Revenue Requirements Analysis - Seattle

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Revenue RequirementsAnalysisAdopted 2015-2016 RatesOctober 6, 2014

ContentsExecutive Summary . 3S.1Revenue Requirements . 3S.2Drivers of the Increase in Revenue Requirements . 3S.3Changes in Average Rates . 5Introduction. 7I.1Introduction . 7I.2RRA Objectives and Organization . 8Chapter 1: Debt Service and Debt Service Coverage . 9Chapter 2: Operating Expenses . 112.1 Introduction. 112.2 Power Contract Expenses . 112.3 Non-Power Operating and Maintenance Expenses . 122.4 Other Expenses . 14Chapter 3: Non-Rate Based Revenue . 163.1 Introduction. 163.2 Net Wholesale Revenue . 163.3 Power Revenues. 163.4 Other Revenue Sources. 17Chapter 4: Retail Revenue from Base Rates. 19Chapter 5: Indirect Costs and Proceeds . 215.1 City Taxes . 215.2 Roy Street Property Sale . 215.3 Cash Adjustments . 225.4 Capital Expenditures and Funding Sources . 22Appendix A: Power Contracts Details . 26Appendix B: Forecast-Budget Crosswalk . 29Appendix C: Capital Expenditures and Funding Sources . 362

Executive SummaryS.1Revenue RequirementsTable S1 shows the 2015 and 2016 Revenue Requirements and the respective annual changes. Therevenue requirement shown here differs from the revenue requirement found in the COSACAR,which treats rate discounts as a cost for the purposes of cost allocation.Table S1Revenue Requirements MillionsRevenue RequirementS.22014 Plan 755.52015 774.12016 815.6Difference2015-2014 18.6Difference2016-2015 41.5Drivers of the Increase in Revenue RequirementsThe drivers of the 18.6 million increase between 2015 and 2014 are:Increases 7.8 million higher debt service coverage requirementso Higher debt service as a result of funding requirements for City Light’s sizablecapital program 20.0 million lower net wholesale revenue (NWR)o 2014 Strategic Plan Update endorsed further reducing NWR targets to levels evenmore conservative than the 2012 Strategic Plan 1.8 million increase to non-power direct O&Mo Higher labor wages, benefit costso Partially offset by 10M underspending assumption 1.6 million higher taxes, uncollectible revenue, and other miscellaneous expensesDecreases 6.0 million decrease in power contract costso Lower annual planning values used for BPA power and wheeling expenses 4.7 million increase in power revenueso Higher revenues from transmission sales and ancillary services 0.2 million decrease from other miscellaneous revenueso Higher Other Revenueo Lower interest earning on investments 1.8 million from the difference in the actual debt service coverageThe drivers for the 41.5 million change between 2016 and 2015 include:Increases 19.2 million higher debt service coverage requirementso Higher debt service as a result of funding requirements for City Light’s large capitalprogram 6.4 million higher power contract costs3

o Higher BPA power and wheeling expenses 5.0 million lower planned NWRo Per the 2014 Strategic Plan Update 1.4 million higher taxes, uncollectible revenue, and other miscellaneous expenseso Mostly higher taxes from higher retail revenue 7.7 million increase to non-power direct O&Mo Increased spending on Strategic Initiatives, baseline inflation 1.7 million decrease to power and other sources of revenueFigure S1 gives a high-level graphical view of the 2015 and 2016 revenue requirement drivers.Figure S1High-Level Revenue Requirements Drivers 830.0 815.6Revenue Requirement ( M) 820.0Debt Service Coverage 810.0 800.0O&M and Other 790.0 774.1 780.0 770.0 760.0Net Power Costs,Decreasing NWR 755.5 750.0 740.02014 Base RevenueRequirement 730.0 720.0201420152016Table S2 provides a summary of the revenues and expenses assumed in this revenue requirementanalysis (RRA).4

