Bushnell/SECO 2011 Evaluation of Electric Service

2011 Preliminary Evaluation of Electric Service Territorial Issues City of Bushnell // SECO 

The following document is a letter dated February 11, 2011, from Electric Cities of Georgia (ECG), consultants, addressed to Vince Ruano, City Manager of the City of Bushnell, with regard to a potential acquisition of SECO territory.

ECG Plec l r 1c ci l1 es of

CJUOl!JICI

February 11, 2011 Mr. Vince Ruano, City Manager City of Bushnell Post Office Bo x 115 Bushnell, Florida 33513

Re:

Preliminary Evaluation of Electric Service Territorial Issues

Dear Mr. Ruano: Electric Cities of Georgia (ECG) has been asked by the City of Bushnell to examine the electric rate and reve nue issues related to the potential acquisition of residential and commercial customers within the current city limits which are presently served by Sumter Electric Cooperative, Inc. (SECO ).

In the conduct of our analysis we have observed the city's and SECO's electric distribution facil it ie s in the areas of in terest and have reviewed the engineering report prepared in October 2010 by Mr. Lloyd D. Shank of Power Services. We take no iss ue here with Mr. Shank's findings.

Bushnell collects a 6.0 percent franchi se fee o n all SECO sales within the city limits. These fees amount to approximately $160,000 per year and imply annual revenues collected by SECO within Bushnell to be on the order of $2.67 million.

SECO has provided the city w ith kilowatthour sales amounts in the franchise areas for the months of December 2009 and July 2010 only. Projecting these figures for six months each yields an estimated 25,535 MWh pe r year provided by the cooperative in Bus hnell. Dividing the dollar sa les by the energy served resu lts in a un it price of 10.46 cents per kWh. Th is is a reasonable amount based on SECO's Energy Information Administration filing for 2009 which reported the residential price per kWh as 12.26 cents and the large commercial as 9.26 cents.

COMMERCIAL RATE COMPARISONS

There are a generous number of high load factor commercial accounts in the areas of interest. The County Road 48 & Interstate 75 interchange features a Wa l-Mart Superstore, a McDonald's, a Wendy's, seve ral hotels and a number of 24/7 gas station convenience stores. Another area which is contiguous to the city's present service territory on the no rth side includes a Winn-Dixie supermarket. a two shift industrial plant with over 300 employees and severa l large Sumter County government build ings.

Shou ld the city proceed to acquire these areas from SECO when t he territorial agreemen t is up for renewal in 2012, these customers would be served under the city's General Service Demand (GSD) tariff rather than the cooperative's GSD rate .

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Mr. Vince Ruano February 11, 2011 Page 2 Wa l-Mart Superstore Typical billing determinants for a Wa l-Mart Superstore are 1,000 kilowatts of billing demand at 70 percent billing load factor. This implies 511,000 kWh of energy purchased per month .

Using the city's GSD rate along with an average power cost adjustment of 4.68 cents/kWh, the computed bill before taxes is $68,972or13.50 cents per kWh. Using SECO's rate with an average power cost adjustment of 0.89 cents yields a bill before franchise fees and taxes of $47,186 or 9.23 cents/kWh. Multiplying by 1.06 to account for the franchise fee moves the bill up to $50,017 (9.79 cents) .

If the City of Bushnell were to acquire Wal-Mart it wo uld need to pu rchase additional power from FMPA. A 70 percent load factor account is estimated by industry sources to be about 90 percent coincident with the system peak. Thus Bushnell would be billed by FMPA for 900 additional kilowatts of coincident demand each month to serve Wal-Mart. The sum of the Demand Capacity Charge ($18.84), t he Demand Transmission Charge ($2.08) and the low delivery voltage Demand Charge Adj ustment ($0.67) is $21.59 per kW. In turn, $21.59 per kW times 900 kW equa ls $19,431 of additional demand charges.

The additional energy charges (ignoring losses) are 511,000 kWh times the energy cha rge of 4.79 cents per kWh for $24,477 per month. Fina lly demand plus energy is $43,908 of added power charges to se rve Wal-Mart. This is 8.59 cents per kWh. The Wal-Mart incremen tal gross margin is 13.50 cents less 8.59 cents or 4.91 cents. City of Bushnell gross revenue (above FMPA cost) wou ld increase by $25,077 per month.

Other Commercia l Accounts The othei comrr.ercial accounts within the areas of interest were estimated <Jt 5 MW with ar. average load factor of 40% (assumed coincidence factor= 85%). Because of the nature of the wholesale rate , which is tilted to demand as opposed to energy charges, the wholesale unit price translates to 11.07 cents per kWh. Th e retail charge stays approximate ly the same as Wal-Mart due to the low demand/ high energy nature of the city's pricing structure. The gross margin is 2.43 cents yielding $35,409 of additional monthly gross revenue for the City of Bushnell.

