HomeMy WebLinkAboutAgenda Packet 07/27/1998
CITY OF POI\T ANGELES
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CITY COUNCIL MEETING
0.721
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I. CALL TO ORDER - REGULAR MEETING: ~; ()i)
II. ROLL CALL:
Members Present: ~
Mayor Braun
Councilman Campbell
Councilman Doyle l ..,.-/'
Councilman Hulett ~
Councilmember McKeown ~~
Councilman Wiggins ~
Councilman Williams L. ..,.-/'
Staff Present:
Manager Ibarra ~
Attorney Knutson
Clerk Upton
B. Becker
S. Brodhun
B. Collins
K. Godbey ,/
S.Ilk
1. Pittis 1..""""-
III. ADJOURN TO EXECUTIVE SESSION:
Reason:
Approximate Length:
IV. RETURN TO OPEN SESSION:
V. PLEDGE OF ALLEGIANCE:
Led by:
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City of Port Angeles
Presentation of Strategic Planning Study
for Eledric Utility
July 27, 1998
Presented by:
Gary s. Saleba, President
EES Consulting, Inc.
A registered professional engineering corporation with
offices in the Seattle, Portland and Calgary metropolitan areas
and
Charlie Earl
The Charlie Earl Company
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.1 . Agenda
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. Introduction and Session Objectives
. How Was the Report Developed?
. Background of Electric Utility Industry
. Options Available for Electric Utility
. Challenges Facing City's Electric Utility
. Recommendations
. Discussion/Adjournment
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Introdurtions and Session Objertives
. Project Team
. City staff
. Electric utility staff
. EES Consulting, Inc.
. Charlie Earl
. Session Objectives
. Presentation of the report
. Discussion of report development
. Initial recommendations
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How Was the Report Developed?
. Interviews with Key Customers and
Employees
. Comparisons of Financial and Cost
Statistics to Evaluate "Competitiveness"
. Benchmarking of "Wires"
. Review of Utility Policies
. Review of Systems:
. Accounting
. Financial
. Management information
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I . How Was the Report Developed?
I (Cont.)
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. Analysis of Other Issues:
. Stranded costs
. Annexation
. Analysis of Electric Utility Options
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I . Background of Eledric Utility Industry
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. Once Vertically Integrated Monopoly
. Monopoly Model Out of V ogue
. Airlines
. Telephone
. Natural gas
. Electric?
. State
. Legislative Push
. Federal
. Local
. Political Push
. Big industry
. Marketers
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Background of Eledric Utility
Industry (cont'd)
. Results
. Functional separation
. Generation/commodity fiercely
competitive
. Wires (transmission/distribution)
monopoly and cost-based pricing
. All other services separated and
competitive
. Customers set choice for commodity
. Pressure on wires companies
./ Keep access fee low
./ Metering/billing difficult
./ Other scenarios spun off
. Washington politics/legislation
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I . Options Available for Electric Utility
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Conservative
Sell Out
Wires Only
Wires Plus Aggregation
. for Core Load
Wires Plus Aggregation for Core Plus
Energy Services
Wires Plus Aggregation for Core Load
Plus Energy Services Plus Marketing to
Non-Core
Run All Wires and Pipes
Into Residences and Providing Juice
Aggressive
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I . Challenges Facing City's Eledric Utility
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. External
. Industry restructuring
,/ Functionally separate
,/ Commodity aggregation
as supplier oflast resort
,/ Metering/billing
. Comparison with neighboring
utilities
. Pressure to merger/consolidate
. Keeping customers informed
. GMA
. In ternal
. Organizational changes
. Information systems
. High morale during transition
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I . Recommendations
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. Business Organizational Options
. Wires plus aggregation for core load
plus Energy services
. Wires plus aggregation for core load
. Wires only
. Generalledger
. Systems
. FERC system of accounts
. Management information
. Annexation
. No losers test
. Alliances
. Need help on power supply and billing
. Look to market for benchmarking
. Pursue where cost -effective
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I . Recommendations (conrd)
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. Other
. Wires fee competitive now
. Customers like DSM
. Review operations organization
. Improve conveyance of industry restructuring
information to customers
. Keep wires fee low and service quality high
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I . Discussion/Adjournment
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Consulting, Inc.
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July 23, 1998
Mr. Jack Pittis
Mr. Robert Titus
City of Port Angeles
Post Office Box 1150
Port Angeles, Washington 98362
SUBJECT: Strategic Planning Report
Dear Jack and Robert:
Thank you for the opportunity to assist the City of Port Angeles to develop a strategic plan
for its electric utility. Please find attached EES Consulting's initial observations and
recommendations regarding how the City's electric utility should proceed strategically.
Our summary recommendations are outlined below.
Table 1 on page 2-5 of the Strategic Plan Report describes the organizational options
available to the City for structuring its electric utility. It is our recommendation that the
City of Port Angeles take a moderately aggressive approach to doing business in a
deregulated environment. In order of preference we present below our recommendations
for the top three options for business organizations that the City should consider adopting.
1. Wires Plus Aggregation for Core Load Plus Energy Services
2. Wires Plus Aggregation for Core Load
3. Wires Only
Each of these organizational options is summarized below.
1. Wires Plus Aggregation for Core Load Plus Energy Services
. PROs
· Maintain level of service of current fully integrated utility expected by
customers
· Citizens will not be required to deal directly with marketers or other
commodity suppliers
· Metering and billing services already in place
Post Office Box 52810
Bellevue, Washington 98015-2810
Telephone 425 452-9200
12011 Bel-Red Road, Suite 200
Bellevue, Washington 98005-2471
Facsimile 425 452-9299
A registered professional engineering corporation with offices in the
Seattle and Portland metropolitan areas and an affiliate office in Calgary
Mr. Jack Pittis and Mr. Robert Titus
July 23, 1998
Page 2
· Revenue opportunity to develop and offer other energy services outside of the
City to non-residents
· Provide conservation and DSM programs desired by customers through
competitive affiliation
. CONs
· Requires more staff with expertise in energy management services
· Requires greater expertise in energy acquisition to evaluate and initiate optimal
purchasing
· Requires entrepreneurial expertise to develop and operate competitive lines of
business
· Requires financial backing /partnerships for higher risk business investment
. Transition Steps
. Determine services to be provided
· Secure investment partners/affiliates to foster product development
· Evaluate cost-effectiveness of providing aggregation and metering/billing
internally versus acquiring a partner and pursue least cost option
2. Wires Plus Aggregation for Core Load
. PROs
· Citizens will not be required to deal directly with marketers or other
commodity suppliers
. Gain revenue opportunity from aggregation
. Metering and billing services already in place
· Revenue opportunity to offer aggregation service outside of the City to non-
residen ts
· May achieve revenue opportunity from marketers by providing aggregation
service for them
. CONs
· Requires greater expertise in energy acquisition to evaluate and initiate optimal
purchasing
. Requires dealing with regulators re: power prices
EES Consulting, Inc.
Mr. Jack Pittis and Mr. Robert Titus
July 23, 1998
Page 3
. Transition Steps
· Develop aggregation program/what's most cost-effective
. Look into metering/billing options
3. Wires Only
. PROs
· Savings by eliminating need for power supply expertise
· Eliminates need for affiliations or partnerships
· Gain opportunity for revenue by providing metering services to power supplier
· Metering and billing services already in place
. CONs
· Lose revenue opportunity available from aggregation
· Lose ability to evaluate best deal for power purchase
· Lose control of power costs
· Citizens will be forced to deal directly with power supplier
. Transition Steps
· Only those suggested for all options
Recommendations Suggested for All Options
. External
· Information on restructuring must be made available through the internet, the
media, and/or direct mailings to customers and employees.
· City's annexation policy should be reconsidered and a decision made regarding
the Urban Growth Area based on the "no losers test".
· Benchmarking should be undertaken periodically to confirm that the City is
maintaining its competitiveness in relation to other utilities.
EES Consulting, Inc.
Mr. Jack Pittis and Mr. Robert Titus
July 23,1998
Page 4
. Internal
· Establish consumer protection policies required by others by ESSB 6560
. Tighten purchasing and inventory control
· Formalize process of material inventory tracking
· Design inventory recording and control system
· Consider State Fish and Wildlife opportunity re: Morse Creek
· Provide a method to accurately account for revenue and expenditures
according to FERC standards
· Identify accounting treatment for all items required by E2SHB 2831
· Evaluate other software vendors when upgrading City accounting, billing, and
information products
EES Consulting and The Charlie Earl Company have greatly enjoyed this challenging
assignment and wish to thank all of the City staff who made our job easier. Please feel free
to call if we may be of any assistance in positioning the City's electric utility for electric
industry restructuring.
