UTILITY COMMITTEE
The Utility Committee Meeting was held on October 23, 2006 at 5:00 p.m. with Chairman Carey presiding. Members present were Mr. Ruane, Mr. Slavin, Mr. Cregar, and Mr. Snaman. Members of Council present were Mr McGiffin, Mr. McGlumphy, Mr. Hogan, Mrs. Russell, and Mr. Salters. Mayor Speed was also present (arrived 5:05 p.m.)
AGENDA ADDITIONS/DELETIONS
Mr. Slavin moved for approval of the agenda, seconded by Mr. Snaman and unanimously carried.
Annexation Request- Property Located on the South Side of Route 8, Between Artis Drive and Dover, Owned by Calvary Baptist Church; and Property Located on the South Side of Route 8 Between Mifflin Road and Artis Drive, Owned by Jireh Christian Center, Inc.; and Property Located on the Southeast Side of Route 8, Owned by Donato Poliseno; and Property Located at 1550 Forrest Avenue, Owned by Alice Taraila; and Property Located at 1538 Forrest Avenue, Owned by Robert J. Harvey, Sr.
Members were provided the Petition to Annex and Zone Property and a Cost/Revenue Analysis Summary for property located on the south side of Route 8, between Artis Drive and Dover, owned by Calvary Baptist Church; and property located on the south side of Route 8 between Mifflin Road and Artis Drive, owned by Jireh Christian Center, Inc.; and property located on the southeast side of Route 8, owned by Donato Poliseno; and property located at 1550 Forrest Avenue, owned by Alice Taraila; and property located at 1538 Forrest Avenue, owned by Robert J. Harvey, Sr.
Mrs. Ann Marie Townshend, Director of Planning and Inspections, advised members that the annexation was initiated by the City in an effort to fill in the existing enclave. City of Dover water and electric services are available to the properties; however, a sewer pumping station would be required to extend sewer services to these properties. It is anticipated that when the adjacent Carey Farm is developed this will be addressed.
Mrs. Townshend advised members that the Cost-Revenue analysis showed a positive cash flow to the City of approximately $1,124 over ten years.
Mr. Slavin moved to recommend adoption of a resolution setting the annexation referendum for property located on the south side of Route 8, between Artis Drive and Dover, owned by Calvary Baptist Church; and on the south side of Route 8 between Mifflin Road and Artis Drive, owned by Jireh Christian Center, Inc.; and property located on the southeast side of Route 8, owned by Donato Poliseno; and property located at 1550 Forrest Avenue, owned by Alice Taraila; and property located at 1538 Forrest Avenue, owned by Robert J. Harvey, Sr. (Attachment #1). The motion was seconded by Mr. Snaman and unanimously carried.
Annexation Request - Property located at 1166 South Bay Road, owned by William M. and Delois M. Shirey, Trustees
Members were provided the Petition to Annex and Zone Property and a Cost/Revenue Analysis Summary for the property located at 1166 South Bay Road, owned by William M. and Delois M. Shirey, Trustees.
Mrs. Townshend advised members that City of Dover electric service is currently used and water services can be extended to this property. Sanitary sewer will be provided by Kent County. The Cost-Revenue analysis showed a positive cash flow to the City of approximately $42,574 over ten years.
Responding to Mr. Snaman, Mrs. Townshend indicated that this property is the first property to be annexed on the south side of Route 113.
Mr. Ruane asked if inquires were made to encourage adjacent property owners to participate in this annexation. Mrs. Townshend stated that, due to time constraints, no other properties were approached; however, staff will make contact with them. She also stated that during the pre-application process, staff will contact the contiguous property owners regarding their interest in participating in the annexation. Mr. Ruane stated that it was his understanding that in the past, the Committee endorsed the process of contacting adjacent property owners to encourage a group annexation rather than one property at a time.
Mr. Slavin moved to recommend adoption of a resolution setting the annexation referendum for property located at 1166 South Bay Road, owned by William M. and Delois Shirey, Trustees (Attachment #2). The motion was seconded by Mr. Snaman and unanimously carried.
Mr. Ruane moved to recommend that Council endorse a policy, to be followed by the Planning staff, that whenever there is a request for annexation sufficient time be allowed for other contiguous properties to be contacted. The motion was seconded by Mr. Cregar.
Mr. Carey suggested that previous meeting minutes be researched to determine if this issue has been previously discussed. If previous action has not occurred, the item will be considered during the next meeting of the Utility Committee.
Mr. Slavin moved to direct staff to research previously adopted policies related to contacting contiguous properties regarding their interest in annexation. The motion was seconded by Mr. Snaman and carried with four (4) yes, and one (1) no (Mr. Ruane).