Table S22015-2016 Revenue Requirement Calculation Summary2014 Plan 189.6 341.42015Forecast 194.0 349.22016Forecast 204.7 368.4Difference2015-2014 4.4 7.8Difference2016-2015 10.7 19.2Operating ExpensesPower ContractsNon-Power O&MOther ExpensesTotal 274.4237.546.7 558.6 268.4239.348.3 556.0 274.8247.049.7 571.5( 6.0)1.81.6( 2.6) 15.5Operating RevenuesNet Wholesale RevenuePower RevenuesOther SourcesTotal 146.3 65.027.738.5 131.1 124.4( 20.0)4.70.2( 15.1)( 5.0)(1.6)(0.1)( 6.8)Chapter RRA Category ( Millions)Debt Service1Debt Service times 1.8234Revenue RequirementsAdopted 755.5 774.1 815.6 18.6 41.5Target753.7774.1815.620.441.5Difference (Adopted - Target)* 1.8 0.0 0.0( 1.8)( 0.0)*In some years the target revenue requirement calculated with the budgeted revenues and expenses may not equalexactly the revenue requirement endorsed by the Strategic Plan. This is because the revenue requirement and the budgetare completed in parallel, and typically the revenue requirement must be finalized before the budget is. Chapter 4discusses the difference between the target and adopted revenue requirement in detail.S.3Changes in Average RatesThe 2014 Strategic Plan Update1 calls for rate increases averaging 4.2% in 2015 and 4.9% in 2016.Table S3 summarizes retail revenue,2 average rates and annual rate increases for 2015 and 2016.The first section shows the retail revenue generated from existing rates and the incremental retailrevenue in 2015 and 2016 resulting from the revenue requirement increases described in thisdocument. The second section provides the average rates for each year, which are calculated bydividing total retail revenue by the total sales to customers and multiplying by 100 (to getcents/kWh). The third section shows the average annual rate increase and a breakout showing howmuch of the increase is due to increases in the revenue requirement and how much is due to changesin the amount of expected retail customer sales.12Adopted by the City Council June 30, 2014, by Resolution 31529.Retail revenue from energy charges, demand charges and base service charges from all customers.5

Table S3Changes in Average Rates2014 PlanRetail Revenue ( M)Current RatesFrom 2015 IncreaseFrom 2016 IncreaseRetail Revenue RequirementSales to Retail customers (GWh)Avg Rates (cents / kWh)Current RatesAfter 2015 IncreaseAfter 2016 IncreaseAnnual Rate IncreaseChange from Increased RRChange from Expected Retail Sales20152016 755.5 742.731.4 755.5 774.1 746.131.637.9 3%1.9%4.9%5.4%-0.5%The average annual rate increase is calculated compared to what the average system rate would befor that year without that year’s rate increase (which may not be the same as the average rate for theprevious year). This method accounts for any changes in projected retail sales. Note that an averagerate is only a statistic and not actually a customer rate.The 2015-16 Rate Study is a comprehensive one; therefore, the revenue requirement is only the firstof three steps. First the revenue requirement is calculated, then the cost of service and costallocation study divides the revenue requirement dollars among customer classes, and then finallyrate design sets individual rates to collect this revenue. Therefore, the revenue requirementdetermines that the average rate increase across all customers is 4.2% and 4.9%, but each individualcustomer class will have a different rate increase that could be lower or higher than the systemaverage.6

IntroductionI.1IntroductionThis report details the 2015 and 2016 revenue requirements developed for City Light’s 2015-2016Rate Study. The revenue requirement is the amount of revenue that City Light must collect fromretail customers in a given year to cover operating costs and meet Council-mandated financialpolicies. Operating revenues, operating costs and capital expenditures (which drive debt servicecoverage) are determined by the budget, which is developed in conjunction with the revenuerequirement. City Light’s current rate setting financial policy specifies that rates should be set sothat after all operating expenses the remaining net revenue will be equal to 1.8 times debt service.3The amount of net revenue available for debt service is also commonly referred to as debt servicecoverage.The following equation helps demonstrate the basic derivation of the revenue requirements.Revenue Requirements Debt Service * 1.8 Operating Expenses –Non-Rate Based RevenuesFigure 1 below shows how retail revenue is sized so that total revenues equal total expenses. It alsoillustrates the relative size of City Light’s Revenues and Expenses.Figure 12015 City Light Adopted Revenues and Expenses 1,000 900 877.7 877.7Misc. RevenuesNWROther Expenses 800 700O&M 600 M 500 400Power Costs,NetRetailRevenues 300 200 100Debt ServiceCoverage 0ExpensesRevenuesThe revenue and expenses used in the derivation of revenue requirements are consistent with themethodology for calculating debt service coverage for ratemaking. Note that rates use a slightlydifferent definition of operating revenues and expenses than is used in the income statement,because the income statement includes non-cash transactions such as depreciation and mark-to3City Council Resolution 31187 passed in March 2010.7