Very truly yours,
~ ~~
Gary Sal~
President
EES Consulting, Inc.
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Consulting, Inc.
SM
A registered professional engineering corporation with
offices in the Seattle and Portland metropolitan areas
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CITY OF PORT ANGELES
DRAFT
STRATEGIC PLANNING STUDY
June 1998
\
Prepared by:
EES Consulting, Inc.
A registered professional engineering corporation with
offices in the Seattle and Portland metropolitan areas
and an affiliate office in Cal!iJary
and
The Charlie Earl Company
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Consulting, Inc.
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June 22,1998
Mr. Jack Pittis, Acting City Manager
Mr. Robert Titus, Deputy Director of Utility Services
City of Port Angeles
321 East Fifth Street
P.O. Box 1150
Port Angeles, Washington 98362
SUBJECT: Second Draft of Strategic Planning Report
Gentlemen:
Attached is our second draft of a strategic planning report for the City of Port Angeles'
'(City's) Electric Utility. Please review and call with additional questions or comments.
We look forward to seeing you again soon.
~ulYYours,
Gary Sale
President
GSS:drr
cc: Charlie Earl
Post Office Box 52810
Bellevue, Washington 98015-2810
Telephone 425452-9200
12011 Bel-Red Road, Suite 200
Bellevue, Washington 98005-2471
Facsimile 425 452-9299
A registered professional engineering corporation with offices in the
Seattle and Portland metropolitan areas and an affiliate office in Calgary
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Contents
Executive Summary
1
Introduction
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1.1 Need for the Study.................................................................... ......... ..... .........1-1
1.2 Overview of Deregulation and Competition................................................. 1-1
2
Strategic Plan
2.1 Electric Industry in Five Years .......................................................................2-1
2.2 Customer Needs in Five Years ........................................................................2-4
2.3 Role of the City's Electric Utility in the Future .............................................2-4
2.4 Public Perception of Service ......................................... .... ...... ........ .............. .2-6
2.5 Cost Effectiveness of Options ........................................................................2-7
2.6 Summary ........................................................................................................2-9
3
Analysis of Current Situation
3.1 Customer and Utility Employee Interviews ..................................................3-1
3.2 Customer Base .............................................. .......... .................. .... .... ..... ..... ....3-1
3.3 Annexation .. ..... ............................................. ......... ........... ........ .... ............. ....3- 2
3.4 CompetItIveness ..................... ....................... .......... ....... ............... ........ ........ .3- 3
3.5 Policies and Procedures. ......... ..................... ........... ....... ................... ......... .....3-5
3.6 Systems .... ......................... ........................... ......... ...... ... ... ..... ....... .......... ..... ...3-6
3.7 Stranded Cost Estimation.. ..... .......................................... ..... .... ................. ...3-8
3.8 Recommendations. ..... ........ ...... ........ ... ................ ...... ...... ..... ...... .... ..... ..... .....3-9
4
Action Plan
4.1 External Issues... ............ ........ ............... ......... ...... ......... ............... ........... ..... ...4-1
4.2 Internal Issues... ......... ............ ............ ... .......... ......... .... ...... ....... ..... .... ...... ..... ..4- 2.
4.3 Summary ........................................................................................................4-5
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DRAFT
6/22/98
Executive Summary
EES Consulting, Inc. was retained by the City of Port Angeles (City) to conduct a strategic
planning study for the City's Electric Utility. The Charlie Earl Company assisted EES Consulting
in the development of this study. This written report is the culmination of many hours of
interviews, research, and analysis of the City of Port Angeles (City) and its Electric Utility.
As a result of the significant changes taking place in the electric industry, electric utilities will need
to determine the best decision path to transition into a competitive environment. The City's
Electric Utility currently provides reliable and cost effective service to its customers. The City is
aware that change is coming and is taking'the steps necessary to prepare for the future competitive
market.
There are several objectives for this report. The initial discussion involves planning for strategic
positioning by the Electric Utility. Included in this discussion are expectations for the future of
the industry, future customer needs, and the role that the Electric Utility wishes to play in a
competitive environment. Following is an assessment of the current status of the Electric Utility,
particularly as regards its relative competitiveness in a deregulated environment. Finally,
recommendations for implementing an action plan are developed.
Industry Changes
With the coming deregulation and competition in the electric utility industry, utilities that survive
will necessarily be more efficient, more cost-effective, and able to make timely decisions. The
major change will be that all decisions, large and sm,all, will carry a financial risk that mayor may
not be collectable from the utility's customers through rates.
The key issue regarding deregulation is how to'position the Electric Utility for competition in the
future. The Electric Utility will need to examine closely'its rates and expenditures to close any
"revenue gap" between projected Electric Utility rates and t,he projected market rates. Failure to
do so will lead to rates that are not competitive in the market. Another need is to enhance
customer support. Price will not be the only consideration when customers choose their electric
supplier, and the Electric Utility should expand its efforts in the area of customer service and
customer choice.
Under restructuring, customer service within a utility will become goals #1, #2 and #3. This is
because price will soon become roughly equal for all pow~r supply; thus, the provider of choice
will be determined by customer service and other non-price issues. Flexibility in internal
operations will also need to be increased. Contracting, procurement, employment and the entire
planning process must be expedited if a utility is to survive in a competitive environment. Real
time decision making authority will be needed for numerous power supply activities as well as the
capability to negotiate special rates for new customers, and to address needed changes in staffing
levels based upon expanding or contracting lines of business for a utility.
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It is also possible that the local utility will undertake additional competitive lines of business under
this restructured environment. The push towards more efficient use of facilities and lower prices
will likely discourage multiple infrastructure providers in the future. The inefficiencies associated
with multiple meter readers, multiple bills, multiple calls for hook-ups, etc. will not be tolerated in
a more competitive environment. There may be a trend towards one utility providing service to
all the cables and pipes into a house. This one-utility concept is sometimes called a "uni-utility"
model. Restructuring has resulted in local utilities not only providing electricity but other services
that include fiber optics, gas, water, security, telecommunications, entertainment, propane,
internet access, appliance repair, energy information systems and distributed' generation. The
goal of this broader array of services is to increase the base over which a local utility can spread its
overhead to reduce per unit costs as well as to provide value to the local resident. It should be
noted, however, that if a utility wishes to undertake some .of these additional services, its core
business should not be overlooked. Without providing good wires service to the end' user, the
local utility's destination is certainly in question.
The staffing requirements in a restructured environment are going to be different than has
previously been the case within the electric utility industry. Historically, the leadership of utilities
has been a function of the major challenges facing the utility. For example, in the 1950's and
1960' s, technical issues associated with power supply development and distribution of electricity
were paramount. Because of this, engineers typically led the utilities during this time. In the
1970's and 1980's, environmental issues permeated the utility i~dustry. Attorneys and regulatory
specialists lead the utility industry. Prospectively, the utility business will become more
competitive and require more marketing, pricing and customer service expertise. As such, the
future utility industry will likely be lead by those with a more business/commercial orientation.
This new utility environment will also require more customer focus. It is likely that account
executives, meter reading specialists, risk managers, schedulers,. forecasters and contract
administration specialists will be much more visible in the utility of the future.
Electric Utility's Financial and Competitive Position
In order for the City to prepare for the future under increased competition, it is paramount to
understand where the Electric Utility and its competitors are positioned today. To this end,
comparisons of financial competitiveness have been developed. Comparisons were' made with
other Washington municipal utilities, regional public utilities districts, private electric utilities, as
well as directly with Clallam County PUD. Comparisons were made of power supply costs and
overall rate levels, as well as "wires" fees. The City's Electric Utility is currently competitive with
its regional counterparts.
Another aspect of the financial review focused on the competitive position of the Electric Utility's
transmission and distribution or "wires". service fees. While much of the early competitive activity
in a deregulated electric market will focus on the cost of power and grid transmission, the
customer's bill will als9 reflect the Electric Utility's cost of delivery to the point of consumption.
The Electric Utility's Wire rates are presently competitive with most municipal, coop, or PUD
operations in the Northwest. This achievement is related in part to the customer densities that a
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6/22/98
City's system enjoys, but is also reflective of the Electric Utility's efforts to streamline and
economize its operations.