PACE and NAES Quarterly Report
Mr. James Utt, Director of Pace Global Asset Management, provided an update for the last three months of the PACE contract with the City of Dover, which included asset operations, energy management and power purchases, risk management and market monitoring (Attachment #3).
Mr. DePrima advised members that monthly PACE and NAES (North American Energy Services) updates have been added to the City Managers monthly report.
Mr. Ken Beard of NAES provided an update of the operations at the McKee Run and Van Sant substations. He indicated that the staff transition from Duke Energy to NAES has been completed and staff has been reduced by 10%, resulting in a savings of approximately $300,000. Union negotiations have been completed with the result of the union’s vote to be announced shortly.
Responding to Mr. Ruane, Mr. Beard explained that the reduced hours recorded for the McKee Run station, which was 10% below the three (3) year average for the month of August, was due to the milder summer temperatures. Mr. Utt indicated that during the summer months, when less power was generated and purchased, the net gross earned was lower than expected. He also explained that McKee Run will operate when temperatures are very hot or very cold.
Mr. Utt provided additional information regarding the pre-purchase of power during on-peak hours (8:00 a.m. to 11:00 p.m. weekdays) and off-peak hours (11:00 p.m. to 7:00 a.m. weekends and holidays). Based on projections for the remaining number of purchases thru the end of the power year, in conjunction with purchases that have been contracted for, it is expected that the City’s wholesale power price will be below the target of $84 per megawatt hour. He also explained PACE’s position in the day ahead market, when placing bids for the City. Mr. Utt stated that there are currently 1.8 million gallons of fuel oil on site and replacement is very important.
Responding to Mr. Ruane, Mr. Utt explained the procurement of 95% of Dover’s on-peak needs. He stated that based on the on-peak volume for the last three (3) years, PACE will purchase power in 5-10 megawatt hour blocks to meet the on-peak need. Mr. Utt noted that 99% of the City’s off-peak need has also been purchased. He advised members that this is common practice for many municipalities and PACE has recommended that the City continue this practice for the coming fiscal years. PACE will provide benchmarks for the procurement of power in fiscal 2008 and 2009.
Responding to Mr. Carey, Mr. Utt provided further information regarding PACE’s ability to purchase power ahead of the markets. Since the contract was initiated in May, there was not sufficient time to implement a managed procurement position. PACE did not recommend that the City take a real time price risk, which could have cost four to five times more than the price of power provided by PACE. In the coming year, power will be purchased in smaller blocks to realize a savings if the power market becomes unstable or if prices rise.
Mr. DePrima emphasized staff’s efforts to keep the price of power at $84 per megawatt hour this fiscal year.
Mr. McGiffin questioned why the names of the counter parties, from which the City purchases power, are kept confidential. Mr. Utt responded that the contracts signed with the counter parties contain a confidentiality provision, to ensure competitive pricing. Mr. DePrima indicated that the names of the counter parties (Connectiv, Constellation, WPS and BP) are contained in the monthly report submitted by PACE.
Responding to Mr. Slavin, Mr. DePrima explained that in order to prepare the next fiscal year’s budget, PACE will provide cost estimates in March for the coming power year.
Mr. Utt, responding to Mr. McGlumphy, indicated that PACE will recommend the right time to purchase power based on several different parameters, including the historic movements of the market. Mr. McGlumphy questioned if Mr. Utt was aware that the revenue generated from the electric utility plays a part in the decision to purchase power. Mr. Utt advised members that PACE has negotiated agreements with counter parties which allow the subsequent sale of the purchased power at a later date.
Mr. DePrima informed members that the transfer of $5M from the Electric Revenue Fund to the General Fund does not play a role in the decision making process regarding power rates. He clarified that the transfer rate, which includes distribution and other associated costs, is layered on top of the $84 per megawatt hour which, in previous years, has been approximately 8% of gross revenue. Mrs. Tieman, Senior City Administrator, indicated that the transfer for this fiscal year is approximately 7% and is not passed on to residents via property taxes. This applies to all rate payers, inside and outside of the City limits.
Mr. Utt informed members that PACE is preparing a market valuation of the McKee Run and Van Sant stations. The Federal Energy Regulatory Commission is currently establishing rules for the capacity market. These rules are due to be published in 2007 and will be good for the City’s substations because it will place a higher value on capacity. Existing capacity regulations require the City to have on hand, or purchase from the market, a certain amount of capacity. The City has approximately 171 megawatts of capacity at the McKee Run and Van Sant stations. Based on the City’s historic peak needs, 177 megawatts of capacity is currently required at both substations and has been purchased by PACE. Responding to Mr. Ruane, Mr. Utt explained that the regulations will not increase cash flow to the City, but will increase the value of the substations.
Mr. Utt explained that the current expenses have been over budget by approximately 20% and will be examined again prior to the end of the year. The additional $4.5M cost expenditure does not include the additional revenue from the sale of emission allowances or any cost reductions at either station. Weekly communication continues with NAES in an effort to reduce costs at both stations when they are not operational.
