Gas Planning Eases Sting of Possible SMUD Rate Surge

The Sacramento Municipal Utility District?s consideration of a potential 6 percent rate increase beginning in 2005 is not good news to customers. But from the perspective of SMUD officials, the possible rate hike could have been a lot higher had the muni been exposed to recent runaway prices in the natural gas market. ?As of two months ago, we?ve contracted for all the gas we need for the next three years,? said Jim Tracy, SMUD chief financial officer. ?So the impact you?ve seen in the market over the past six to eight weeks has had no impact on our financial projections.? Tracy estimated that next year?s budget will be between $50 million and $60 million less than it would have been had SMUD not planned ahead. The muni?s board of directors is weighing a 2005 draft budget proposal that could yield rate increases to pay for natural gas, as well as a list of other purposes?purchased electricity, transmission interconnections, renewables, energy efficiency, and equity increases among them. If the board goes with its own policy objectives outlined last year, SMUD would need an additional $180 million through 2007, leading to a 6 percent rate increase. Even if natural gas prices weren?t soaring, the muni would still be spending more money for the fuel because of increased consumption. The muni?s gas-fired, 500 MW Cosumnes plant should be completed by November 2005, according to Tracy. The utility district continues to hunt for long-term gas reserves. In April, SMUD elected not to issue bonds to acquire such supplies after it was unable to work out a deal with possible counterparties in time for a bond issue ( Circuit , April 23, 2004). SMUD purchased a share in a gas field in 2003 but is on the lookout for more. ?Our goal is to get 30 percent of our [gas] supply from long-term sources,? according to Tracy. An $87 million gap lies between the muni?s energy commodity budgets for 2004 and 2005. The loss of dedicated power from the Western Area Power Administration?electricity that SMUD must now purchase from another party?represents about $24 million of that figure. To date, WAPA has had agreements with customers such as SMUD to deliver defined energy and capacity based on system integration pacts between WAPA and Pacific Gas & Electric. Those contracts expire at the end of this year, and the muni will now instead receive a portion of actual energy produced by federal hydro facilities. In effect, SMUD will get 10 percent less energy from WAPA beginning next year. The fact that Western will join the muni?s grid control area starting next year will have no impact on muni finances, Tracy said. About $11 million of the aforementioned $87 million owes to SMUD being ?more conservative? about hydro generation possibilities for next year, Tracy continued. Another $25 million would be put toward higher market prices for purchased gas and electricity. The remainder, roughly $17 million, would help serve 13,000 new customers in the utility district?s territory. The 2005 budget also makes provision for SMUD?s Solano County wind farm, where Tracy said capital allocations could help build out the site?s total projected capacity of 85 MW. At present, the turbines in the Montezuma Hills have a capacity of 10 MW to 15 MW. Though the utility district also has plans to boost its ownership equity, Tracy reminded that this course?increasing equity to 20 percent in the next three years?is subject to the discretion of the muni?s board of directors. Higher equity usually leads to better credit ratings and lower borrowing costs, which are helpful as SMUD ponders other capital layouts. Candidates include a possible pumped storage facility on the American River hydro project and efforts to strengthen transmission interties in the Sacramento region, which could soften the summer electricity peak. The last time SMUD increased rates was during the energy crisis, when bills for the muni?s customers rose by 16 percent. That hike marked the first such increase in more than 10 years for the utility district. Staff will make recommendations on the 2005 draft budget next month, and public hearings are set for early next year. If approved, the budget would go into effect April 1. Green Like (IO)U For municipal and investor-owned utilities alike, rising natural gas prices are likely to lead to electric rate increases around the state. But California muni customers could face higher bills if the Legislature renews its efforts to hold public power agencies to renewables portfolio standards (RPS). ?There?s no doubt that there would be rate impacts with some of the proposals we?ve seen so far,? said Jerry Jordan, executive director of the California Municipal Utilities Association. Most of those approaches are missing a key ingredient, he argued?the proviso that renewables requirements not be binding if they trigger rate increases. RPS law SB 1078 allows investor-owned utilities to put off incremental green supply additions if the extra cost exceeds the amount currently being spent on renewables by utilities under the state public-goods charge. ?They don?t have to pay a single penny more? to secure green power, Jordan said. ?Munis don?t have the same carve-out? in some of the draft proposals in circulation. Jordan expects to see the issue resurface at the Capitol in 2005, though circumstances surrounding it appear ironic. ?The truth of the matter is that we?re the ones that are actually building renewables in California,? he said.

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Gas Planning Eases Sting of Possible SMUD Rate Surge

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