This overview indicates that the City's Electric Utility is well positioned financially to address the
changes that will occur as electric deregulation moves forward. The strengths of the City's Electric
Utility lie in its wires services. It excels in the distribution areas of operations, maintenance and
planning. The ability to maintain its competitive position will be directly affected by how
d~igently the Electric }Jtility continues to pursue efficiency and the changing demands that
consumers place on the system under open access.
Current Situation
The City has had a long-standing policy of serving annexed areas with its utilities. In the case of
electric service, the fact that its rates are lower than Clallam County PUD's rates would be an
attractive selling point for citizens considering annexation.
With the potential size of the UGA annexation, the City must be cautious of the impacts of its
"annex and serve" policy. How the acquisition of the assets would be financed, what service
upgrades and additions may be needed, and what rate eff~cts might accrue to existing customers
on both sides of the annexation boundary are among the questions that need to be addressed.
The City should consider replacing its "annex and serve" policy with a "no-losers test" in
evaluating whether to serve newly annexed areas. In the case of electrical service, customers on
both sides of the annexation boundary, as well as the balance of Clallam County PUD's customers,
should be 'no worse off for the City serving newly annexed areas. This standard to meet has the
very real advantage of precluding the view of annexation as a win-lose proposition.
An approximate evaluation of the no loser threshold indicates that the electric utility customers ~.
would not be inordinately burdened by the acquisition of the UGA electric facilities under current
cost configurations. .
A similar conclusion may not be appropriate with respect to the water system serving the UGA.
~ndications are that the existing system outside of the City will need to be improved if it is to be ,
capable of providing a level of service and quality that City consumers currently enjoy.
Establishing a Local or Utility Improvement District (LID/UID) will most likely be required so
that those customers who benefit from the needed improvements pay for them, and existing
customers are sheltered from attendant rate increases.
Recommendations and Action Plan .
What to do with the City's Electric Utility in the face of deregulation is a significant financial,
public relations and employee issue. Financially, the Electric Utility provides a large sum of
money to the City's general fund and competitive rates to its customers. From a public relations
standpoint, doing nothing, raising rates or selling the utility all can have negative impacts. Finally,
a significant number of highly trained professionals have committed much of their professional
careers to the Electric Utility at the expense of other opportunities.
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Of primary consideration is the fact the City currently operates. a successful and competitive
utility. The question, then, is how to continue to do so once the forces of competition begin to
exert their influence on price, services and consumer choice.
Information is a key element in maintaining competitiveness. Customers need information to
make their own decisions about power suppliers for the first time. Employees need it to feel more
secure in their jobs, their futures, and how to best direct their daily efforts. The Electric Utility
needs itto benchmark its position relative to the competition.
Policies and procedures that deal with both external issues, like annexations, and internal ones like
power supply, finances, rates, customers and procurement, need to be reviewed and consolidated
for soundness and flexibility. The City's debt position needs to be assessed in light of its financial
position and the impending higher risk competitive environment. Stranded costs should be
considered a possibility and mitigation strategies proposed.
The recent reorganization of the Electric Utility has provided many advantages to the City, but has
also created some difficulties. The new utility environment will require flexibility and real-time
decision making. As such, new organizational delegations may need to be made to promote the
promptness necessary to compete with private enterprise.
Changes will also be necessary in some of the systems that support City functions. Statutory
requirements of E2SHB 2831 may initiate accounting and other financial system changes. The
Electric Utility's cost of service study needs to be updated to provide greater cost detail by service
function. The Management Information System, while capable of handling the current needs of
the Electric Utility, will be required to provide more timely and different information in the future.
The City would be well served to begin investigating its software options to facilitate and
complement its transitional efforts.
The most important consideration for the City is the level of participation its Electric Utility will
choose in a competitive environment. It is the recommendation of this report that the Electric
Utility take advantage of the strengths of its wires service and seek a partnership to complement'
these strengths in the areas of power supply aggregation, meter reading and billing.
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DRAFT
6/22/98
1 Introduction
EES Consulting, Inc. was~retained by the City of Port Angeles (City) to conduct a strategic
planning study for the City's Electric Utility. The Charlie Earl Company assisted EES Consulting
in the development of this study. This report is the culmination of many hours of interviews,
research, and analysis of the City and its Electric Utility.
The electric utility industry is undergoing ~ignificant change and tran~ition to a competitive
industry. As a result of this change, electric utilities will need to determine the best decision path
to transition into the future. The City's Electric Utility currently provides reliable and cost
effective service to its customers. The City is aware that change is coming and is taking the steps
necessary to prepare for the future competitive market.
There are several objectives for this report. Initially, planning for strategic positioning by the
Electric Utility will be discuss~d. Included in this discussion will be expectations for the future of
the industry, future customer needs, and the role that the Electric Utility wishes to play in the
competitive environment. An assessment of the current status of the Electric Utility, particularly /
with regard to its relative competitiveness in a deregulated environment, will follow. Finally,
reco~mendations for implementing an action plan are developed.
1.1 Need for the Study
As discussed above, a major driving force for this study is the changing environment of the electric
utility market place from a quasi-monopoly, regulated industry to an open and competitive arena.
With this change, the Electric Utility will need to revise its thinking and behavior in order to
respond'in a positive and efficient manner. A more detailed discussion of deregulation and
competition is developed below to establish a framework for the analysis.
1.2 Overview of Deregulation and Competition
With the coming deregulation and competition in the electric utility industry, utilities that survive
will necessarily be more efficient, more cost-effective, and able to make timely decisions. The
major change will be that all decisions, large and small, will carry a financial risk that mayor may
not be collectable from the utility's customers through rates.
The key issue regarding deregulation is how to position the Electric Utility for competition in the
future. The Electric Utility will need to thoroughly examine its rates and expenditures to close any
"revenue gap" between projected service rates and projected market rates. If gaps are permitted to
continue, they can lead to rates that are not competitive in the market.
1-1
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DRAFT
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Competition will also create the need to seek out methods and approaches that enhance customer
support. Price will not be the only consideration when customers choose their electric supplier,
and the Electric Utility should expand its efforts in the area of customer service and customer
choice. Failure to take the necessary steps to maintain a competitive position will erode the value
of the Electric Utility to the City's customers and present the City's policy makers with
uncomfortable choices in the future. -
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1.2.1 Historical Perspective
Historically, the electric utility industry has been vertically integrated, featured cost-based
pricing, and maintained a virtual monopoly on all electrical.services. While utilities were
required to provide service to customers, the utility's historical sensitivity to the end user
was not particularly high as the end user had little choice but to buy from the local utility.
( .
Likewise, the historical planning process for the electric utility industry was "top down".
Utility planners would develop a load forecast, determine the least cost way of producing
any needed power, and undertake only necessary power plant construction. This planning
process was based upon sophisticated modeling techniques, but in essence was the product
of a "best-guess" of what the consumers' needs would be. Very little interaction with the
actual end user was undertaken throughout the process.
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1.2.2 Future Directions
Any time there is a fundamental change in an industry, there is consid~rable regulatory
review needed in order to shape the restructuring. It is possible that in the near future, the
Electric Utility will come under the regulatory province of the Washington Utilities and
Transportation Commission (WUTC).
Within the new restructured environment, it is likely that the utility industry Will be split
up into four major areas. These areas include generation, aggregation, wires and energy
servIces.
The generation arm will be an entity that provides the real and reactive power
requirements to the transmi~sion grid. This. entity will be the owner of the "concrete and
steel" that actually makes the electricity commodity. The aggregator function will be filled
by people not owning generation, but rather acquiring pieces of output from various
generators, bundling these pieces an~, then delivering the combined bundled product to
the end user. The wires company will be the local provider and maintainer of the
substations, conductors, poles, transformers, and meter reading. Energy services will
include all the other activities potentially available through a wires company and may
include many diversified services.
1.2.3 Pros and Cons
There are positives and negatives associated with each of these functions. In natural gas
deregulation, the traditional vertically integrated gas company was allowed to participate
in only one of these functional areas. In electric restructuring, it is generally considered
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that a utility can undertake any of these four areas assuming a level playing field is
maintained between the utility and its competitors.
The decisions that establish how involved the Electric Utility will become with each or any
of these four areas will be based upon a strategic plan that has equal parts of vision i~nd
consideration of consumer demands, risks, and Electric Utility capabilities. To that end,
the near term issues and opportunities raised by deregulation need to be identified and
explored. The following section looks at the emerging market with a focus on what the
Electric Utility needs to consider in developing its strategic planning decisions.
