of Service and Rate Design Study Rate Analysis 5-3 Burns & McDonnell Table 5-2: Existing Residential Service Electric Rates Table 5-3: Existing Small Business Electric Rates Table 5-4: Existing Medium Business Electric Rates Large Business TOU customers are billed a monthly customer charge on a $/month basis for electric service. Energy usage is billed on a TOU basis with varying rates during peak, mid-peak, and off-peak time periods, and include power factor adjustment charges. Billing demand is calculated on a TOU basis with varying rates during peak, mid-peak and off-peak time periods. Municipal Account customers are billed a monthly basic charge on a $/month basis for electric service. Energy usage is billed on a flat $/kWh rate, and are not billed an unbundled monthly demand charge. Residential (D)Summer Rates Winter Rates Customer Charge ($/month)3.81$ 3.81$ Energy Charge (kWh) First 250 kWh 0.1160$ 0.1160$ All excess kWh 0.1487$ 0.1487$ Residential (WH/SH)Summer Rates Winter Rates Customer Charge ($/month)3.81$ 3.81$ Energy Charge (kWh) First 250 kWh 0.1160$ 0.1160$ Allowance for water heating, per month 250 kWh 0.1160$ 0.1160$ Allowance for water heating, per month 550 kWh 0.1160$ 0.1160$ All excess kWh 0.1487$ 0.1487$ Small Business (G-1)Summer Rates Winter Rates Customer Charge ($/month)6.96$ 6.96$ Energy Charge (kWh) 0 - 500 0.1740$ 0.1740$ 500 +0.1426$ 0.1426$ Medium Business (G-2)Summer Rates Winter Rates Customer Charge ($/month)-$ -$ Demand Charge First 20 KW or less -$ -$ Additional KW of demand 8.39$ 8.39$ Energy Charge (kWh) 0 - 500 0.1748$ 0.1748$ 500 - 4,500 0.1539$ 0.1539$ 4,500 +0.0950$ 0.0950$ Minimum Monthly Charge (if bill does not exceed)167.81$ 167.81$ UB-149 Electric Cost of Service and Rate Design Study Rate Analysis 5-4 Burns & McDonnell AL&W offers Metered and Non-Metered Street Lighting, and Outdoor Lighting Service to individual customers and the City where it is economically feasible to serve. Customers are billed monthly for lighting service on either a $/lamp/mo. plus ¢/kWh energy basis or simply a $/lamp/mo. basis if unmetered. In some cases, a Customer Service charge is applied to the bill on a $/month basis. Table 5-5: Existing Large Business TOU Electric Rates Table 5-6: Existing Municipal Accounts Electric Rates Large Business (TOU + D)Summer Rates Winter Rates Customer Charge ($/month)42.15$ 42.15$ Demand Charge All kW of Max Demand, per kW (non-time related)4.50$ 4.50$ On-Peak 7.51$ -$ Mid-Peak 1.31$ 1.03$ Off-Peak -$ -$ Energy Charge (kWh) On-Peak 0.1546$ -$ Mid-Peak 0.1044$ 0.1194$ Off-Peak 0.0703$ 0.0703$ Municipal Accounts (MS)Summer Rates Winter Rates Customer Charge ($/month)7.09$ 7.09$ Energy Charge (kWh)0.1157$ 0.1157$ UB-150 Electric Cost of Service and Rate Design Study Rate Analysis 5-5 Burns & McDonnell Table 5-7: Existing Street Lighting and Outdoor Lighting Electric Rates Street Lights (SL-1)Avg kWh per Month Per Lamp per Month Incandescent 4,000 Lumen (300W)104 5.32$ Mercury Vapor 60 15.74$ 7,000 Lumen (175W)86 20.32$ 11,000 Lumen (250W)138 27.84$ 20,000 Lumen (400W) High-Pressure Sodium 9,500 (100W)35 14.26$ 9,500 Lumen (2-100W)70 32.11$ 14,000 Lumen (150W - 14')52 24.30$ 14,000 Lumen (150W - 28')52 29.00$ 22,000 Lumen (220W)76 19.83$ 22,500 Lumen (250W)86 21.22$ Outdoor Lights (SL-2)Summer Rates Winter Rates Customer Charge ($/month)3.84$ 3.84$ Energy Charge (kWh)0.1102$ 0.1102$ Avg kWh per Month Per Lamp per Month Incandescent 4,000 Lumen (300W)104 5.32$ Mercury Vapor 60 15.74$ 7,000 Lumen (175W)86 20.32$ 11,000 Lumen (250W)138 27.84$ 20,000 Lumen (400W) High-Pressure Sodium 9,500 (100W)35 14.26$ 22,000 Lumen (220W)76 19.83$ 22,500 Lumen (250W)86 21.22$ Outdoor Lights (SL-3)Avg kWh per Month Per Lamp per Month High-Pressure Sodium 9,500 (100W)35 