CWLP Outlines Reasons Behind 2012 Electric Rate Increase Request

City Water, Light and Power introduced a proposal to the Springfield City Council on January 24, 2012, which asks to increase electric rates by 9.5% effective March 1, 2012. CWLP officials are also recommending that the rates adjust annually every March 1 according to the Consumer Price Index (CPI). This inflationary-based annual adjustment would reduce dramatic changes to rates in the future. These adjustments would be capped at 3% per year, with a floor of 1%. Any year where gross wholesale revenues exceed $55 million from the prior calendar year, the CPI adjustment would not be applied. CWLP would make a formal written report to the City Council before March 1, 2016, on the continued use of the CPI formula.

Wholesale power price impact
The wholesale energy market has continued on a steady decline since the economic collapse that began in the fall of 2008. During the design period of Dallman Unit 4, CWLP’s budget planning anticipated higher surplus power returns from the wholesale market. The wholesale power market has continued to drop below analyst expectations.

For FY2012, Electric Operating Revenues are $20,329,879 below budget. Wholesale sales revenues are $20,523,345 below budgeted expectations. Wholesale power prices are not improving or even stabilizing. Power prices prior to this collapse never fell below the $50 per megawatt hour (MWh) mark. Current forward power prices have dropped to less than $31 per megawatt hour.

Revenues vs. expenses
Based on an audited income statement, the Electric Fund experienced a net loss of $12,236,133 in FY2011. To-date in FY2012, the fund is showing a net loss in excess of $14 million.

Working cash low
The Electric Fund Financial Position has deteriorated to an historical low. Rating agencies recommend electric utilities keep at least 60 days worth of working cash, which in CWLP's case would equate to $27,980,000 (based on FY2011 figures). However, as of December 2011, the Electric Division's effective working cash was a negative $7,136,969. CWLP has a line of credit with an outstanding balance of $2,250,000. Additionally, the Electric Fund owed $6.3 million to the Water Fund as an inter-fund payable, which has been steadily increasing during this Fiscal Year 2012.

Debt coverage insufficient
The Electric Fund Debt Coverage Ratio (all revenues less O&M expenses/principal and interest payments on outstanding debt) through December is 1.04x. A Year-End Debt Coverage Ratio of less than 1.25x would be a technical default under the Electric Fund Master Bond Ordinance. Missing the required Debt Coverage Ratio of 1.25x constitutes a "Material Event," which must be disclosed to the Financial Market. In all likelihood the Electric Fund will fall short of the requirement at year-end. In a disclosure of such a shortfall, CWLP needs a plan in place to remedy the technical default. The proposed rate increase would allow CWLP to meet its obligation to its bondholders by improving the debt coverage above the 1.25x requirement.

Rating agency outlooks
Moody's Investor Services downgraded the Electric Fund to A1 from Aa3 as of December 2010 with a Negative Outlook. This downgrade was issued primarily because the Electric Fund’s cash position and debt coverage were insufficient.  A “Negative Outlook” is often considered a warning of potential further downgrades in an issuer’s debt rating.

2005 rate increase
CWLP’s Electric Fund has been carrying an additional $58 million in debt that wasn’t provided for in the 2005 electric rate increase. Wholesale revenues were predicted to remain steady and cover the additional debt payments. A $35 million State Grant was included in the financial planning for Dallman 4 that did not materialize. During the rebuild of Dallman 1, approximately $5 million of improvements not covered by insurance was completed on the plant grounds such as blast walls protecting the primary step-up transformers. An additional $15 million was borrowed to pay for part of the Dallman 33 scrubber upgrade.

This rate increase didn’t include any funds for operation and maintenance costs for Dallman Unit 4 due to the anticipated wholesale revenues. Low wholesale power prices and revenues combined with the additional debt can no longer be absorbed by the Electric Fund.

Consumer Price Index
Since the Electric Fund’s 2005 rate increase to pay for construction of Dallman Unit 4, inflation has increased by 14.4% as measured by the Consumer Price Index (CPI). The proposed rate increase of 9.5% would remain below CPI and would restore CWLP’s debt coverage to compliance with Electric Fund Master Bond Ordinance. CWLP recommends that rates be adjusted annually by the same CPI used in labor contracts.

USEPA mandating costly regulations
Along with the other power generators across the United States, CWLP faces current and pending environmental regulations by the USEPA, which will be costly to implement in the coming years. These mandates will require extensive construction and modifications to Dallman Units 1, 2 and 3. Upgrades or replacements of pollution control systems will be under consideration. Limited operation of Dallman Units 1 and 2 may also be possible, which would deplete most of the surplus generation capacity that could be available for the wholesale market. Pending coal ash rules may require CWLP to replace or close ash ponds and invest in new ash collection systems.

CWLP will need to be able to show the rating agencies and the financial markets that it has the financial stability and capacity to allow for borrowing to pay for these projects.

Labor and O&M cuts
CWLP’s proposed authorized headcount for the Fiscal Year 2013 budget is down by 60 positions since Fiscal Year 2010. This labor reduction represents nearly $4.4 million in annual savings.

CWLP’s Fiscal Year 2013 budgeted Operations & Maintenance expenses are down $6 million from the Fiscal Year 2012 budget.

Reliable service
The rate adjustment, as proposed, will support CWLP’s reliability rating. CWLP has been certified a Reliable Public Power Provider (RP3) by the American Public Power Association (APPA). RP3 measures a utility's performance in four specific areas of proficiency—reliability, safety, training and system improvements.  CWLP customers experience less than half as many outages per year and each outage averages less than half the time as compared to investor-owned utilities in Illinois.

Reducing rate increase impact
The shortest end to minimizing the impact of an electric rate increase is for customers to reduce their energy usage. CWLP’s Energy Services Office is tasked with helping residential and commercial customers increase personal comfort and convenience while reducing utility costs. The Energy Services Office administers nine different efficiency rebate programs, offers home energy audits and can provide an array of expertise and quick tips on how to save on energy costs.  http://www.cwlp.com/energy_services/energy_services.htm

Bill Assistance Programs
CWLP Customer Service can assist those needing financial assistance. There are six area assistance programs available to CWLP customers. Customer service can be reached at 789-2030.

CWLP’s Senior Citizens Discount rate will remain available to qualifying customers.

CWLP has proposed updates to its Project RELIEF bill assistance program to help offset some of the impact of the proposed rate increase on qualifying low income customers. The utility's plan to roll the current fuel adjustment into the base rate will also benefit customers who qualify for the Senior Citizens Discount. Learn more about both of these topics.

More information
View a copy of the PowerPoint presentation that was presented to the City Council Committee of the Whole on January 31.

If you have questions or wish additional information, you can contact:

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