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2 Strategic Planning
Strategic planning has been a cornerstone of the electric utility environment for many years. The
strategic planning process is becoming more visible during restructuring as fundamental changes
in the strategic positions taken by a utility are likely to be required.
Strategic planning for the Electric Utility consists of four steps. These steps are:
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. What will the electric utility business look like in five years?
. "What will the customer need in five years?
. What role does the Electric Utility wish to play in the new competitive environment?
. How can this role be undertaken cost-effectively?
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This four-step planning process has become the focus of virtually all utilities' planning process in
the restructuring environment. The clear articulation of the role of the Electric Utility in these
four steps is critical for its future developrrent and growth. '
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2.1 Electric Industry in Five Veius
,
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The electric utility industry is going througb unprecedented change. Numerous federal ~nd state
legislative initiatives have been directed at its restructuring. Concurrent with such fundamental
change in the industry, will be the need to develop numerous guideli~es and policies that shape
the basic restructuring process. In other jurisdictions where restructuring has advan,ced, there has
been a consistent set of regulatory issues that must be addressed. Below is a summary list of some
of these regulatory issues. '
. Functional Separation
Theigoal of restructuring is to promote a competitive commodity market. This, in the electric
industry, means the generation of bulk power. In order for a competitive bulk power markit
to develop, the operator of the transmission system must be completely independent from,
and have no vested interest in, any bulk power supply. Interes,t in bulk power supply, along
!with operation of a transmission network, results in an inherent conflict of interest where the
transmission operator may tend to favor his power supply over the competition. As such, an
independent system operator (ISO) or indep,endent grid operator (IGO) is usually employed .
to guide the operation of the transmission system to avoid this conflict of interest.' .
. Control of Meter and Billing Function
Control of the meter and billing function is a strategic and technical issue. The controller of
meters and billing controls the contact with the customer. This control has valuable marketing
potential. As such, control of the meter and billing function is a highly contested issue in most
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regulatory forums. Conversely, metering has safety, accuracy and monetary impacts which
often lead to its regulation and cost-based pricing.
. Calculation of Stranded Costs
In industry restructuring, the calculation and collection of stranded cost is a major issue.
There are two general ways of dealing with the quantification of stranded cost. The first is to
have various experts forecast the price of power, determine the difference between the forecast
price of power and the embedded book value of generation, and define the difference as
stranding. The other method is let the market determine what is stranded by selling off all
generation. The difference in sales priCe and ~e embedded book value of generation is then
deemed to be the stranded cost or benefit.
. Market Power
In order for a competitive power market to develop, there must be multiple buyers arid sellers.
Multiple sellers are the key component to a successful competitive market. Industry practice
and economic principles dictate that no one supplier of power should control more than 15%
to 20% of the power market if a competitive bulk power environment is to be created. If a
dominant player has more than a 15-20% market share, a competitive market for bulk power
can only develop if the dominant player is required to divest itself of this excess market power.
. Allocation of Overhead/Administrative and General (A&G)
For a wires company with other competitive lines of business. a natural competitive tendency
is to have the regulated monopoly pay for most overhead and shield this overhead from the
competitive business lines. From a regulatory standpoint, this practice is considered
subsidizing competitive ventures with a monopoly wires service. This particular practice is
viewed with great displea~sure by utility regulators. To address this issue, many utilities are
undertaking activity-based accounting systems to functionally separate overhead and A&G in
the most accurate manner. .
. Real vs. Virtual Access
In a retail access environment, there are two types of retail access-real and virtual. In real
access the utility allows end users to contract directly with third party providers of power. In
virtual access the wires company offers a menu of different pricing options (index, green,
blended, spot market, etc.) that match up to the pricing offers available from a third party.
Under virtual access, the wires company offers to the end user a menu of different pricing
options similar to the actual power supply options available from a third party.
. Retail Rates
Within retail rates, the regulatory issues include methods of recovering stranded costs,
customer choice/portfolio rate designs, unbundling of rates, performance-based rate setting
and how to deal with pre-existing interclass subsidies.
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. ,AdequaCy of Legal Authority
Many municipal utilities are constrained by lack of legal authority to pursue certain lines of
business that may' be desirable or required under a competitive market model. These
authority constraints generally turn on the capability of a municipal utility to raise venture
capital for other lines of business, protecting confidential information, dealing with the
cumbersome and often expensive public bidding process, and reducing employee hiring and
firing constraints..
. Industrial Bypass
Under restructuring where stranded costs must be collected, there is an additional economic
incentive for larger industrial or commercial customers to "bypass" a local distributing
company and also bypass any stranded costs. This bypass can be undertaken by construction
of duplicate distribution facilities and/or in-the-fence generation. Municipal utilities must
deal with this issue at the regulatory lev.el, as not dealing with bypass will result in the
remaining cus~omers (residential and commercial) picking up a disproportionate share of any
stranded cost obligations.-)c
. Level Playing Field/Tax Status
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Under restructuring where a monbpoly wires company undertakes additional competitive
lines of business, concern is often expressed that a tax -exempt monopoly should not be
allowed to compete in a competitive environment against other entrants who have taxable
status. As such, municipal utilities should be sensitive to this criticism and attemptto set up
any competitive lin~s of business on a "level playing field" with other entities. This leveling of
the playing field for a municipal utility should also include removing impediments to hiring
and firing, public bid requirements, relaxation of confidentiality constraints, etc.
. .''1
It is also possible that the local utility will undertake additional competitive lines of business in this
restructured environment. The push towards mo~e efficient use of facilities and lower prices will
likely discourage m~ltiple infrastructure providers in the future. The inefficiencies associated with .
multiple meter readers, multiple bills, multiple calls for hook-ups/disconnects, etc. will not be
tolerated in a more competitive environment. There may be a trend towards one utQity providing
service to all the cables and pipes into a house. This one-utility concept is sometimes called a
"uni-utility" model. The goal of this broader array of services is to increase the base over which a
local utility can spread its overhead to reduce per unit costs, as well as provide value to the local
resident. It should be noted, however, that if a utility wishes to undertake some of these additional
services, its core business should not be overlooked. Without providing good wire service to the
end user, the local utilities' future is certainly in question.
..!;.:
The restructuring situation in the Pacific Northwest differs from most other areas of the country in
two major aspects: the presence Of the Bonneville Power Administration and the fact that this area
enjoys some of the lowest electric costs in the country. The fact that these positive benefits exist
will make it difficult for consumers to. realize significant savings once open access is fully
implemented. This savings shortfall Will automatically place greater immediate pressure on
regional utilities to develop and offer consumers the choice of services that they can demand
within a competitive environment. The reshaping of the industry toward a "bottom up" or
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consumer-based perspective will rely upo~ the same competitive forces that work to' create
efficiency in other markets and that regulati~n, at one time, was designed to duplicate.
2.2 Customer Needs in Five Y e~rs
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Customer needs in the future will be much th~ same as they have been in the past, with one
significant. addition. Low price, reliable po*er and good service will still be required, but the new
element will be customer choice. Customers in small towns and rural areas will be as interested in
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choosing their own provider as are those in ~arge metropolitan areas.
The market for the energy commodity will Be competitive. . Retail access will allow the customer to
not only select the supplier of the commqdity, but also have the option to specify the type of
resource, such as renewable, from which to receive the power.
. I .
Transmission and distribution services willi remain regulated. The provider of choice, therefore,
will be determined not only by an evaluatior of price, but also by customer service and other non-
price issues. Customers will have a new need for information in order to make the decisions they
will face. I
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It is likely that the customer will also expect the local utility to undertake additional competitive
lines of business in this restructured enviroriment. Restructuring has resulted in local utilities not
only providing electricity, but other serlrices that include fiber optics, gas, water, security,
. telecommunications, entertainment, propa'ne, internet access, appliance repair, energy
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information systems and distributed generation.
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Where restructuring has occurred, the entire planning process for utilities has changed. Rather
than utilities telling end users what type qf power they will receive and what the price will be,
customers tell utilities what they want. Under restructuring, it is very likely that utilities will
become order fakers for an end user's powh supply requirements. Customer service will be key
i under this new environment in determining the power supply provider of choice. There will also
be a heightened awareness of customer seryice and the customer will always qe right. The utility
that best provides the customer with information, good energy service, and options for additional
services will have the best chance to retain or acquire the consumer's business in a competitive
environment.