market valuation for certain energy purchases and sales. These types of transactions are not part ofthe debt service coverage calculation. City Light’s 2013 Annual Financial Report providesinformation on specific types of adjustments made to the income statement categories.I.2RRA Objectives and OrganizationThe RRA’s two main objectives are: (1) to summarize how the 2015 and 2016 revenuerequirements are determined; and (2) to explain what has changed from the revenue requirementsused to set the existing 2014 rates. To accomplish this, this report compares the forecast for the2015 and 2016 revenues and expenses to the forecast that determined the 2014 rates, referred to asthe 2014 Plan. The 2014 Plan is the 2014 Adopted Revenue Requirement adjusted for increasedBPA power and wheeling costs and the associated retail rate pass-through that went into effectOctober 1, 2013. Note that 2014 actuals are not pertinent to this discussion; the RRA only comparesthe current proposal to the revenues and expenses used to determine the existing 2014 rates.The RRA is organized into five chapters with appendices providing additional detail. Chapter 1explains debt service and debt service coverage. Chapter 2 discusses operating expenses, whileChapter 3 discusses non-rate based revenue. The revenue requirement, which is calculated from thevalues in Chapters 1-3, is summarized in Chapter 4. Finally, Chapter 5 discusses indirect costs andproceeds, such as capital expenses and proceeds from bond issues. These impact the revenuerequirements indirectly through their role in size and timing of future debt issues, which ultimatelyimpact future revenue requirements.8

Chapter 1: Debt Service and Debt Service CoverageCity Light finances a portion of its capital program by selling municipal revenue bonds. At the endof 2013 City Light held around 1.86 billion in long term debt obligations. The bonds are paid backover a term of 20 to 30 years through interest and principal payments, also called debt service. CityLight’s financial policies require it to set rates sufficient to cover debt service 1.8 times after allrequired operating expenses are paid. Therefore, changes in debt service have 1.8 times the impacton the revenue requirements that regular expenses have.For the purpose of the financial forecast and the revenue requirements, federal interest subsidies aresubtracted from interest payments instead of treating them as revenue.4 Also, a 7.2% reduction inplanned subsidy payments is assumed, to reflect the potential of reductions due to federalsequestration. Table 1.1 shows the debt service projections for the 2014 Plan compared with theforecast for 2015 and 2016 and the year to year changes. The debt service coverage requirement isincreasing in both 2015 and 2016. The drivers of the increase are discussed below.Table 1.1Debt Service and Debt Service Coverage MillionsDebt Service , GrossFederal SubsidiesDebt Service , Net of SubsidiesDebt Service Coverage (1.8x)2014 Plan 195.05.4189.6 341.42015 199.15.1194.0 349.22016 209.75.1204.7 368.4Difference2015-2014 4.0(0.3)4.4 7.8Difference2016-2015 19.2The debt issues are sized to meet City Light’s forecasted cash requirements for approximately 12months, resulting in annual debt issues each year. The details of the planned debt issues are shownin Table 1.2. The 2015 debt issue is expected to be the largest new money issue in over a decade,partly due to costs associated with the new Denny Way Substation. The below future debt issues areassumed to be fixed rate debt and do not anticipate any refinancing of existing debt.Table 1.2Planned Debt Issues2014 Planned Issue2015 Planned Issue2016 Planned IssueDebt Issue Amount ( M) 220.0292.4240.3Term (years)303030Average Rate5.0%5.0%5.0%Table 1.3 shows debt service by issue year. Debt service on existing debt is decreasing but the debtservice on future debt is expected to increase at a faster rate, leading to a net increase in debtservice. The Capital Improvement Plan (CIP) is the major driver of debt service; the CIP isdiscussed in detail in Appendix C.4Federal interest subsidies are subsidies City Light receives on Build America Bonds (BABs), Conservation andRenewable Energy Bonds (CREBs) and Recovery Zone Economic Development Bonds (RZEDs). Traditionalaccounting treats the subsidies as revenues. With approval from City Light’s financial advisors, the financial forecastdoes not count the subsidies as revenue but rather subtracts the subsidies from debt service and uses net debt service inthe debt coverage calculations.9

