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HomeMy WebLinkAbout11/7/2001 - STAFF REPORTS (17) DATE: November 7, 2001 TO: City Council FROM: Assistant City Manager-Administration SUBJECT: CVAG MUNICIPALIZATION STUDY RECOMMENDATION: That the City Council: 1) Consider whether or not it desires to participate in and fund its share of Phase II of the CVAG Municipalization Study; 2) Approve a Budget Amendment in the amount of$10,190 to pay forthe City's funding share of Phase I of the CVAG Municipalization Study; and 3) Approve a Budget Amendment in the amount of$56,613 to cover the City's Phase II assessment, should the City Council decide to participate. SUMMARY: The Coachella Valley Association of Governments (CVAG) has completed Phase I of a study regarding Municipalization of Electrical Services, and has asked each of its member agencies to determine whether or not they want to participate in and help fund Phase 11 of the Municipalization Study. This is the question before the Council. BACKGROUND: The Coachella Valley Association of Governments(CVAG)has entered into a contract with EES Consulting for the first phase of the Municipalization Study, which was completed in mid-September2001. The purpose of the Municipalization Study is to address what can be done about the current energy crisis and high cost of electricity for agencies in the Coachella Valley being served by Southern California Edison. Attached is the Executive Summary of the Phase I Study, which provides CVAG members with the options available to them, and then recommends that the CVAG members pursue 1) the municipalization of the Edison distribution system and 2) aggregation and/or participation in new generation, if all or part of the State-imposed exit fees can be avoided. It should be noted that the Phase I Study, except for the Executive Summary which is attached, is considered by CVAG and its member agencies to be a confidential document, and has not been released to the public, nor to Southern California Edison. The City of Palm Springs' share of the cost of the Phase I Study was$10,190. Since this amount exceeds staff's authority for payment, and was not anticipated in the budget, a proposed Resolution amending the General Fund budget is attached appropriating funds for this cost. lyA Before moving on with Phase II of the Municipalization Study, CVAG has requested that the legislative bodies of each of its member cities and the County review the Scope of Work for the proposed Phase 11 Study and vote on whether or not to participate in and help fund the next phase. Attached is the Summary of Proposed Scope of Services for Phase II of the Electric Utilities Option Study for City Council's review. The proposed study is projected to cost$250,000. Palm Springs'initial assessment has been determined to be$56,613. However, CVAG has also invited Coachella Valley water agencies and districts within the Southern California Edison service area to participate. Should the water agencies and districts agree to participate, the cost assessments for regular members of CVAG would most likely be reduced. After Council discussion, should Council determine that the City of Palm Springs will participate in the Phase II Study, attached is a proposed Minute Order authorizing the City of Palm Springs to participate and help fund the Phase 11 Study. Likewise, if the Council decides not to participate and fund the Phase 11 Study, attached is a proposed Minute Order declining participation in and funding of the Phase II Study. Should the City Council decide to approve participation and funding of the Phase II Study, attached is a proposed Resolution amending the General Fund budget in the amount of $56,613, representing the City's initial assessment for its participation in the Phase 11 Study. All other agency members of CVAG, except Rancho Mirage, which voted "No," have voted to go with the Phase 11 Study. CVAG is awaiting Palm Springs' response. Dallas J. Flicek, Assistant City Manager-Administration APPRO�V D City Manager Attachments: 1. Executive Summary - Phase 1 2. Scope of Services - Phase II 3. Minute Order Approving Phase II 4. Minute Order Declining Phase 11 5. Resolution Amending Budget - Page 1 6. Resolution Amending Budget - Phase II /yA � DRAFT-9113/01 xec i e..: tam pry�. , The Coachella Valley Association of Governments (CVAG) has initiated a study to determine what can be done to alleviate the growing concerns of CVAG members about the current energy crisis in California. Since power supply costs are the