September 11, 2008

City Utility Users Shocked By Electric Surcharge

A 6.7 cent surcharge on electric bills going out to consumers in August had a number of concerned citizens on hand for the September meeting of the Memphis City Council.

With the additional surcharge nearly meeting the base rate of 8.77 cents per kWh, consumers voiced their frustration with the rising utility costs.

The city has not raised its base rate for power sales since 2001, instead using the power surcharge to help offset the rising cost of electricity from suppliers.

The city’s base rate of 8.77 cents per kWh is broken down to include 4.47 cents for power purchase and 4.4 cents for the city to fund the electric plant, line crews, the electric reserve fund and other various city services.

In August, the city paid MoPEP just under 8.1 cents per kWh for power.

The council agreed that the city could eliminate some of the confusion as well as the volatility of the surcharge, by increasing the base rate to reflect the rising power costs, bringing the base rate’s power purchase portion up from 4.37 cents closer to the current 8 cent price tag.

But the price difference didn’t totally explain the recent surcharge price spike.

Alderman Chris Feeney explained that the high surcharge was a temporary spike caused by abnormally large amounts of loss during the billing period.

Despite the belief that the surcharge rate would go down on its own in September, the council agreed to meet September 11 after receiving the monthly statement from the city’s electric provider MoPEP. The council plans to review the proposed surcharge and consider the possibility of adjusting the rate.

The surcharge is calculated based on the city’s power purchase compared to its power sales. The rate is calculated over a three-month average, so the surcharge on the August bill was based on power purchases and sales made in May, June and July.

While all power systems experience loss, power which is used up by the current traveling down the power lines, the Memphis City system experiences above average loss. According to the city’s engineer, Memphis loses on average 11 to 12 percent of the power it purchases, due in part to a portion of the city’s power system being older, and rated for lower voltage.

But faced with replacement costs of several million dollars, the cost efficiency of upgrading the system to decrease loss to 6 or 7 percent comes into question.

“We are going to have to upgrade the system eventually, but the cost savings we would experience compared to the enormous cost of the project prevent this from being a simple fix to our electric rate concerns,” Feeney said.

The latest surcharge spike was caused by abnormally high loss figures, which the city engineer indicated can be caused by the meter reading process, particularly with varying periods of time between readings. The later means that some months have consumers paying for less than a month’s use while other billing period’s have them paying for more than a month’s use. The engineer noted that this loss figure balances out over the full year, pointing out that some months the city saw five percent loss while others that number was over 20 percent.

The later was the case for the latest surcharge spike. In July the city purchased 1,876,450 kWh from MoPEP and only sold 1,317,340 kWh, which represented a loss of more than 500,000 kWh, or 26 percent loss.

The city paid $151,714 to MoPEP for the power, or roughly 8.1 cents per kWh. But in order to make $151,714 on the 1,317,340 kWh sold, the city had to charge just over 11.5 cents per kWh.

The surcharge is figured by taking this adjusted energy cost (the price paid by the city divided by the total number of kWh sold by the city) and subtracting the city’s energy purchase price included in the consumer’s base rate, which is 4.37 cents.

The latest surcharge was 6.71 cents, the difference between the adjusted energy cost average for the past three months ($0.1108) minus the city’s base power cost rate ($0.0437).

Alderman James Parker pointed out that while the cost of power, and to a degree the loss of power is something the council can not totally control, the other 4.4 cents of the base rate which goes to the city, is totally under the control of the council.

He pointed out that the engineer-designed rate structure creates a desired 12-15 rate of return for the city.

“This is something we can look at,” he stated. “The experts recommend that we maintain a certain reserve level, but we must decide whether we are comfortable trying to do that if it means placing too much burden on the consumers who have to pay the high electric rates in order to get there.”

Currently the city has a $1 million electric reserve, which is below the recommended balance of one year’s budget, or $2.7 million.

The city’s electric system is self-insured, meaning the reserve is the protection for consumers if the system experiences any major problems. It also serves as the funding for future capital improvement projects.

“This is something we need to take a hard look at, and decide if we want to continue to build those reserve numbers, or if we would prefer to offer some relief to consumers, by lowering their electric rates,” Feeney said. “That will lower the rate of return, either building that reserve at a slower rate, or possibly not at all.”

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