Grays Harbor PUD commissioners have begun considering the possibility of a 2013 rate increase to avoid what otherwise would be a multimillion-dollar deficit in a preliminary operations and maintenance budget presented Monday.
The three commissioners were told the budget draft for next year includes assumptions for a net power cost increase of about $2.2 million, with operating revenues forecast at $104.4 million, and total expenses of $110.5 million, for a $6 million projected deficit.
“These numbers are kind of a ‘read ‘em and weep’ sort of thing — it’s just what it is,” said PUD Commission President Tom Casey, who leaves office at the end of the year.
The PUD did not increase rates for 2012 in the $107.5 million operations and maintenance budget and a capital budget of $8.48 million adopted last year.
“It’s rate increase time,” Casey declared as the commissioners later formally opened an ongoing public hearing process to start the 2013 budget deliberations.
Earlier in a budget workshop, Chief Financial Officer Doug Streeter presented a summary that showed the total operation and maintenance budget represents an increase of about $3.4 million over 2012 spending levels. A large boost in the cost of power is attributed to $1.1 million in increases from the Bonneville Power Administration, the federal agency that supplies most of the power — about 78 percent — to the PUD.
Another $840,000, which could be offset by revenue from secondary power sales by the district, is for the PUD’s investment in the natural gas-fired combined-cycle generating facility in Frederickson in Pierce County; and another $228,408 goes to meet renewable energy purchases required under the state Energy Independance Act (I-937).
“Not doing a rate increase last year at all is catching up to us,” said PUD General Manager Rick Lovely, who has announced his retirement effective at the end of the year. “There is just nowhere to go.”
He noted that what still needs to be specified is how big the capital budget for system improvements will be, suggesting a target figure of about $10 million.
Other items in the operations and maintenance budget include:
• About $150,000 to the administration department for the search for a new general manager to replace the retiring Lovely and relocation fees for the new hire if necessary.
• About $250,000 for engineering, meter shop, substation and tree trimming services.
• About a $1 million increase to the operations budget.
The preliminary budget document also notes that 10 departments decreased their budgets by $980,609 combined, with energy services cutting the most ($684,900).
Total power supply costs are estimated at $65.4 million, with $44.8 million going to the BPA. The expenses also include $17.6 million in depreciation and taxes, and $6.3 million in interest expense. Some factors not yet known are what the level of the capital budget will be and how it will be funded.
“We’re actually saving money on the transmission side for some things we have done on the capital side of the budget,” Streeter said. “Our metering has gotten a lot better, so we’re saving some costs.”
Casey, who is not running for re-election this year after 30 years as a commissioner, said he believed it was most important to keep the reliability of the electrical system well maintained.
“Assuming wise investments, the better shape your system is in and your equipment, the less expensive your (operations and maintenance) is just because you’re not running a bunch of junk that’s breaking all the time,” Casey said.
“We’re not even in a steady state in terms of what the public expects from the quality of this system,” Casey added.
The biggest question was how to pay for capital improvements and a projected operations deficit at the same time. Casey said the PUD is closely watched by “creditors and by Wall Street and by the rating agencies” who want to see the district increase revenue to remain on solid financial ground.
“If what you need to do is raise rates, then you raise rates,” Casey said. “You don’t want to hesitate to do that when it is something we need to do.”
Streeter noted that most rating agencies, such as Fitch Ratings, Moodys and Standard &Poors, want to see a utility like the PUD maintain at least 120 days worth of operating revenue as cash on hand. That could amount to between $34 million and $35 million for the PUD, he said.
To meet minimum debt service coverage under the budget scenario would require a 5 percent rate increase, Streeter’s budget presentation said.
Casey said his first assessment was that the PUD had “a 5 percent problem” in terms of a potential fix of at least $4 million to $5 million.
“So many of these costs are fixed and if they are not fixed, then they are absolutely essential for us,” he said.
While no one endorsed a specific number, it was clear at the end of the workshop that a rate increase is likely. The last rate increase of 7 percent was passed in December 2010 and went into effect in 2011.
“I think we all understand that kicking around the edges isn’t going to get you into the magnitude that has to be done here,” Casey said.