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Energy Cost Adjustment helps city avoid electric rate increases, bad credit

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Posted: Saturday, January 7, 2012 12:00 am | Updated: 6:14 am, Sat Jan 7, 2012.

When you opened your city of Lodi utility bill, you may have noticed a line item under your electricity statement labeled "ECA" and wondered what it is.

This number is the city's Energy Cost Adjustment, and it changes from month to month. The ECA is applied to your bill as part of the city's per-kilowatt-hour rate for electricity.

The city started using the variable rate more than four years ago to allow the Lodi Electric Utility to recapture the actual costs of providing electricity.

The electric market can be volatile, and prices can vary hour by hour. The ECA allows the utility to adjust for any increases or decreases in wholesale power on the market, Deputy City Manager Jordan Ayers said.

One of the intended consequences of the ECA is that the city has not had any electric rate increases since it went into effect in 2007.

In the past, council members have requested reviews of whether the ECA is working effectively, but this time Mayor JoAnne Mounce requested more information for another reason.

In December, a citizen noticed that there was an error in the city's monthly calculation that would mean that the city would collect almost $150,000 less than it should. The error was corrected before it hit bills, Ayers said.

After hearing about the situation, Mounce said it is important for the council to review the ECA on a more regular basis. She asked city staff to go through how the rate is calculated at the next quarterly review of the utility.

"It's a concern that needs to come to the forefront, so everyone can see how that mathematical equation comes about so we can all be aware of it," Mounce said.

What is the ECA?

There are three factors that go into the calculation of the ECA: the cost of power, how much the city estimates Lodi residents will use every month, and the actual amount of power residents consume.

The ECA increases when wholesale power costs are higher than the city's budgeted estimates, Ayers said. It also depends on what supplies are available to the city.

For example, if there is a wet winter and the city is using a large amount of hydropower in the spring, then the ECA will be lower because the city does not have to buy more expensive power on the open market, Lodi Electric Utility Director Liz Kirkley said.

The ECA tends to be higher in the winter months, when people are using less electricity, and lower in the summer months, when people are running their air conditioners.

The city struck a deal with Seattle City Light, an electric power utility in Washington, Morrow said. During the summer months Lodi needs more energy, so the city receives it from the Seattle utility. In the winter it switches, and Lodi provides the utility with more power.

Throughout the past four years, the amount the ECA has collected to cover electricity costs has ranged from $2.5 million in fiscal year 2010 to $8.7 million in 2008.

During calendar year 2011, the ECA was lower in 10 out of the 12 months when compared to 2010.

The reduction can be tied to a decrease in power usage during the recession, with businesses closing and homes being foreclosed. This leads to the cost of power going down, Kirkley said.

The city has also been using more hydropower because of winter rains, and the costs for that have also gone down, she said.

Because the electricity market can be volatile, with large swings up and down, the ECA helps the city recover the costs of power in a timely fashion, Ayers said.

Another benefit of the ECA is that the utility does not have to burn through reserves when the price of power increases, Ayers said.

For example, in the past, the city used $9 million in reserves during one year instead of raising rates to meet the increased costs in wholesale power.

Recovering costs is especially important for financial rating agencies, which take that into consideration with their ratings, Councilman Larry Hansen said.

"The main reason it is working as it should is (that) it enables us to get much better credit ratings from the bond council, because it shows that we are always going to cover all the costs of electricity. We are receiving the amount it costs to generate and provide the electricity," he said.

The problem in December occurred when the city used almost $150,000 it has on deposit at the Northern California Power Agency to pay some of the month's electric costs. NCPA is an agency that generates, transmits and distributes power to its 20 members and associate members, including Lodi.

City staff then did not include that amount in the total power costs when they plugged it into the ECA formula.

Since the ECA started, John Johnson reviewed all of the calculations as part of his role on the Budget and Finance Committee. He said this is only the second time he has found an error.

But because the ECA applied to 32.2 million kilowatts hours in December, it is important that the calculation is correct.

"Small mistakes when you are selling 33 million of something can add up to real money," he said.

ECA and electric rates

One of the most striking aspects of the ECA for electric utility customers is that there has not been a rate increase in five years.

The city council does not have to consider whether to raise rates every year, because the variable electric costs are already covered, Hansen said.

"It's probably more palatable to people that it's blended into the rates, as opposed to a 20 percent increase," Hansen said.

When Mounce joined the council, the utility had nothing in its reserves. She said the ECA protects the utility and makes sure it has enough money to operate.

In the past, she said, the council did not raise rates enough or staff did not even bring necessary increases forward, which put the utility in jeopardy.

But Mounce does worry that there is less accountability with the ECA.

"The council doesn't have to take the political pressure of raising rates," Mounce said.

If the city did have to raise rates, then they would have to validate the decision to citizens and show why they need the additional money, Mounce said.

"I personally don't support rate increases until I'm comfortable that we have done everything on the other side of things to prevent the increases," she said.

Mounce also has concerns that, because the ECA changes every month, it makes it hard for residents to know how much they will pay.

"It can really affect someone's rates one way or the other. It's harder for people to budget," she said.

Johnson also agrees that the ECA creates budgeting issues, especially for large businesses. He said the city should look at changing the ECA only once every six months, so people can plan for it more.

"It would be fairer to all of them, particularly the bigger users, if they knew how much they will pay per kilowatt hour for the next six months," Johnson said.

Contact reporter Maggie Creamer at maggiec@lodinews.com. Read her blog at www.lodinews.com/blogs/citybuzz.

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1 comment:

  • roy bitz posted at 1:55 pm on Sun, Jan 8, 2012.

    roy bitz Posts: 489

    "the problem occurred when the city used almost 150k we had on deposit with NCPA.." More information please.
    Will LNS do story on how rate payers money is allocated to NCPA.



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