Table 1.3Debt Service by Bond Series5 MillionsDebt Service by Bond Series2002-2004 Unrefunded Bonds2008 Bonds2010 Bonds2011 Bonds2012 Bonds2013 BondsSubtotal2014 PlanFuture Debt2014 Bonds2015 Bonds2016 BondsSubtotalFederal SubsidiesTotal Debt Service Net of Subsidies20152016 23.626.078.326.524.516.3 195.1 187.2 14.824.178.426.525.411.6 180.8- 11.8 11.8 11.817.1 28.9 5.4 189.6 5.1 194.0 5.1 204.7Debt service on the 2014 debt issue assumes 2.5M in interest savings, reflecting debt managementefficiencies assumed in the 2014 Strategic Plan Update, based on potential improved liquiditymanagement and/or the possible issuance of variable rate debt.5The debt service payments for many of these bond series reflect refinancing, so the debt service payments on thesebonds are not just for the debt issued to cover capital expenses in those years.10

Chapter 2: Operating Expenses2.1 IntroductionOperating expenses are grouped into power contracts expenses, non-power O&M and otherexpenses. Table 2.1 shows the operating expenses and the annual changes.Table 2.1Operating Expenses MillionsPower ContractsNon-Power O&MOther ExpensesTotal2014 Plan 274.4237.546.7 558.62015 268.4239.348.3 556.02016 274.8247.049.7 571.5Difference2015-2014( 6.0)1.81.6( 2.6)Difference2016-2015 15.52.2 Power Contract ExpensesPower contract expenses include the costs City Light pays to third parties for the acquisition andtransmission of energy. Table 2.2 summarizes planned power contract expenditures for 2015 and2016 and compares them with the prior year. A more detailed description of power contracts islocated in Appendix A.Table 2.2Power Contract Expenses MillionsLong Term Purchased PowerBPAPriest RapidsGrand CouleeHigh RossLucky PeakStateline Wind ProjectSmall RenewablesSubtotalWheelingBPA Firm WheelingSouth Fork ToltGrand Coulee (Local)Other, NetSubtotalTotal Power Contracts2014 Plan20152016Difference2015-2014Difference2016-2015 232.3 231.9 237.2( 0.7)(0.2) 0.3) 5.2 42.1 36.5 37.6( 3.6)(0.0)0.0(2.0)( 5.6) 1.2(0.0)0.00.0 1.2 274.4 268.4 274.8( 6.0) 6.411

Long Term Purchased Power ExpensesThe forecast of power expenses is based on the power contracts budget. In some cases the forecastuses values that are different from the budget; these differences are discussed in Appendix B. Intotal, Long Term Purchased Power expenditures in 2015 are forecasted to stay close to planned2014 levels but increase in 2016 by 5.2 million, primarily due to higher BPA expenses. BPAPower Costs were set at levels consistent with the Strategic Plan (see BPA Expenses).Wheeling ExpensesWheeling Expenses consist of payments for transmission services under long term contracts. Asshown in Table 2.2, BPA is City Light’s primary provider of wheeling services (see BPA Expenses).The “Other, Net” wheeling category is negative because it includes 2.0 million in power-relatedsavings that are expected to come from lower expenditures in power and wheeling costs orincreased power related revenues.BPA ExpensesBPA Power and Wheeling Expenses in the 2014 Strategic Plan Update were set at the levelsestablished in the previous (2012) Strategic Plan, which assumed CPI inflation of approximately 2%per year. In the 2016 federal fiscal year beginning October 1, 2015, BPA rates may increase morethan the amount assumed in the Strategic Plan update. When the final decision is published in latesummer of 2015, City Light will evaluate the effect of new BPA rates in relation to City Light’se

S.1 Revenue Requirements Table S1 shows the 2015 and 2016 Revenue Requirements and the respective annual changes. The revenue requirement shown here differs from the revenue requirement found in the COSACAR, which treats rate discounts as a cost for the purposes of cost allocation. Table S1 Revenue Requirements Millions 2014 Plan 2015 2016

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