SMUD: Financial Forecast Cloudy

13 Nov 2014

A drop off in revenue and the need to replace aging infrastructure could cause the Sacramento Municipal Utility District to raise customer rates 4.5 percent by 2017, the muni’s chief financial officer said.

“When we went through the recession, we had a big drop off in revenues, we had a very big slowdown in customer growth,” chief financial officer Jim Tracy told the board Nov. 6. “We’re just slowly digging ourselves out of that.”

In 2013, the muni approved a 2.5 percent rate increase that’s scheduled to go into effect in January 2015. No increase is projected for 2016, but staff could eventually propose a 4.5 percent increase to the board next year, Tracy said.

“The 2016 and 2017 numbers here are a first snapshot of what we’re seeing the rate levels are likely to be during that two-year period,” he said. “These are not final numbers . . . but it’s kind of a starting point for where we probably will be in the first quarter of next year when we bring a recommendation on rates for 2016 and 2017 to the board.”

Among the reasons why rates could increase, he said, was the lingering effect of the 2008 recession, including less construction and greater energy efficiency. Although the number of utility customers is rising, the total amount of energy usage doesn’t correspond, particularly due to the implementation of rooftop solar.

“Even though we’ve got increasing customers, we’re seeing a lot of energy efficiency.” Tracy said. “The amount of use per customer is actually going down.”

Although flat sales are forecast for the next three years, he did say that the region’s beginning to see more new construction, with the level beginning to rise to pre-recession levels. That translates into higher energy sales.

Up to 2007, 6,000 to 10,000 new lots were being constructed every year, but that amount fell to about 1,600 in 2008 and there was almost no activity for three to four years before it began climbing upward again in 2014.

Residential customer growth over the past few years has met the projection of about 6-7 percent per year, however commercial growth still is lagging behind projections at 5 percent annually instead of the planned 6.5 percent, Tracy said.

Another factor in a projected rate increase is the cost of upcoming infrastructure projects. Over next three to five years, the level of capital expenditures is expected to creep up, according to staff projections, due to major generation projects, transmission upgrades and the planned 400 MW Iowa Hill pumped-storage system.

“We’ve got a significant amount of capital expenditures, but not until about three or four years out, when we begin building infrastructure to accommodate wind and solar and all the renewables,” Tracy said.

Starting in 2017 or 2018, the muni is expected to invest in $1 billion to $1.5 billion of infrastructure spending to add more wind, solar, and other resources that cycle up and down.

“It’s not having a big impact over this current three-year period, but it will begin to impact our spending requirements five to seven years from now,” Tracy said.

Another expenditure expected to increase after years of declines is staffing costs, according to the three-year report.

Muni staff had been declining in recent years in part because of the recession, but due to technology and complex changes in industry, the muni’s seeing an increase in staffing need. There’s been additional pressure on staff levels and costs due to regulatory compliance and increasing complexity of the technology-driven business model, Tracy said.

Tracy also noted: • The utility’s projected net income for 2015 is $73 million. • Since the muni buys gas on a weighted average basis over 36-month periods and locks in prices of its natural gas procurement three years in advance, its gas prices are expected to be stable for the next three or four years. • The muni has 25 percent equity-to-debt ratio and won’t need to borrow money for capital projects until at least 2017. • Even if sales levels of electric vehicles doubled in next three years, it wouldn’t have a significant sales impact on electricity. Any impact of electric vehicle sales on utility electricity sales won’t come for another seven to nine years.

He also warned that a temporary, unplanned rate increase could occur next year, depending on the current seasonal weather. After three very dry years recently, the muni’s $27 million hydro rate stabilization fund is at about zero; if another dry year comes, rates would be automatically adjusted between zero to 4 percent for 12 months to make up for the lost hydro generation and cost of the replacement power.

“In 2015, there is the potential for an additional rate increase due to dry weather, but it would be totally dependent on what kind of rainfall we get this fall,” Tracy said.

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