biggest component of a customer's electric bill, the option to change suppliers by becoming a utility or an aggregator -is a major consideration. There are also inherent savings with a municipal-type structure for the distribution system due to the differences in the less cost of capital, taxation differences and not- for-profit status. Electric service in the Valley is mostly provided by Southern California Edison (Edison) and Imperial Irrigation District(IID). Electric costs are very high in Edison's territory. The members participating in this study are from those cities whose electric services are provided by Edison -- Desert Hot Springs, Palm Springs, Cathedral City, Rancho Mirage, Palm Desert and Indian Wells, and the Aqua Caliente Tribe. It is this group that is evaluating the electric utility options, not the entire membership of CVAG. References in this document to the "New Utility" refer to one formed by the cities currently served by Edison. The average energy load for Edison's service area within the CVAG members' boundaries is about 250 aMW. This average load compares to a total of 8,000 aMW for Edison and 25,000 aMW for the entire state. This makes the New Utility's load about 3 percent of Edison's and about I percent of the total for the state. The New Utility's size is also close to the 280 aMW load for the Imperial Irrigation District (IID). The average rate paid to Edison is roughly $130/AM or 13¢/kWh. CVAG members have several options available to them. Options to be considered in this report cover a broad range of possibilities from deciding to keep the situation the same as it is now, to condemning Edison's system and running it as a municipally-owned utility. These options are discussed in a broad sense at this point but can be fine-tuned once a more definite direction is selected. Options discussed in this report include: ■ Municipalization(Negotiated or Condemnation) ■ Formation of a New Utility to Serve New Customers/Load Growth Only ■ Aggregation of CVAG Member Loads and/or Constituent Loads ■ Participation in New Generation Developed in the Valley ■ Other Options—Legislative,Regulatory and Demand Side Management(Conservation) Based on the options identified, a preliminary economic evaluation was performed to determine the potential savings to CVAG members under each option. This preliminary evaluation is COACHELLA VALLEY ASSOCIATION OF GOVERNMENTS—MUNICIPALIZATION STUDY 1 /NA 3 DRAFT-9113101 intended to provide broad direction in terms of going forward with a change in the current full electric service from Edison. All information in this study was taken from public documents or other information provided by the CVAG members. In general, the economic benefits from the various options will depend on a great many issues that currently cannot be known with certainty. For example, market prices for power supply have proven to be highly volatile and unpredictable, there are dozens of legislative bills pending that could impact the study's conclusions, and the ultimate status of Edison's financial future is unknown at this time. For these reasons, the study results are presented in terms of ranges. In summary, the economic, legal and operational reviews of all options available to the CVAG members served by Edison indicate several actions may be prudent. First, municipalization of the Edison distribution£unction within the Valley is cost-effective. The distribution function can be undertaken by a municipal utility at a savings of 20 to 25 percent over Edison's rate for the distribution function. Secondly, local generation and/or aggregation of Valley loads could save another 10 to 25 percent off Edison's current power supply charges if state-imposed exit fees are not accessed. Finally, the municipalization of Edison's distribution function would save Valley residents between $15—$50 million annually in lower power bills, provide for local control over such matters as the baseline allocation amount and provide additional opportunities for local economic development. These savings are primarily a function of a municipality's lower cost of money, favorable income tax treatment and non-profit status. The following provides a more detailed comparison of the options in terms of economics and other factors. ■ Municipalization—Negotiated or Condemnation. In the event of a negotiated sale of the system to a New Utility or exercise of eminent domain powers, savings for the distribution of power is in the range of about $7 to $9 per MWh. These hard savings are in addition