SMUD Defends Proposed Rate Hike

By Published On: May 1, 2009

Employees far outnumbered citizens in the first of two public workshops the Sacramento Municipal Utility District held to discuss a proposed rate increase. SMUD proposes raising its rates 9.5 percent in September, followed by another increase of 3.5 percent on January 1, 2011. A perfect storm of higher energy costs, customers falling behind on bills, and new environmental goals and regulations led SMUD to initially project a 2009 budget shortfall of $87 million, but the muni was able to whittle that down to $27.7 million, said Jim Tracy, the agency’s chief financial officer, at the April 23 workshop. Even then, without additional revenue, the muni would end this year with little or no money in its rate stabilization fund. The lack of liquidity could affect the utility’s credit ratings, he added. However, in a positive development, Standard & Poor’s upgraded its opinion of SMUD’s credit worthiness April 30, raising the utility’s rating from A to A+. The rating agency said the upgrade is particularly noteworthy considering the recession and numerous recent downgrades. SMUD board president Howard Posner said he’s hearing more protests from his constituents compared to 2001, when SMUD increased rates by 20 percent after the energy crisis. “Now, as everyone feels pressured, a rate hike of 9 percent is perceived as a big hit. But when you explain the reasons, there’s a sigh, a shrug.” Tracy said 45 percent of the increase is tied to the economy. “We’ve had no increase in our sales whatsoever because of the business downturn,” he said. He said sales levels have fallen by 7 percent, and total sales levels in 2009 are projected to be $90 million lower than expected. In addition, disruption in the credit markets has increased borrowing costs on some existing debts while lowering interest rates on reinvested funds for SMUD’s cash reserves to less than 1 percent. SMUD customers also are taking longer to pay bills, and more are paying on installment plans. The utility expects to have 74,000 customers enrolled in its discount rate program (open to people earning up to 200 percent of the federal poverty level) by year’s end, compared to 58,000 in 2007. “More of our customers are applying for low-income assistance, and that number will increase as the unemployment rate goes up,” said Tracy. He added that 25 percent of the rate increase is due to a significant rise in the cost of renewable power. SMUD focuses primarily on biomass and biogas projects, but will have to pay $22 million more in purchases than originally forecast. “Every state is trying to meet goals so because there are so many buyers, the competition for supplies has intensified and there’s not a lot of room to negotiate,” Tracy explained. SMUD saved $68 million from its 2008 budget through cuts in operation costs and by delaying capital projects. An additional $40 million through 2011 could be saved by changing some company processes, according to Tracy. But that’s still not enough, he added. While the cost of natural gas decreased from approximately $15/MMBtu to $6/MMBtu, SMUD is locked into the higher rates for the contracts it made for 2010 and 2011, according to staff. Lower costs for gas it is buying won’t show up until at least 2012. SMUD also expects to see the amount of power it purchases from the federal government, via Shasta Lake, reduced to 260 GWh, a 20 percent decrease due to below-average precipitation Scott Johnson, manager of rates and planning, said the average monthly increase for residential customers would be $8 and $5 for low-income customers. For commercial increases, small businesses like coffee shops would have an average monthly increase of $12.50. Larger establishments, such as a big-box retailer using 25,000 kWh, would have an average increase of $536. The biggest commercial establishments, like warehouses using approximately 300,000 kWh, would have an average increase of $3,200. Tracy said the increases would still keep the muni’s rates 27 percent lower than those of neighboring Pacific Gas & Electric. In an effort to improve its service, SMUD is proposing projects in order to receive federal stimulus funds, including automated metering, home weatherization for low-income customers, and smart-grid installations on the campuses of Sacramento State University and Sacramento City College. “We’re shovel ready, we have more structure to our proposals than other utilities, so we have some chance--but those chances are less than 50 percent. We’ll know where we stand by July or August,” said Tracy. -Vanessa Richardson Edited By

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