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CITY OF CLEVELAND Department of Public Utilities Cleveland Public Power Request for Proposal For Development of Comprehensive Financial Plan, including Cost of Service Study and Rate & Fee Analyses for Electric Service 2019 through 2023 January 2018 1 Table of Contents I. Introduction and Background II. Scope of Services III. Project Schedule and Deliverables IV. Proposal Requirements V. Qualifications for Proposal VI. Proposal Contents VII. Proposal Evaluation; Selection Criteria Appendix A – CPP Rate Schedules Appendix B – List of Ancillary Fees and Charges for CPP Appendix C – 2016 Separately Issued Report for CPP Appendix D – Fee Proposal Template Appendix E – Required City Forms OEO Notice to Bidders and Schedules Federal Form W-9 Vendor Entry Form Affidavit Non-Competitive Bid Contract Statement For 2018 Northern Ireland Fair Labor Practices Affidavit Appendix F – Sample Agreement Appendix G – Reimbursables Policy Appendix H – Ordinance No. 1436-17 2 I. INTRODUCTION AND BACKGROUND Introduction The City of Cleveland (the “City”) Department of Public Utilities (“DPU”) operates the Division of Cleveland Public Power (“CPP”) for the purpose of supplying electric energy to customers located primarily in the City. Today, CPP serves approximately 72,000 customers primarily through wholesale power purchases and interests in several generating plants through its membership in American Municipal Power (AMP) Inc. In addition to CPP, DPU consists of five other divisions including the Division of Fiscal Control (Fiscal Control) and Utilities Administration. Fiscal Control manages the financial aspects of DPU. Utilities Administration handles all administrative aspects for DPU, including, but not limited to Public Affairs, Information Technology, and Human Resources. CPP will need to undertake a financial study and analyses in order to develop its schedule of Rates, Fees and Charges covering year’s 2019 through 2023. A full cost of service study has not been completed since the early 1980s. The Cost of Service Study and subsequent rate design development process is intended to provide justifiable and equitable methodologies for appropriate user fees that are adequate to fully fund the expenses associated with the power system, including operating and capital costs. This will include a review and evaluation of CPP’s current operating revenues and expenses and a comparison of similar utilities. In addition, while the Comprehensive Financial Plan to be developed for CPP will specifically cover the years 2019 through 2023, the selected consultant will also be required to study and consider the long term impacts any recommendations implemented as a result of this study will have upon the financial well-being of CPP. For the purpose of this study, this long term period shall be defined as the period from 2019 through 2034. Background Information - The Division of Cleveland Public Power CPP was created in 1906 and charged with the responsibility for the distribution of electricity and related electric service to customers within its service areas. CPP operates a municipal electric system that is the largest in the State of Ohio and the thirty-ninth largest in the United States according to the American Public Power Association’s statistics for 2014. CPP serves an area that is predominantly bound by the City limits and presently serves approximately 72,000 customers. CPP is one of the few municipal electric companies in the United States that competes door to door with an investor-owned utility; in this case First Energy Corporation’s Cleveland Electric Illuminating Company (CEI). 3 According to the most recent census estimates, the City’s population is 390,000 people. There are approximately 212,000 residential dwelling units. Approximately 33,000 companies have a presence in Cleveland. CPP has distribution facilities in about 60% of the geographical area of the City, primarily on the east side. CPP obtains substantially all of its power and energy requirements through agreements with various regional utilities and other power suppliers of power delivered through CEI interconnections. The balance of CPP's power and energy requirements are satisfied with production from CPP's three combustion turbine generating units and various arrangements for the exchange of short-term power and energy. To reduce its reliance on the wholesale market, CPP’s long-term base load supply includes a mix of power provided by participation in AMP hydroelectric projects, the Fremont Energy Center, the Prairie State Energy Campus project, and the Blue Creek Wind project. Major Cleveland Public Power Issues To Be Addressed CPP has three main components to the rates charged to customers, 1) Base Rate 2) Energy Adjustment Charge (EAC) and 3) Environmental and Ecological Adjustment. The last time CPP changed the Base Rate was 1983. The ordinance for the EAC was updated in 2012. This charge is used to account for the annual costs of power that can fluctuate over time to account for the power market environment CPP is part of. A. Stagnant Load Over the past few years, CPP has signed on several new large customers. The increased consumption has been off-set by other customers’ reduced consumption use, and in some cases, other customers leaving CPP. B. Rising Expenses CPP is facing rising operation and maintenance expenses, which need to be factored into the development of any long range financial plan and subsequent rate analyses and recommendations. CPP’s operation and maintenance expenses have increased 11% between 2014 and 2016. C. Rising Power Costs CPP has an EAC which allows CPP to pass on the costs of power to their customers. CPP has experienced an increase in power costs of 26% between 2012 and 2016, but in that same time, has seen no significant change in kWh sales. 