2.3 Role of the City's Electric Utility in the Future
As indicated above, within the new restructured environment it is likely that the utility industry
will be split up into four major areas: generation, aggregation, wires and energy services. While
there are pros and cons associated with each of these areas, it is generally considered that a utility
can undertake any of these four areas assuming a level playing field is maintained between the
utility and its competitors.
Below on Table 1, the various strategic options available to the Electric Utility are presented in a
continuum going from the most conservative to the most aggressive positions. The most
conservative position would be to sell off the Electric Utility and get out of the electricity business.
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The most aggressive position is to run all of the wires and pipes into all residences in the City and
provide electricity to all Electric Utility customers, perhaps even marketing to non-core
customers. Where the Electric Utility falls between these two extremes is a critical strategic
decision that must be clearly defined and articulated.
Table 1
Options Available for City's Electric Utility
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Conservative
Sell Out
Wires Only
Wires Plus Aggregation
for Core Load
Wires Plus Aggregation for Core Load
Plus Energy SeIVices
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Wires Plus Aggregation for Core Load
Plus Energy SeIVices and Marketing to
Non-Core
Runs All Wires and Pipes Into Residences
and Provide Marketing and Energy SeIVices
to All cOre and Non-Core Customers
~ive
In formulating a restructuring strategy for the Electric Utility, three key areas must be developed.
These areas include strategic objectives, higher principles from a regulatory standpoin~ and the
development of a message for Electric Utility customers. Each of these areas is discussed below.
Regarding strategic objectives, the Electric Utility's strategic objectives should include:
. No financial harm to the City
. Keep customers happy
. Maintain control of metering and billing
. Protect system reliability
. Keep costs down and wires charges competitive
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Regarding the higher principles associated with restrUcturing, it is proposed that the Electric
Utility adopt the following:
. Enhance economic efficiency
. No rate shiftsr'no losers" test for customers wishing retail access
. No decrease in system reliability
. Need level playing field
These higher principles should be articulated, consistently endorsed and incorporated into all
discussions associated with industry restructuring.
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Regarding a public message, it is important that all City staff, politicians and policy makers
endorse the same basic themes regarding restructuring. It is recommended that the following four
points be used in all Electric Utility public presentations regarding industry restructuring:
. Competition and customer choice are good if they enhance economic efficiency
. The Electric Utility will always be there to perform desired electric service functions
. Make haste slowly to minimize any problems associated with restructuring and learn from
others
. A "made for Port Angeles" solution is desirable due to the City's unique characteristics
These strategic objectives, higher principles and elements of all public presentations should
establish the basic format and overview for the Electric Utility's position regarding restructuring.
2.4 Public Perception of Service
In developing a more customer-oriented environment, the Electric Utility's efforts to acknowledge
consumer and employee concerns can facilitate the transition. . When customer and employee
interviews were conducted, respondents raised numerous issues and concerns.
A primary aspect of competitiveness is service. The customer's perception of quality is critical to
retaining customers for the long term. The Electric Utility has a strong reputation currently and
can capitalize on it. The Electric Utility must ,continue to develop programs to ensure a
continuing high level of service that meets or exceeds customers' expectations. Internal stress
could threaten the external reputation and the customers' perception of service. The loyalty of
customers to the Electric Utility is a barrier that would have to be very carefully managed should a
sale or merger be considered.
Customers are split on the importance of local control and ownership. Any proposed change in
this status for the Electric Utility would likely result in a substantial local issue. Those discounting
the value of City ownership of the Electric Utility suggest that service and rates are what matter.
Those who value City control offer that good service and low rates have resulted from customer
access to decision makers. The idea also exists in Port Angeles that local control is important
because "we are at the end of the line" and will not get good service if control is in Seattle or
elsewhere.
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Many customers know that Clallam County PUD has higher rates, and believe it to provide service
of lower reliability and responsiveness. Even though the PUD is a "public," it should not be
assumed that citizens would view a merger as a continuation of the benefits oflocal control.
Regarding the addition of new business services like cable or telecommunication, the public is
skeptical. On one hand they see that giving the local cable company some competition could spur
them to better service and rates. On the other hand, customers are uncomfortable with
"gbvernment" in competition with private business and with the possibility of having to debt
finance investments in new businesses. They also fear the Electric Utility losing focus on
providing good electrical service. Customers do not see a clear need for the Electric Utility to
enter new service lines at this time. . .
2.5 Cost Effectiveness of Options
2.5.1 Commodity
With a core customer base of 9,600 (many of whom are residential and small commercial),
the Electric Utility will always be the provider of last resort, as well as the emergency
service provider for a large number of consumers. While many of these core customers
look forward to competition, some will have no interest in changing power supply
providers and many will decide that the Electric Utility provides their best option.
The marketing of electricity as a commodity is not only very complex, but also ferociously
competitive. With the current proliferation of marketers (more than 300 already in the
business), it is unlikely that the Electric Utility will wish to compete in that arena. While
the Electric Utility could choose to purchase power by staffing up internally, there are
other options available. These options include contracting to third parties or forming
strategic alliances.
2.5.2 Energy Services
Utilities, because they have direct access to a major portion if not all of the community, are.
well positioned to offer services of a npntraditional nature at competitive prices.
Inefficiencies associated with duplication of bills, service calls, meters, etc. will not be
tolerated in a more competitive environment. The trend towards one utility providing
service to all the cables and pipes into a house is sometimes called a "uni-utility" concept.
In addition to these "uni-utility" services, other nontraditional services are being offered
by stand-alone subsidiary companies. Some of these are as follows:
. Home security has been a very attractive business for some utilities, given their 24-
hour operating schedule, available personnel, and access to the community. Since
much of the basic infrastructure needed to provide this service is already in place, the
economic viability of the opportunity is enhanced.
. Information services, such as Electronic Bulletin Boards (EBB) or internet web sites,
are methods of information access that customers welcome in order to weave their way
through the maze of deregulation issues and optional service offerings. '
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. Demand Side Management (DSM) is' no longer offered by many utilities due in large
part to diminishing cost recovery and subsidiary potentials. Many customers would
still like to see programs that offer options for improving efficiency in order to evaluate
for themselves whether to participate.
. Appliance repair is a service offered by some utilities. There are regulatory concerns
about funding this type of service, but, as a separate business or in conjunction with
existing private enterprise, it could be offered by smaller utilities.
. Telecommunications is becoming an increasingly popular service offered by electric
utilities, given existing access to customers, capital market accessibility, and facilities
synergies. One of the complementary services most commonly considered for offer by
utilities today is fiber optics. Since the Electric Utility has expressed particular interest
in this type of service, it is discussed separately below.
Fiber Optics
The need to communicate more rapidly, in more ways, and with greater quality is fostering
the development of fiber optic technology. The ability to improve and expand
communication through the enormous amounts of information that pulses of light
speeding over glass highways can provide represents a genuine advancement of existing
technology.
The communication needs of the City and the Electric Utility may offer the opportunity to
develop a backbone network from which this technology can take root. The Electric
Utility's current use of cellular telephones to obtain operational information has had
limited success as the quality of service is compromised by repeated interruptions and
breakdowns. The City's water system recently considered upgrading its SCADA system
using fiber optic technology but, given timing considerations, chose a radio wave system.
The allure and promise of this type of technology is obvious. However, the decision to
construct and offer this system to consumers should still be fundamentally. rooted in
economics. One can embrace the perspective that fiber optics is much like stereo
equipment, desktop computers, cellular telephones or any other previously innovative
technology. The early cost of these systems may be too prohibitive for most to support, but
as time passes and system components become more affordable, the marketability of the
service comes into line with the ability and willingness of consumers to pay for it.
At this stage a recommendation to construct an optical network for the Electric Utility
requires a more in-depth evaluation and comparison of the costs of the alternatives.
Concurrent with this exercise would be an investigation, at the policy level, to establish the
level of involvement that the City is comfortable with in regard to the risks inherent in
investing in the construction of the necessary infrastructure. Until those studies arefconducted, there is little tangible evidence to support the City's development of such a
network.
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Due to regulatory and customer funding restrictions, all of the business options discussed
above must be operated as stand-alone companies. It is generally necessary in these
situations to procure a venture capital partner in order to offer them. Because the
businesses are competitive, the operator must not only have the ability to lose money on
the venture, but be willing to take that risk.
2.5.3 Wires
Currently, the Electric Utility maintains ownership and operation of its wires. With the
advent of unbundled services, the costs associated with this service will be exposed. While
it is unlikely that knowing the Electric U~ity's costs to provide these services will cause
large numbers of consumers to consider leaving the system for a lower cost provider, if
those costs are out of line with the mainstream, it can cause pressure to build on the
Electric Utility operations. Over time, this type of pressure can encourage improvements
and efficiencies in higher cost providers as well as supply lower cost providers with the
knowledge that their operations are competitive.