to the benefits associated with local control, access to tax-exempt financing, additional opportunities for economic development and control over rate issues such as the baseline amount. ■ New Utility to Service Only New Loads. If a New Utility is formed to serve only new customer growth in the Valley, costs for distribution of power will be higher than Edison in the early years by as much as $15 per MWh. Over the longer run, savings of about $2 per NM are expected. The benefits of a municipal utility in this case would apply only to new customers. ■ Aggregation. Savings from aggregation accrue only to the power supply component of the rate. The distribution function would still be provided by Edison. If stranded costs can be avoided, savings of about $10 per MWh can be achieved through aggregation. This is about 10 percent savings over Edison's power supply rate component. Savings may also be offset by stranded costs under aggregation, and in fact, the legislature may disallow aggregation entirely in the future. ■ New Generation. Participating in new generation projects has the potential to save as much as 10 percent in the early years, and 25 percent over the long term when compared to market f COACHELLA VALLEY ASSOCIATION OF GOVERNMENTS-MUNICIPALIZATION STUDY 2 MA4 DRAFT-9113101 price projections. Savings for options other than taking project output may be more or less than this, depending on negotiations. In developing a recommendation for CVAG members, economics, organizational options, legislative status and other issues are all important factors. Because of the uncertainty in data for Edison assets at this time plus the large impacts on rates from legislation that is yet to be resolved, it is difficult to predict accurate savings under any option at this time. We do, however, have a broad understanding of savings that can occur under different options. Because there are many legislative issues that will have a large impact on electric bills, with and without municipalization, there may be opportunities to affect that legislation to receive a favorable outcome. At the same time, there may be unique windows of opportunity as new generation is built in the Valley, and as Edison is working out solutions to its financial difficulties. Given the pros and cons of the various options considered, it is recommended that CVAG members: ■ Pursue the municipalization of the Edison distribution system. ■ Pursue aggregation and/or participation in new generation if all or part of the state-imposed exit fees can be avoided. These recommendations are not made lightly. The task of acquiring Edison's distribution functions may not be simple or quick. A certain amount of risk is inherent in any transaction of this nature and size; however, the potential benefits of acquiring Edison's distribution function for the Valley residents appears to be large enough to justify municipalization. The savings noted in this study are certainly material but in the longer-term, additional savings are likely. The 25 to 30 percent savings on the wires component or roughly 10 percent on the total bill are hard savings that are available immediately under municipalization. In the future, additional benefits and savings will accrue due to a municipal utility's access to low cost federal power, tax-exempt financing, preferable tax treatment, not-for-profit status and control over rate setting. These future benefits are already realized by existing customers of municipal systems in southern California where their current rates are 30 to 40 percent less than Edison's. COACHELLA VALLEY ASSOCIATION OF GOVERNMENTS-MUNICIPALIZATION STUDY 3 1451 Oct-26-01 03: 29P COachella Valle-VASSOcOFGOv 760 340 5949 P_02 Coachella Valley Association of Governments Summary of Proposed Scope of Services for Phase II of Electric utility Options Study Estimated Labor Budget for FF$ Consulting and Task Orrick Merringtan Sutcliffe, Technical Action Plan Detail faoilltles In cities, county and tribal lands for ---------as-uisition Perform random sample of Edison equipment to determine value and condition ✓ update financial pro formas Tender oporating contract to competitive bid Research Just compensation precedents in ., California --- _.