14.26$ 22,500 Lumen (250W)86 21.22$ Outdoor Lights (OL)Existing Pole New Pole Mercury Vapor 16.01$ 19.91$ 7,000 Lumen (175W)29.23$ 33.12$ 20,000 Lumen (400W) High-Pressure Sodium 9,500 (100W)14.26$ 18.15$ 22,500 Lumen (250W)20.19$ 24.09$ UB-151 Electric Cost of Service and Rate Design Study Rate Analysis 5-6 Burns & McDonnell 5.2.2 Proposed Rate Schedules As previously discussed, the financial forecast indicated that AL&W is on sound financial footing and the periodic rate adjustment approach employed to date should sufficiently support the financial health of the utility moving forward. Burns & McDonnell recommends AL&W take no action to raise additional revenue over and above monies generated by current rates. AL&W is maintaining adequate operating income and operating fund cash balances, meeting debt service coverage requirements, and generating sufficient rate base returns. However, Burns & McDonnell does recommend that minimal base rate adjustments be made, such that the fixed charge portion of residential and commercial rates are increased, and the variable, or energy, portion of the rate is decreased. These adjustments would keep rates revenue neutral. An increase in solar customers on the system and the increase in customers participating in net energy metering (NEM), fixed costs incurred by AL&W will not be sufficiently recovered under the existing rate structures. Increasing the fixed portion of the rates will help AL&W recover these fixed costs and maintain adequate levels of income from base rates. On average, customers will not see an increase in their monthly bills. Street Lighting, Outdoor Lighting and Municipal Account rates are recommended to remain the same. Table 5-8: Proposed Residential Service Electric Rates Table 5-9: Proposed Small Business Electric Rates Residential (D)Summer Rates Winter Rates Customer Charge ($/month)5.80$ 5.80$ Energy Charge (kWh) First 250 kWh 0.1091$ 0.1091$ All excess kWh 0.1487$ 0.1487$ Residential (WH/SH) Customer Charge ($/month)5.80$ 5.80$ Energy Charge (kWh) First 250 kWh 0.1091$ 0.1091$ Allowance for water heating, per month 250 kWh 0.1091$ 0.1091$ Allowance for water heating, per month 550 kWh 0.1091$ 0.1091$ All excess kWh 0.1487$ 0.1487$ Small Business (G-1)Summer Rates Winter Rates Customer Charge ($/month)10.00$ 10.00$ Energy Charge (kWh) 0 - 500 0.1650$ 0.1650$ 500 +0.1430$ 0.1430$ UB-152 Electric Cost of Service and Rate Design Study Rate Analysis 5-7 Burns & McDonnell Table 5-10: Proposed Medium Business Electric Rates Table 5-11: Proposed Large Business TOU Electric Rates Medium Business (G-2)Summer Rates Winter Rates Customer Charge ($/month)-$ -$ Demand Charge First 20 KW or less -$ -$ Additional KW of demand 9.75$ 9.75$ Energy Charge (kWh) 0 - 500 0.1689$ 0.17$ 500 - 4,500 0.1498$ 0.15$ 4,500 +0.0950$ 0.10$ Minimum Monthly Charge (if bill does not exceed)167.81$ 167.81$ Large Business (TOU + D)Summer Rates Winter Rates Customer Charge ($/month)42.15$ 42.15$ Demand Charge All kW of Max Demand, per kW (non-time related)4.50$ 4.50$ On-Peak 7.51$ -$ Mid-Peak 1.31$ 1.03$ Off-Peak -$ -$ Energy Charge (kWh) On-Peak 0.1546$ -$ Mid-Peak 0.1044$ 0.1194$ Off-Peak 0.0703$ 0.0703$ UB-153 6.0 – SUMMARY & RECOMMENDATIONS UB-154 6.0 SUMMARY & RECOMMENDATIONS 6.1 Summary This report described the approach and assumptions used to complete the Electric Cost of Service and Rate Design Study. The following is a summary of the results of the Study and Burns & McDonnell’s recommendations for AL&W. The first phase of the Study completed for AL&W determined the test year net revenue requirement. In order to determine the test year net revenue requirement, a five-year financial forecast was developed to estimate the results from the electric operations of