2.6 Summary
)
The City has indicated that maintaining local control of its Electric Utility is a priority.
Deregulation, with its separation of functions, certainly offers the ability to do this to whatever
degree is desirable. Maintaining local control will require a good mix of high quality and low cost.
This can be determined in three ways:
. Benchmarking will provide the Electric Utility with the comparative data that it needs to know
whether it is staying competitive with its peers.
. Historical data should be tracked to make certain that the Electric Utility is improving as time
goes on and not lagging behind its own performance.
. The market value of the Utility or its cO'mponents should be checked periodically by testing
market interest.
With the changes that deregulation of the industry will bring to the management of electric
utilities, the role of the strategic planning process should be to establish the direction and focus
needed to provide the Electric Utility customers with excellent service and a reliable commodity at
a very competitive price. Costs will be unbundled through deregulation and customers will be
aware, for the first time, of what they are paying for each of the different components of their
electric service. The Electric Utility will be faced with marketers looking for new customers, and
customers looking for more choices. In the short term, there might be synergies available from
joining with other public or private entities in areas such as billing, purchasing, or shared
inventories. However, the Electric Utility will be required to be at or close to the competition if its
services are to be of value to other utilities, as well as to consumers, in a deregulated market.
. (
The following assessment of the Electric Utility's financial and competitive position is developed
to help identify areas that management will need to address as competition begins to influence the
market for the Electric Utility's services.
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3 Analysis of the Current Situation
An important starting point for any study of this nature is an analysis of the situation as it exists
today. Therefore, the purpose of this section of the report will be to examine both the external-and
internal forces that impact the Electric Utility. This will provide the background needed to begin
the proce~s of exploring future needs. '
3.1 Customer and Utility Employee Interviews
In order to provide a critical perspective of tJ:1e Electric Utility, an early step in the evaluation
process was to conduct external interviews with both the Electric Utility's customers and its
employees. These interviews were conducted using a variation of David Garvin's "Eight
Dimensions of Quality"l that was adapted for this study.
The Electric Utility's customers generally provided positive comments. The quality of service,
level of rates, and the responsive staff were all cited as positives. Customers perceived three
weaknesses in the Electric Utility. Issues surrounding a lack of understanding and information
regarding deregulation and demand charges, lack of service options and conservation programs,
and concerns about efficiency were perceived by customers as problem areas.
Interviews with employees revealed that overall Electric Utility performance was a perceived
strength, along with low rates, the safety program and continued commitment to customer
service. Employees expressed concern over insufficient engineering personnel and low morale
within certain departments. Other cited weaknesses included the value of the Electric Utility's
integration with Public Works, internal communication difficulties, lack of backup at all functions
and utilization of a non-FERC based accounting system.
While weaknesses were cited by both customers }mdemployees', the Electric Utility currently
enjoys a very positive relationship with its customers and good support from the community.
3.2 Customer Base
The Electric Utility's customer base is altering with the vagaries of industrial development and the
realities of the Growth Management Act. When the Rayonier Plant closed, the Electric Utility lost
more than 15% of its load. If the EIwha dams are removed and Daishowa acquires replacement
power through the Electric Utility, industrial load will increase. These changes must be reviewed
closely for their financial impacts on both the Electric Utility and the City's general fund.
I David A. Garvin, "Competing on the Eight Dimensions of Quality," Harvard Business Review. November-
December, 1987.
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3.3 Annexation
The City has had a long-standing policy of serving annexed areas with its own utilities. In the case
of electric service, the fact that Electric Utility rates are lower than Clallam County PUD's rates
could be an attractive selling point for citizens considering annexation.
With the potential size of the area's UGA annexation, the City should be cautious of the impacts of
its "annex and serve" 'policy. How the acquisition of the annexed assets would be financed, what
service upgrades and additions may be needed, and what rate effects might accrue to existing
customers on both sides of the annexation boundary are among the questions that need to be
addressed. .
The City should consider replacing its "annex and serve" policy with a "no losers test" in
evaluating whether to provide utility service to newly annexed areas. In the case of electrical
service, customers on both sides of the annexation boundary would be no worse off if the City
annexes a new to area. This standard has the very real advantage of precluding the view of
annexation as a win-lose proposition.
A rough evaluation of the no loser threshold can be developed based upon existing utility
investment information. If the required investment exceeds the threshold, then existing customers
would be disadvantaged and other considerations would be needed to support the decision to
annex.
Existing per customer investment by the Electric Utility in plant in service amounts to roughly
$1,550 at year-end 1997. Clallam County PUD's per customer electric investment at year-end
1997 amounts to roughly $2,100. The difference in average investment values reflects many
factors to inClude the density advantage that the Electric Utility enjoys relative to Clallam County
PUD.
. If the City were to acquire all of the PUD's customers currently within UGA at the PUD's average
cost/customer, the price would be approximately $1,900,000 (assuming about 900 customers exist
in the UGA). The value of the Electric Utility's average investment cost in serving 900 customers
would amount to about $1,400,000. The investment-difference of about $500,000 would represent
the portion of the acquisition that would impact existing Electric Utility customers through
increased rates as a result of the acquisition.
The Electric Utility's current internal rate of return is about 6.5%. Bond financing rates run
between 5.5% to 6.5%. Assuming a required rate of return of 6% on the $500,000 of incremental
investment would establish a required increase in annual Electric Utility revenue of about $30,000.
With existing Electric Utility rate revenues of about $16,500,000, the additional revenue required
to support the incremental investment would amount to about a .2% increase in rates.
This increased rate burden should be viewed not only in the context of the Electric Utility's fund,
but also the general fund. If the Electric Utility provides electricity, a utility tax of up to 6% of the
increase in sales will accrue to the general fund. Assuming revenue of $1 ,000 per year revenue per
customer under existing rates, the utility tax to be generated from the annexation area would be
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up to approximately $54,000/year. Under this hypothetical example, the electric customer would
pay slightly more for power, but could receive an equal or greater value of general fund services.
A similar conclusion may not be appropriate with respect to the water system serving the UGA.
Indications are that the existing water system within the UGA will need to be improved if it is to be
capable of providing the same level of service and quality that City consumers currently enjoy. In
. such situations, a "no loser" analysis can be used to identify the per customer contribution needed
to protect existing City customers from having to bear ~e cost of upgrading the water systems
outside of the City's current boundaries but within the UGA. Without basic cost data, the
necessary analysis cannot be constructed at this point; however, establishing a Local or Utility
Improvement District (LID/UID) charge in addition to existing water rates would allow those
customer who benefit from the improvements to pay for them, and shelter existing customers
from inappropriate rate increases.
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3.4 Competitiveness
Comparisons of financial and cost statistics were developed as a means of evaluating the Electric
Utility's ability to compete in an open access electricity market. Comparisons were made with
other Washington municipal utilities, regional public utilities districts, private electric utilities, as
well as directly with Clallam County PUD. Comparisons were made of power supply costs and
overall rate levels, as well as "wires" fees. In summary, the Electric Utility is currently competitive.
I ts wires fees are in the lower quartile of similarly situated public utilities in Washington.
3.4.1 Finances
The Electric Utility has undergone a significant financial transformation in recent years
both as a result of certain events that were outside of the Electric Utility's sphere of
influence as well as internal efforts to improve the efficiency of its operation. The closure of
the Rayonier facility and the 1996 Bonneville Power Administration (BP A) rate reductions
helped reduce. the size and amount of the Electric Utility's power. purchases. More
fundamental, however, were management's decisions to purchase a portion of the Electric
Utility's power supplies from non-BFA sources, and to curb its operating expenditures
through employee cutbacks and increased efficiency. These consCious efforts to reduce
and control costs have helped improve the Electric Utility's financial position.
Statistical support for this assertion indicates that the Electric Utility is one of the lower
cost providers of electric service in the Northwest in comparison to other municipals,
coops and PUDs. The combination of competitive power costs and efficient delivery
service will allow the Electric Utility to contin\le to offer its customers competitively priced
electric services when full retail access takes effect.
