September 18, 2008

City Caps Electric Surcharge at 4 Cents

One month of record high electrical surcharges was more than enough for the Memphis community. The City Council took steps to insure there would not be a repeat of the 6.7-cent surcharge electric customers witnessed on their September bills for the August usage period.

The council voted 4-0 to implement a 4-cent cap on the surcharge calculation for the remainder of 2008 to allow the city to update its utility billing.

The city implemented it’s existing rate structure in 2001 and the base rate has not been adjusted since then. That rate basically established a $7.71 minimum charge for the first 50 kWh used and an 8.77-cent rate per kWh thereafter.

When the rate was established, the city was paying approximately 4.37 cents for power, allocating 4.4 cents to cover service costs and to rebuild the electric reserve fund.

The surcharge was installed to insure that if the cost of power increased, the city would pass that cost on to the consumer.

With the cost of electricity increasing to between 7.5 and 9 cents a kWh, consumers saw their surcharge following suit, averaging 4.42 cents over the past 12 months.

However the surcharge calculation uses the total power amount purchased by the city compared to the total amount of power sold by the city. Those figures can be affected by the billing cycle, as each customer’s meter is not read on the first day of the month. Some months customers may pay for a few less days than a full month, followed by a month when they may pay for a few more days.

“In a nutshell, that’s basically what has happened in this billing cycle,” said Alderman Chris Feeney. “The city bought 1,876,450 kWh and we only billed for 1,317,340 kWh. That huge difference is what caused the jump to 6.71-cents in surcharge.”

From January to May customer’s surcharges were less than the 4.4 cent average, falling as low as 3.84 cents in March

But in June that figure went to 5.1 cents followed by 5.85 cents in July and then 6.71 cents in August.

The council indicated the volatility in the surcharge rate was due partly to the fact the base rate had not been adjusted since 2001, and partly due to the fact the calculation used a three month average for the city’s purchase and sales totals.

While the city’s loss, the difference between power purchased and power sold, averages approximately 10 percent annually, the three month averages used in the calculation allowed that figure to fluctuate from 5% or less earlier in the year to 20% like it did when the August surcharge was calculated.

With an energy loss percentage of 15% in September, Memphis utility customers would have been faced with a 5.61-cent surcharge on this month’s bill.

But the council action will cap that at 4 cents, meaning consumers will pay 12.77 cents per kWh instead of 14.38 cents.

By capping the charge at 4 cents instead of simply setting it at 4 cents, the council allowed for the possibility that the surcharge will drop below 4 cents later this year.

While the surcharge cap is effective for the rest of the year, the council is working on restructuring the electricity rate for 2009 to eliminate the volatility in the current rate system.

The council is considering raising the base rate closer to the current cost of power and restructuring the surcharge figure to use a rolling 12-month loss figure as opposed to the current three-month average.

That likely would mean a base rate closer to 10 to 13 cents per kWh, with a minimal surcharge, thus eliminating the volatility created by a low base rate and highly varying surcharge.

The city’s engineering service will provide a rate survey that will allow the council to review commercial and residential rates as well as the city’s proposed rate of return. This process will be completed following the annual year end audit and possibly could allow the city to consider adjusting the 4.4 cent figure in the rate structure that is earmarked for city services and the electric reserve.

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