Responding to Mr. Ruane, Mr. Utt explained that the gross margin generated by the stations for energy capacity and black starts is below the original June budget by $4.5 million. Mr. Utt also explained that he expects the margin the shrink by the end of the year and will include the revenue from the sale of emissions allowances.
Mr. DePrima stated that when the contract with Duke Energy expired, the City did not know if McKee Run and Van Sant made a profit. Several attempts to obtain this information from Duke Energy have been unsuccessful. Staff recommended, for this budget year, that the funds to cover the additional expenses be taken from reserves and rate increases.
Burns and McDonnell - Rate Analysis
Mr. DePrima reminded members that, during the presentation in June, it was stated that an analysis would be conducted to identify any adjustments.
Mr. Ted Kelly of Burns & McDonnell provided members with an update and analysis of the electric rate adjustments. He stated that the overall rate increase implemented in July 2006 amounted to 22.5% not 38%, as originally stated. He also outlined $3.2 million of additional need that was not anticipated in June.
Responding to Mr. Slavin, Mr. Kelly provided additional information regarding $964,000 of lost revenue as a result of the Duke Energy contract expiring. These funds were included in the first rate analysis in error.
Responding to Mr. Salters, Mr. Kelly explained the PACE incentive fee that was not part of the analysis performed in June. The incentive fee is included in the original contract and will be payable to PACE if targets are met and costs are reduced. Mr. DePrima explained that this incentive is to be paid in the following fiscal year; however, for accounting purposes, it is recorded during this fiscal year. Other expenses include the transfer to the General Fund of approximately 6.5% of revenue, which is lower than the amount transferred in previous years.
Mr. Kelly provided information regarding the City’s debt service coverage ratio. The updated ratio, which does not include the transfer from the rate stabilization fund but does include additional funds from a rate increase effective in January, will allow the City to have a positive debt service coverage.
The actual rate increases, scheduled to take effect in January and July 2007, will be presented to the Committee when the numbers have been put through the appropriate billing models.
Responding to Mr. McGlumphy, Mr. Kelly stated that the anticipated rate increases will take effect in January and July of 2007. If the power plants report net losses, an additional 6% rate increase would be implemented in July, which brings the total rate increase in 2007 to 14%. Mr. DePrima indicated that funds from the rate stabilization will not be available next year. He also explained that electric rates increased between 12-16%, depending on rate classifications.
Mr. Hogan stated that the proposed 8% rate increase will vary depending on the rate class and could be less for residential customers. He suggested being more cautious when discussing the possible rate increase percentages because they apply system wide.
Mr. DePrima stated that if the market price decreases, the proposed 14% will not be necessary; however, if the markets increase, the same proposed percentage may increase. He also stated that if the operating expenses of the power plants can be reduced in the coming year, it will effect the percentage, in addition to the sales of the emissions allowances.
Mr. Hogan suggested that when discussing the proposed increases they be presented in a range, until a final percentage is realized.
Responding to Mr. Ruane, Mr. Kelly stated that the debt service coverage ratio required in the bond covenant is 1.25 times. Mr. DePrima stated that the City will be below that mark this fiscal year. Mrs. Donna Mitchell, Finance Director, stated that she has been in contact with the rating agencies and they have informed her that if the City is not below the covenants in the future, they will be satisfied. She stated that the rating agencies have approved the use of the rate stabilization fund, and if the City is not setting rates to cover the costs, there needs to be a plan in place showing how operating revenues will meet expenses. They would expect the City to pass those costs on to the customers and not further erode reserves. Mrs. Mitchell stated that she has forwarded all of the necessary paperwork for their review and will be in touch with both agencies later in the week.
Mr. DePrima stated that the actual rates, by rate classification, that correspond with the increases scheduled to take effect in January will be presented to the Committee at the next scheduled meeting. Mr. Ruane requested that different scenarios, other than an electric rate increase, be presented to the committee. Mr. Carey suggested that other cost cutting measures be explored.
Mr. Slavin stated that the information presented is exactly what is needed to make the necessary decisions moving forward.
Mr. Slavin moved for adjournment, seconded by Mr. Snaman and unanimously carried.
Meeting Adjourned at 7:00 P.M.
Respectfully submitted,
Carleton E. Carey, Sr.
Chairman
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Attachments
Attachment #1 - Annexation Resolution - Properties adjacent to Carey Farm
Attachment #2 - Annexation Resolution - 1166 South Bay Road
Attachments to Original Minutes and File Copy
Attachment #3 - PACE and NAES Asset, Energy and Risk Management First Quarter Update
Attachment #4 - Burns and McDonnell - Updated Electric Rate Analysis and Adjustments