An investigation of the Electric Utility's financial statistics must address the significant.
amount of cash on hand as a current asset. Approximately 67%, or roughly $6,000,000, of
year-end 1997 Current Assets are Cash and Equity in Investments. This highly liquid
position has both positive and negative connotations. This level of liquidity will provide
the Electric Utility with the flexibility to take advantage of market opportunities in a
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deregulated environment. The ability to quickly react to these markets will be affected by
the amount of readily available assets the Electric Utility has to call upon.
Contrary to this perspective is the realization that a large portion of this cash balance was
generated in recent years through the Electric Utility's retail rates. Under deregulation, the
Electric Utility's ability to generate such surpluses in the future may be affected by the
pressure that competition can exert on rates. For now, the ElectricUtility's cash position
offers a degree of financial flexibility that can be an advantage in a deregulated electricity
environment.
3~4.2 Debt
The Electric Utility's Long-Term Debt position also came under scrutiny when evaluating
its competitive position. The Electric Utility's outstanding debt represents a larger portion
of its Total Assets than that of several other local municipalities. The fact that the interest
rates are low can be viewed positively in comparison to using internally generated funds to
finance operations.
Given the Electric Utility's large cash holdings, an opportunity to retire a significant
portion of the outstanding debt obligations exists in the future. Competition, however, will
playa hand in this decision as the pressure to remain competitive creates other demands
on the Electric Utility's assets.
3.5 Policies and Procedures
A review of the Electric Utility's existing .policies found that they cover topics and areas
traditionally found in electric utilities. However, there are areas where the deregulated
environment will require policy refinements in order to broaden the Electric Utility's ability to
take advantage of emerging market opportunities. In this regard, the review concentrated on five
key areas that will feel the burden of increased competition in the electric industry: power supply,
finance, rates, customer service, and procurement.
3.5.1 Power Supply
At this time, there is no formal policy on power procurement or procedures used to
evaluate least cost supply alternatives. The budget references a policy to give "High priority
to expenditures that reduce future operating costs". Unfortunately, given that almost 57% of
electric utility costs are power supplies, such a generic directive may not provide sufficient
emphasis for future market acquisitions.
In the future, load aggregation, affiliations and cooperative arrangements with other
utilities, customers, and other entities will be available. The Memorandum of
Understanding with the Clallam County PUD, along with purchase arrangements with
LG&E and CSPE, represent the types of opportunities that the Electric Ut~ity will
continually need to evaluate and pursue under deregulation. Regardless of the
opportunities, a more definitive power supply policy is warranted in response to the
competitive electricity era.
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3.5.2 Financial
The City's investment policy should be evaluated relative 'to what power supply
competitors will be pursuing. One aspect of a competitive energy market is the use of high
risk financial tools such as futures contracts and derivative trading by marketers to help
reduce or fix short term energy costs. Such investments are totally inconsistent with the
City's investment performance objectives of safety and liquidity. Therefore. in evaluating
its involvement in the competitive electric m'arket, the City's investment policy ne,eds to
reflect a conscious decision as to the level of its participation, if any, in alternative
investment strategies.
3.5.3 Rates
Competition will also exert greater influence on price, and force utilities to develop more
service options for customers to choose from. The cost to provide these new services will
need to be determined to develop appropriate rates. In certain instances. some of these
services will need to be priced based upon the market rather than cost. The City's cost-
based rate policy .}Vill need to be broadened to recognize the potential for these situations
to arise. '
3.5.4 Customer Service
In conjunction with developing additional service options, competition will emphasize
greater efforts toward meeting customer desires. To that end, the Electric Utility's
customer service policies will also need some refinement.
For example, utilization of late fees as penalties is a punitive type of method for
encouraging prompt payment. One approach that is commonly used is a discount to
encourage prompt payment. The discount is "rolled" into rates, and, in essence, those that
do not take advantage of the discount (the late payers) fund the discount. This simple
approach turns the punitive concept around and represents an excellent way to reward the
good customers for prompt payment.
Issues such as Service Reliability Standards, Curtailments and Service Restoration
Priorities, Metering and Testing procedures, Deposits, Premise Access, as well as
Temporary and Standby Services are typically addressed within a General Terms and
Conditions segment of an electric utility tariff. Most of these topics affect the treatment of
customers under normal and non-normal operations. To the extent these policies exist,
they should be consolidated into the Utility's Rate Schedule document.
Consumer protection issues are a natural outgrowth of the move to competition since
situations can be created in which consumers could be disadvantaged. The state legislature
recently adopted certain consumer protection standards (ESSB 6560) for most electric
utilities. Many of these standards are already addressed as policy items. While the Electric
Utility may not be required to adopt such policies, the fact that some utilities already have
adopted them and others may be required to do so, indicates that consideration of them by
the Electric Utility would be a prudent course of action at this time. !
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3.5.5 Bidding, Procurement, and Contract Management
The Public Works Department utilizes concise and appropriate policies to guide its
bidding and contact management activities. These policies, however, can be expensive in
both the time it takes to administer-the processes, and in lost opportunities.
The project administration policy could be strengthened by more explicitly stating the
mutual responsibilities of the parties. Another area that may need some tightening up is
purchasing and inventory control of electrical material. The City's Finance Department
should design a modest recording and control system to assure good records, adequate
inventory levels, and timely material replacement.
Deregulation may also necessitate some changes in policy. If voters pass Initiative 200 in
the fall, the City should call for a legal review of the women and minority business
solicitations policy to assure its continued legality. Purchasing and contracting under
deregulation could be an area where state law may need updating to enable utilities to
make decisions more promptly and with less process.
3.5.6 Future Issues
In addition to these existing policies and procedures, there are future issues that also
warrant discussion.
As power supply markets develop, utilities will likely transact purchases and sales on a
much shorter time line than before. Typically, utilities are accustomed to thinking about
resources as long term obligations. However, daily and real time transactions are more
likely to occur as these markets mature. Policies need to be developed to, guide the Electric
Utility's participation in these markets.
Market participation also carries a concurrent obligation to improve the response time of
the rate setting process. The traditional approach of analyzing the cost of service and
revenue requirement and developing a rate proposal for adoption by the City Council will
continue to be a mainstay of the rate setting process. However, under open access it is very
likely that Electric Utility customers will be approached regularly by alternative service
providers with lower cost proposals or programs. The Electric Utility will need to respond
to these offers within a matter of hours or days and essentially need to be afforded the
authority to meet the competition based upon whether it determines that it is financially
prudent to do so.
3.6 Systems
The City utilizes a number of different systems in conducting its operations. Three of those
systems, Accounting, Financial (Rates), and Management Information were reviewed to
determine their ability to complement the Electric Utility's progress toward deregulation.
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3.6.1 Accounting
The City's Accounting system follows a traditional municipal budgetary approach. While
this system is appropriate for the City's current operations, as deregulation moves forward
there will be a greater need for budget and accounting information to be developed along
"functional" service categories. The need for this information is crucial to the development
of an "unbundled" cost of service analysis (COSA) and accompanying rate structures for
both existing and new services. The present accounting system is incapable of providing
this information unless some type of modification is developed. '
The review focused on four separate modifications that could be pursued in an effort to
upgrade the existing accounting system. Of the four, the preferred approach is to develop a
supplementary set of accounts, designed to track cost in a functional format. The process
would establish a parallel system of FERC accounts, using a system similar to the City's
existing "job cost" approach, to track costs by service function.
Anyone of these four options will improve the systems ability to provide more accurate
functional cost data than the existing system. However, the City must consider the cost and
impact that implementation would have on existing processes.
3.6.2 Financial
The accounting system modifications discussed above will have the greatest impact upon
the Electric Utility's existing financial or rate setting system. Electric rates and service
charges are developed using the Electric Utility's CO SA model. At present the model
follows traditional cost analysis techniques but lacks sufficient cost detail to identify this
information by the individual service functions that the City's Electric Utility provides.
For example, under the existing accounting system costs are lumped into categories such
as Debt Service, Labor, Taxes, etc. The Electric Utility does not provide debt services, labor
, or taxes. Instead, the Electric Utility incurs these costs in its efforts to provide such
functional services as the Generation, Transmission, and Distribution of electricity. The,
improvement in the accounting systems ability to provide costs by these functional
services will enable the Electric Utility to modify its existing COSA model to identify the
costs incurred in providing each function to each class of service or rate schedule.
3.6.3 Management Information System (MIS)
The speed and complexity at which competitive markets operate will require the City to
consider enhancements and upgrades to its existing Management Information System
(MIS). The City's current Solutions for Government™ software is very capable of
conducting some of the activities that the deregulated market will require. However, other
activities such as tracking power costs and matching customer consumption and billings
with specific power suppliers is beyond the systems current capabilities.