AL&W. Following the development of the financial forecast, a comparison of annual revenue and revenue requirements was completed to determine whether sufficient revenue would be available to cover projected operating and capital expenditures or if revenue adjustments would be required. This phase of the Study showed that AL&W is maintaining adequate operating income and operating fund cash balances, meeting debt service coverage requirements, and generating sufficient rate base returns. The development of the cost-of-service analysis followed the revenue requirements analysis. The cost-of- service analysis included the assignment, or unbundling, of the various costs included in the test year 2018 revenue requirement to AL&W’s functional services. These unbundled cost components of the revenue requirement were then allocated to the various electric rate classifications to determine cost recovery requirements. The results of the cost-of-service analysis indicated some cross subsidization between the rate classes. The final phase of the Study was the rate analysis. As previously discussed, the financial forecast indicated that AL&W is on sound financial footing and the periodic rate adjustment approach employed to date should sufficiently support the financial health of the utility moving forward. Based on sufficient financial results and rate design constraints, moderate base rate adjustments are recommended while mainlining revenue neutrality among existing and proposed rates. 6.2 Recommendations Burns & McDonnell recommends a number of actions be taken by AL&W based on the analyses conducted during the Study. The Study recommendations are presented herein. • Based on the analysis completed and specific discussion regarding rates, Burns & McDonnell recommends AL&W take no action to raise additional revenue over and above monies generated by current rates. UB-155 • Burns & McDonnell recommends adjustments be made to rate structures by increasing the fixed charge portion of the rate and lowering the energy charge portion of the rate. These adjustments are revenue neutral for the system. • AL&W should consider reassessing the PCA to more closely reflect reductions in power supply costs. One approach may be to reassess the PCA base rate and adjust it if significantly different than one currently used. • AL&W should consider implementing the recommended time of use (TOU) seasonal rate adjustments to more accurately reflect time-based power supply costs incurred by the system. • AL&W may consider devising a modified TOU rate, and offer it as an option, whereby energy component of the rate would be closely linked to the ISO wholesale energy prices in the Los Angeles Basin. • Burns & McDonnell recommends consideration of additional rate options once the advanced metering infrastructure (AMI) program is completed and AL&W has a minimum of one year’s worth of usage data on the system. • AL&W should continue to monitor their financial position and revisit a rate analysis in three to five years; or after the AMI system has been in place for at least one year. The City should monitor the financial position of AL&W, including adequacy of cost recovery and cash balances on an on-going basis to help ensure the utility continues to meet its financial requirements. Burns & McDonnell recommends the reexamination of the utility’s financial plan, costs-of-service, and electric rates at most every five years. Reexamination of financial position and rates may have to be contemplated sooner or on more frequent bases when major capital infrastructure projects are contemplated and/or endeavored. UB-156 Burns & McDonnell World Headquarters 9400 Ward Parkway Kansas City, MO 64114 O 816-333-9400 F 816-333-3690 www.burnsmcd.com UB-157