HomeMy WebLinkAboutF-1.1. Review of Electric Fund Cash Reserve PoliciesINFORMATION ITEM
TO: HONORABLE CHAIRPERSON AND MEMBERS OF THE AZUSA UTILITY
BOARD
FROM: MANNY ROBLEDO, DIRECTOR OF UTILITIES
DATE: APRIL 26, 2021
SUBJECT: REVIEW OF ELECTRIC FUND CASH RESERVE POLICIES
BACKGROUND:
The Electric Fund is an enterprise fund established for the operation of the electric utility portion of the
Light and Water Department. As such, all revenue collected and expenses paid for the provision of
electrical services reside in the Electric Fund, including cash reserves. In accordance with prudent utility
practices, in 2010 City Council approved an unrestricted cash reserves target to provide for unexpected
contingencies, which may arise from time to time. Additionally, in 1997 City Council approved a
restricted cash reserve fund for the purpose of stabilizing electric rates in the event of long-term power
supply assets becoming uneconomic due to the deregulation of the electric industry in California. This
report will provide a history and status update for both cash reserve funds within the Electric Utility.
RECOMMENDATION:
This report is provided for information only and no action is required.
ANALYSIS:
On September 27, 2010 City Council approved a minimum cash reserves policy for the Electric Fund,
which is based on a percentage of certain financial and operational elements. The following table shows
the reserve categories and levels based on Fiscal Year (FY) 2010-11 budget and the updated amounts
based on the current FY 2020-21 budget.
Basis Cash Reserves Basis Cash Reserves
25% 39,469,954$ 9,867,489$ 39,820,496$ 9,955,124$
3% 46,448,227$ 1,393,447$ 34,221,604$ 1,026,648$
100% 973,151$ 973,151$ 944,331$ 944,331$
15% 372,200$ 55,830$ 400,000$ 60,000$
15% 1,861,000$ 279,150$ 1,200,000$ 180,000$
100%12,569,066$ 12,166,103$
ELECTRIC FUND POLICY APPROVED 9-27-2010
Annual Operations and Maintenance
Electric System Assets
Annual Debt Service Reserve
Current Year Capital Improvement Program Budget
5-year Capital Improvement Program Budget
TOTAL Minimum Reserve Target:
Description of Basis
Cash
Reserves
Target
FY 2010-11 FY 2020-21
F-1Approved
Utility Board
4/26/21
Review of Electric Fund Cash Reserve Policies
April 26, 2021
Page 2
Based on this policy, the minimum cash reserve requirement in 2010/11 was $12.569 million, and as
updated based on 2020/21 budget is $12.166 million.
In addition to the general unrestricted cash reserves policy described above, in 1997 City Council
established a restricted reserve fund for stranded investment for the purpose of stabilizing electric rates
in the event of long-term power supply assets becoming uneconomic due to the deregulation of the
electric industry in California. This fund was established with $6 million of unrestricted reserves set-
aside for the servicing of debt associated with uneconomic resources in the event that electric customers
chose energy suppliers other than the City of Azusa. With subsequent contributions from surplus net
income, this restricted fund grew to $9.215 million in 2010, and with interest earnings to date the fund
balance is currently $10.826 million. To date no withdrawals have been required for stranded investment
for the following reasons:
1. Deregulation in California was reversed after the Energy Crisis of 2000, and all electric
distribution companies have retained their service territories.
2. The Energy Policy Act of 2005 provided the Federal Energy Regulatory Commission the
authority to assess significant civil penalties for energy market manipulations, and California
energy markets have since been very stable and predictable.
3. As of July 2017, the bonds associated with Palo Verde Nuclear Generating Station have been
paid in full, and as of December 2017, Azusa is no longer a participant in San Juan (coal)
Generating Station, thus eliminating the risk of stranded investment from these two power
resources, which were thought to be the major risk of stranded investment in 1997.
As such, these events have overtaken the purpose of maintaining the rate stabilization reserve fund for
stranded investment, it is no longer needed, and the unrestricted cash reserve policy described above is
more than adequate to cover any unforeseen contingency that should arise within the electric utility.
Status of Electric Fund Cash Reserves
The current balance of the unrestricted cash reserves is $11.758 million, which is slightly below the cash
reserve policy target of $12.166 million. This is due to i) a one-time $5.4 million payment to CalPERS
to buy down unfunded pension liability associated with Electric Fund employees and ii) lower than
expected Electric Fund revenue due to the unanticipated economic slowdown caused by the recent
COVID-19 pandemic.
If the economy and electric revenues do not recover further during Fiscal Year 2022, an additional
drawdown in cash reserves would be required to maintain the electric utility capital improvement
program, and the unrestricted cash reserves would decline to approximately $7 million by June 30, 2022.
This would still be considered an “Adequate” reserve level by the public finance bond rating agencies,
i.e. 70 days of liquidity falls within the 45 to 90 days criteria for an Adequate rating; however, this
would be a sharp decline from the “Extremely Strong” liquidity rating received by the Electric Fund
when rated by Standard and Poors at the end of Fiscal Year 2020 when cash reserves provided 321 days
of liquidity. Even though cash reserves are maintained precisely to weather “rainy days” such as the
COVID-19 pandemic, the $12.1 million reserve policy described above is a good target because it
provides approximately 120 days of liquidity, which is considered “Strong” by the rating agencies (90 to
150 days), and it would be prudent to return to this level of cash reserves as soon as possible.
Review of Electric Fund Cash Reserve Policies
April 26, 2021
Page 3
Given that the stranded investment fund is no longer required, as described above, at the April 5, 2021
Regular City Council meeting Staff recommended that the stranded investment fund ordinance be
repealed and the $10.826 million balance be transferred to the general reserve account, bringing it into
compliance with the general reserve policy target. If this action is taken by City Council then the
unrestricted cash reserve balance would immediately increase to $22.485 million, which would position
the Electric Fund to survive several years of economic downturn and maintain a “Strong” liquidity
position without requiring the need for an adjustment in electric rates.
FISCAL IMPACT
This report is provided for information only and there is no fiscal impact.
Prepared by: Reviewed and Approved:
Danny Smith Manny Robledo
Utilities Admin & Finance Manager Director of Utilities
Reviewed and Approved:
Sergio Gonzalez
City Manager
Attachments:
1) Electric Fund Reserve Policy 2010
2) Stranded Investment Reserve Ordinance 1997