-- --- -- Review eminent domain process and schedule -. - Calculate level of stranded costs that may attach to a ✓ new utility a g .. es a fatQs Identify anyfinancing constraints that mgh#impact a new unnlcipal utility Deter i y aceI taxing districts will be adversely impacted by municipalization, and If so, by how much 'Review franchise agreements to disclose any constraints Assess potential,to participate In existliig„�eneratlon Aesess potenMa-I toparticlpate In new generation ✓ Evaluate optlan�far aggregation Total Technical Budget S s100,00A • Governance Action Plan Identi list of participants Draft development a re is for Phase II p p - _,.p _ g. ament to guide Phase II _. Determine best structure for final organization _ Develop plan for eliminating any harriers to forming demand organization withproposed participants _ _ Total Governance Dudcet - - _. -_ ..,.. $ 30,000 1 JYAb Oct-26-01 03: 29P Coaches-lla4alleyAssocOPGov 760 310 5949 P-03 - Estimated tabor Budget for EES Consulting and Task Orrick Herrington Sutrliffe Legislative/Political Action Plan Rot orm ev In p ubllc Information flop public Information material ✓ Present sent concept to all local agencies and state officials Pursue exit fee exemption,volume cap and any needed authority Chance®s ddi - n ®e� ✓ Montana PUC proceeding o pursue needed changes - Look far additional partners P g to Edison's current rates I.e., baselino Total l egl€lathe/Political Budget $ 70,000 . • Budget Summary for EIFS Consulting and Or r ick ✓ ... ✓e_r..r.„n. g„ton Sutcliffe Labor , fe Labor forTec�ni clal • .. ._....-.... ......- . _. _-$$—21�0000,0000-^0_ ahor for Covernance 30,000_ Labor for Le sl. av 70.000 Subtotal Labor _-_ -- Estimated Out-of-Pocket Expenses + - -- 50.00 Other Consultants/Firms TOTAL PHASE II BUf)GET UW,000 MINUTE ORDER NO. APPROVING PARTICIPATION IN AND FUNDING OF ITS SHARE OF THE CVAG PHASE II MUNICIPALIZATION STUDY IN AN AMOUNT NOT TO EXCEED $56,613. --------------- I HEREBY CERTIFY that this Minute Order, approving participation in and funding of its share ofthe CVAG Phase II Municipalization Study in an amount not to exceed$56,613 was adopted by the City Council of the City of Palm Springs, California, in a meeting thereof held on the 711 day of November, 2001. PATRICIA A. SANDERS City Clerk MINUTE ORDER NO. DECLINING PARTICIPATION IN AND FUNDING OF ITS SHARE OF THE CVAG PHASE II MUNICIPALIZATION STUDY --------------- I HEREBY CERTIFY that this Minute Order, declining participation in and funding of of the CVAG Phase II Municipalization Study was adopted by the City Council of the City of Palm Springs, California, in a meeting thereof held on the 7t" day of November, 2001, PATRICIA A. SANDERS City Clerk RESOLUTION NO. OF THE CITY COUNCIL OF THE CITY OF PALM SPRINGS, CALIFORNIA,AMENDING THE BUDGET FOR THE 2001-02 FISCAL YEAR. WHEREAS Resolution 20062 approving the budget for the fiscal year 2001-02 was adopted on June 6, 2001; and WHEREAS the City Manager has recommended, and the City Council desires to approve, certain amendments to said budget; NOW THEREFORE BE IT RESOLVED that the Director of Finance is authorized to record inter-fund cash transfers as required in accordance with this Resolution, and that Resolution 20062, adopting the budget for the 2001-02 fiscal year is hereby amended as follows: SECTION 1. ADDITIONS Fund Activity Account Amount 001 1010 43802 $10,190 General Fund City Council Electrical Municipilization Purpose To fund Phase I of CVAG's Municipal Electric Facility Study SECTION 2. SOURCE General Fund reserves FUND Activity Account Amount 001 29349 $10,190 General Fund Reserve for Contingencies Adopted this day of 2001. AYES: NOES: ABSENT: ATTEST: CITY OF PALM SPRINGS, CALIFORNIA By City Clerk City Manager REVIEWED AND APPROVED �� i RESOLUTION NO. OF THE CITY COUNCIL OF THE CITY OF PALM SPRINGS, CALIFORNIA,AMENDING THE BUDGET FOR THE 2001-02 FISCAL YEAR. WHEREAS Resolution 20062 approving the budget forthe fiscal year2001-02 was adopted on June 6, 2001; and WHEREAS the City Manager has recommended, and the City Council desires to approve, certain amendments to said budget; NOW THEREFORE BE IT RESOLVED that the Director of Finance is authorized to record inter-fund cash transfers as required in accordance with this Resolution, and that Resolution 20062, adopting the budget for the 2001-02 fiscal year is hereby amended as follows: SECTION I. ADDITIONS Fund Activity Account Amount 001 1010 43802 $56,613 General Fund City Council Electrical Municipilization Purpose To fund Phase 11 of CVAG's Municipal Electric Facility Study SECTION 2. SOURCE General Fund reserves FUND Activity Account Amount 001 29349 $56,613 General Fund Reserve for Contingencies Adopted this day of 12001. AYES: NOES: ABSENT: ATTEST: CITY OF PALM SPRINGS, CALIFORNIA By City Clerk City Manager REVIEWED AND APPROVED yO