Additional city revenue net of offsetting power costs across all commercial customers is approximately $60,000 per mo nth or $720,000 per yea r.

CONSIDERATIONS

Power Services has estimated that the annual debt service to pay SECO plus the annual debt service to pay for the costs of constructing new distribu tion facilities to serve the acquired accou nts to be

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Mr. Vince Ruano February 11, 2011 Page 3 approximately $220,000 per yea r. Th e foregone franchise fees add an additional $160,000. In round numbers this means that the City of Bushnell's annual ca sh flow gain would be a la rge positive amount of $340,000 ($720,000 minus $380,000). This additional income could be directed to targeted rate relief, across the board rat e re lie f or power cost adjustment relief for electric customers. It might also be put in full or in part to other city uses.

If all additional income is applied to across the board rate re lief, for example, $380,000 spread over 50 million kWh per ye ar (existin g plus acquired loads) would yield a $0.0076 (7.6 m ills) per kWh reduct ion.

In the Wa l-Mart example what was a 3.71 cen t s per kWh spread between the city and SECO could be lowered to 2.95 cents. Th e Wa l-M art increase would now be about $15,000 per month or $180,000 per yea r, still a very large amount fo r a company w hich thri ves on low customer pricing by squeezing all excess profits out of its su ppliers.

The other acqu ired commercia l customers would also have their spreads reduced by varying amounts accord ing to their billing load facto rs.

We believe th at t he increases to be borne by th e acquired commercial custo mers would inevitably lead to potential negative consequ ences for t he City of Bushnell. There is precedent at the Florida Public Service Commission fo r an individual customer or group of cu stomers to file a complaint resu lting in the PSC ordering a fully all oca ted cos t of service study. That study would need to comply in all aspects to th e PSC's rule making regard ing customer class rates of return and rate structure designs. Additionally, because of t he high dema nd nature of FMPA rates ($21.59 per kW/ $0.0479 per kWh) it is st rong ly believed th at low load facto r loads (residenti al) would face steep in creases while high load factor loads (Wal-Mart, Winn Dixie, etc., the "plaintiffs") would be granted significant decreases.

The city has not performed a cos t of service study in 30 yea rs. Revised tariffs have been fil ed on occasion (last in 2005) for small increases and th e PCA has increased in stages to its cu rren t ly high level.

Thi s has all been done under the PSC's generally sensi tive rada r, perhaps beca use Bushnell is a relat ive ly small supplier.

RECOMMENDATIONS

ECG has helped many of Georgia's commu nities to prepare for econom ic development through cost justified electri c rat e incentives. Th e City of Bushne ll's current comm ercia l cus tomer base is mainly in the non-competitive sector o f Sumter County governm ent. Key accounts are jails, courthouses, administrative buildings, etc. The current key accounts may ind eed be payi ng justifiably high elec tric rates due to low load factor considerations. In addition, most institutions are property t ax exempt so their co ntributions to t he city's fina nces are fo r the m ost part limited to utility rate margins.

However, if city wishes to pursue the attraction of va lue added business it needs to have some more att ra ctive tariffs in its portfolio. Beca use you are in Florida, such tariffs must be cos t based and compliant with PSC ru les . If th e city's GSD rate was more closely matched to SECO's we might be in a position to recommend th e expansion of your elec tri c se rvice territory into the commercially developed franchise areas. However, as th e situation presently st ands, your regul ato ry risk seems too high.

Mr. Vince Ruano February 11, 2011 Page 4 As we discussed yesterday it may be wise to pursue a shorter term extension of the franchise and territorial agreements with SECO in th e developed areas, say for 5-10 years . Undeveloped areas near the wholesale metering location and south of the city's current service territory should be claimed in 2012 such that growth in those areas would be to the city's benefit and largely be financed by the developers according to your utility extension policies. Exchanges of residential customers along the city's northern boundary with SECO could also be arranged to clean up the distribution lines co-mingling there.

The city would then have an opportunity to position itself better through cost and rate planning to compete for private sector electric loads the next time the agreements are negotiated.

I wish you the best in your upcoming discussions with Jim Duncan. Please give him my regards. Also on behalf of Michael Ivey and myself please thank your operations and office folks for providing us with all necessary information promptly and cheerfully . It was our pleasure to work with all of you .

Sincerely,

John Lansing Manager, Pricing and Sales Support Electric Cities of Georgia