4 D. Capital Needs CPP has significant capital needs over the next five years, as many existing electric system assets are coming to an end of their useful life, and will need to be addressed over this time period. CPP intends to address multiple areas over this five year time period, including but not limited to: replacing the current 69 KV System used in several areas of the City, turbine replacement/rehab work, new substations, updating the SCADA system, Southern Transmission Line, and installation of new meters for the customer base. E. Current and Future Debt Issuances CPP has funded significant capital improvements in the past through revenue bonds and annual operating revenue. The most recent new bond issue in 2008 (Series 2008 A&B) netted CPP approximately $72.6 million in proceeds to fund the system expansion, to pay capitalized interest and costs of issuance. As of the end of 2017, CPP will have $202 million of outstanding bond debt. CPP’s annual debt service payments on its outstanding revenue bonds will average in excess of $18 million per year. In addition, CPP has several interests in AMP projects which include debt payments for the project construction and/or purchase. These payments are made through power invoices, but should also be considered. F. Rate Structure (Appendix A) CPP’s current monthly retail electric rate schedule consists of a base rate, EAC, Environmental and Ecological Adjustment, and a kilowatt tax. There are seven different rate classifications currently used; residential, small commercial, large commercial, industrial, street lighting, traffic lights and protective lighting. CPP currently has two different seasonal rates for each of these classifications, a summer rate (five months) and a winter rate (seven months). Currently, there is no fixed fee charge for customers. In addition to these rate classifications, CPP has customized rates for customers who meet certain criteria as set by ordinance. These rates are negotiated between the customer and CPP, and usually are attached to a long term contract for service with CPP. CPP’s most recent rate increase was in 1983. There have been many changes to the electric industry since that time. The electric industry in Ohio was deregulated in 2001. At this time, the investor owned utilities were broken up into two main categories; transmission and distribution, and power supply. CPP continued to offer a bundled service and did not break out the transmission, distribution and power supply. 5 CPP is looking at all options for rate structures including, but not limited to, fixed fees, different customer classifications, solar rates, etc. The consultant will provide different options for the structure as well as the phase in for such a change in rate structure if chosen. G. Rate Competitiveness It should be noted our current rates sometimes negatively impacts our ability to be competitive when negotiating electric service agreements with potential new customers. Based on Public Utilities rate comparisons, CPP existing rates can be a major impediment, making CPP non-competitive in terms of cost. Conversely, if CPP provides special rates to a large number of customers, CPP runs the risk of either alienating or adversely affecting our relationship with a group of existing customers. The determination of potential methodologies for bridging this competitive gap is an issue which needs to be addressed as part of this Comprehensive Financial Plan. H. Rates and Price Elasticity Considerations Another issue regarding rates which should be examined in this study is relative to price elasticity. Specifically, we would like to determine what impact our proposed rate increases, as well as other utility rate increases, have on electric consumption. For example, as the EAC increases, what percentage of power consumption will decline, if any? This issue needs to be studied in detail and taken into account when forecasting consumption levels for the five-year study period. I. Customer Retention Factors and Strategies CPP is in direct competition with CEI for many large customers. CPP is aware of several instances where current customers have been approached by CEI to switch service provider. Many customers have notified CPP of these discussions. Currently, no significant movement has been made by the large customers, but as prices increase, this will need to be addressed.