ERMUSR HANDOUT #3 10-13-2009 - Laserfiche WebLink

Home Browse Search

7 Rate and Finance Challenges The Municipal Utility is owned by the city and the citizens it serves. As such, the city is entitled to a reasonable return on its investment. The Municipal Utility makes a payment in lieu of tax (PILOT) contribution to the city every year. Historically, the amount of the PILOT has been more or less negotiated between the Municipal Utility and the city. The Municipal Utility believes the historical PILOT amount has been reasonable. Recently, the city has come under economic pressure to increase funding and • The Municipal Utility has ongoing capital needs to fund infrastruc- ture improvements and additions to its system. It has outstanding debt related to past capital additions, and it maintains a favorable and stable rating from the rating agencies. The utility is projecting a steady increase in capital needs in the future for renewable re- sources, AMI systems, peaking generation and other local system additions. The Utility Board is not debt-averse, but it prefers to pay for capital needs out of reserves and cash flow as much as possi- has requested a sigrnf~cant temporary increase in the PILOT pay- ble. As increasing costs and opposition to rate increases combine ment from the utility. The Municipal Utility is concerned that the to diminish available margins, the board is concerned about its new PILOT amount is unreasonable, the increase will not be tem- ability to maintain the utility's bond rating white relying more on porary, and the utility may be viewed as a source for future debt financing of capital items. The Municipal Utility needs to increased funding needs. strike the right balance concerning funding of capital. V ~ ~~n~~~'~ ~~ ` ~Z ~V _,,..,,w..._.. ..,,...... _ ~ ~+M~xn ..,- . xf5 'W 7 ~~a. ~1 {q'~ The Municipal Utility determined that its goals related to the The Municipal Utility currently funds depreciation through its PILOT are fairness, predictability and transparency. Fairness will rates. It has decided to establish a policy to use the cash flow avail- be resolved through direct discussions with the city. The Municipal able from funding non-cash flow depreciation to fund normal Utility will collect information regarding other municipally owned ongoing capital needs. If capital needs in a given year are less than utilities and their PILOT payments as well as franchise and prop- depreciation, the excess funds will be added to a capital reserve ac- erty tax information for communities served by investor-owned count. If capital needs exceed depreciation funding available, utilities and rural electric cooperatives. Once a fair contribution is capital reserve funds will be utilized as well. If these funds are not determined, the issue of predictability can be addressed. Pre- sufficient, the Utility will rely on issuing additional debt. It will in- dictable levels of PILOT payments are advantageous to both the crease its interaction with its financial adviser and the rating city and the Municipal Utility. There are numerous methods avail- agencies to ensure it maintains or improves its current rating. The able for devising a predictable calculation of PILOT, including as a utility also plans to work with its governing body to make sure board ~~~ percentage of revenue, an amount per energy sold, a percentage of members understand the need to maintain a favorable rating and plank in service, a fixed amount with an escalator and others. Each the steps necessary to achieve that goal. method has advantages and disadvantages, but if fairness can be corr~bined with predictability, the Municipal Utility will have arrived at an outcome that best serves its ratepayers. The issue of trans- parency can be a more difficult political challenge. There are many advocates of placing a separate line item on the utility bill to identify the PILOT payment, so the Municipal Utility has decided that it will adopt this practice. As utility bills get more complicated and costs increase for a variety of reasons, the Municipal Utility has de- i<ermined that it wants its customers to have as much information as possible to understand the individual components that make up their bills. The utility also feels that if the PILOT payment is de- fendable, there is no reason not to list it separately. ~p-s, utility bills get more complicated and costs increase for a variety of reasons, the ,Municipal Utility has determined that it wants its customers to have as much . information as possible to understand the individual components that makeup their bills. ZO SEPTEMBER 2OOJ PUBLIC POWEF