New systems are being introduced into the market today that are designed to address these
requirements. In the interim, the City's information systems specialist can develop
customized reports that will retrieve some of the information that the Electric Utility will
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need under deregulation. However, caution is suggested with respect to initiating extensive
changes to the system to accomplish this refinement.
Reworking an existing system versus purchasing an upgrade is a decision that the City will
need to consider as deregulation progresses. Any recommendation to purchase an upgrade
comes with the precaution that the acquisition should be delayed until other utilities have
experience with the software. A more cautious approach toward software acquisition
allows others to work through the programming "bugs" that typically plague initial
releases. The lIkelihood that additional hardware capability will also need to be acquired to
run the new software warrants a slower approach to enhancing the existing system at this
time regardless of the progress of deregulation.
3.7 Stranded Cost Estimation
The shift to a competitive environment may present the Electric Utility with the risk of customers
choosing alternative service providers. This occurrence could hinder the Electric Utility's future
ability to recover the costs of its existing assets. When customers begin to choose alternatives,
utility assets can become under-utilized or completely "stranded."
Stranded costs are estimated as the ongoing cost of an asset in excess of its market value. Under
the new competitive environment, Port Angeles residents will want to pay no more than market
value for the power they receive. It is important to note that many utilities will face significant
stranded costs over the next five to ten years and will need to implement some form of stranded
cost recovery. Stranded cost recovery requires rate increases to fund accelerated payment of debt,
buydown or buyout of power contracts and other measures such that remainy,.g asset costs are "at
the market". These rate increases, implemented as a competitive transition charge (CTC), would
be non-bypassable. All customers would pay CTCs, even those that have left the system.
The two items investigated for stranded costs are associated with the Electric Utility's power
supply costs. The Morse Creek Hydro facility represents a classic stranded cost asset, given its
. total costs in relation to the market. However, the Electric Utility's efforts to work with the State
Fish and Wildlife Department ~o provide power and water management capabilities in exchange
for avoiding expensive habitat mitigation expenditures effectively addresses the issue at this time.
The Electric Utility is also faced with the prospect of having to pay for BP A conservation programs
after the existing power contract ends. While the Electric Utility can pursue various strategies to
avoid or mitigate these charges, the Electric Utility should monitor this situation for further
developments.
For distribution systems, stranded costs are typically low since customers do not have alternative
providers for wires service. That is not to say that customers cannot self-generate, or in some
cases, by-pass the system. However, stranded costs for the Electric Utility's distribution system do
not appear to be a significant risk for the City.
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3.8 Recommendations
What to do with the City Electric Utility in the face of deregulation is a significant financial, public
relations and employee issue. Financially, the Electric Utility provides a large sum of money to the
City's general fund and competitive rates to its customers. . From a public relations standpoint,
doing nothing, acquiring additional territory or combining the utility with another all can have
negative impacts. Finally, a significant number of highly trained professionals have committed "
much of their professional careers to the Electric Utility at the expense of other opportunities.
Notwithstanding the complexity and multiple impacts associated with electric deregulation, the
City Council has asked for recommendations on how to proceed as this new environment unfolds.
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Of primary consideration is the fact the City currently operates a successful and competitive
Electric Utility. The question, then, is how to continue to do so once the forces of competition
begin to exert their influences on price, services and consumer choice. Given this role, the Electric
Utility should continue to provide wires service, power supply for core customers and perform
certain other energy service functions.
Information is a key element in maintaining competitiveness. Customers will need information to
make their own decisions about power suppliers for the first time. Employees need it to feel more
secure in their jobs, their futures, and how to best direct their daily efforts. The Electric Utility
needs it to benchmark its position relative to the competition and the City Council needs it to
properly focus the direction the Electric Utility pursues in this more competitive environment.
Policies and procedures that deal with both external issues (like annexations) and internal ones
(like power supply, finances, rates, customers and procurement), need to be reviewed and
consolidated for soundness and flexibility. Stranded costs should be considered a possibility, and
mitigation strategies proposed.
. The recent reorganization of the Electric Utility has provided many advantages to the City, but has
also created some difficulties. The new utility environment will require flexibility a,nd real-time
decision making. As such, new organizational delegations may need to be made to promote the
promptness necessary to compete with private enterprise.
Changes will also be necessary in some of the systems that support City functions. The Utility's
COSA needs to be updated to provide greater detail. The Management Information System, while
capable of handling the current needs of the Electric Utility, will be required to provide more and
different information in the future.
"The following action plan section of this report will discuss the direction and options that the City
should consider in determining how it will operate under deregulation.
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4 Action Plan
4.1 External Issues
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4.1.1 'Information
More than at any other time in history, information has become the buttress of the
electrical industry. The wholesale market has required that information systems be greatly
enhanced. Independent system operators (150s) and electronic bulletin boards (EBBs)
have become widespread. The Dow Jones cash prices for power at various sites and the
NYMEX futures market for electricity have changed the character of power purchases.
The end result of this increased information and open access to high voltage transmission
is fierce competition at the wholesale level. At the retail level, anxious consumers faced
with customer choice programs will also be demanding increased levels of information.
While the Electric Utility does maintain a presence within the Public Works Department
portion of the City of Port Angeles' web site, there is no restructuring information
available there. A more customer-friendly, informative, and accessible site would be of
great service to consumers facing decisions involving electric service providers.
Information for the use of the Electric Utility itself will also be crucial in the future business
environment.
'4.1.2 Annexations
The City has identified a large area east of the incorporation boundary as part of its Urban
Growth Area. With some 1,700 people that may be annexed, this urban growth area could .
increase, the number of households/businesses served by the Electric Utility by
approximately 9%. The City currently has a policy of serving all infrastructure
requirements in an area that is annexed. T?e acquisition and service costs resulting from
this annexation policy must be weighed carefully as Port Angeles' growth management
plans are considered. A no-losers test should be used as the cornerstone for subsequent
annexation decisions.
4.1.3 Maintain Competitiveness
In order to remain competitive in the industry, it will be necessary to periodically
benchmark the position of the Electric Utility compared to other utilities. The most
reliable and direct way to do this would be to compare the functional components of the
Electric Utility's wires fees to other, similar providers. This benchmarking should be
undertaken periodically.
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4.1.4 Service Needed in New Environment
As noted earlier, it is recommended that the Electric Utility provide power supply services
for its core customers (residential and small commercial), be the power supply provider of
last resort, continue to run the wires business (to include meter reading and billing) and
offer certain competitive energy services (DSM, appliance repair, information, etc.). In
order to fulfill this future role, the Electric Utility needs to undertake the following
. Acquire a partner to assist in power supply management and aggregation.
. Evaluate subcontracting the necessary time of use metering, billing and data
warehousing requirements associated with full retail competition.
. Look for a strategic alliance to enter into cost-effective energy services.
All of the aforementioned requirements can be acquired through a public solicitation of
int~rest or direct acquisition. A public solicitation is recommended.
4.2 Internal Issues
4.2.1 Policies and Procedures
Power Supply
. Directly address power supply issues
. Diversify the City's electric power portfolio
. Evaluate and secure attractive alternatives
Financial
. Refine policy regarding the loan of funds between departments
. . Operate Utility in an environment that simwates what its competitors endure
. Recognize the potential volatility of various market opportunities
. Consider the use of high-risk financial options such as futures contracts and derivative
trading to either reduce or fix short-term energy costs.
. Evaluate the Utility's level of participation in a competitive electric market.
Rates
. City's cost-based rate policy will need to consider that market, rather than cost, may
establish the rate
. Service Policies should be included within the Rate Schedule document
. Complete update of existing Line Extension policy and procedures
. Clarify Service Territory boundary review
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Customer
. Institute "discount" payment incentives rather than penalties
. Establish General Terms and Conditions Section within Rate Schedule document
. Establish Service Reliability Standards Section within Rate Schedule d001ment
. Consider following consumer protection policies required of some other utilities as a
result of the passage ofESSB 6560
Bidding, Procurement, and Contract Management
. Strengthen project administration. policy by explicitly stating the mutual
responsibilities of the parties.
. Call for a legal review of the women and minority business solicitations policy if
Initiative 200 passes
. Work to update state law re: purchasing and contracting to enable utilities to make
decisions more promptly and with less process
. Tighten purchasing and inventory control of electrical material
. Formalize process of material inventory tracking and control
. Design modest recording and control system to assure good records, adequate
inventory levels, and timely material replacement
Other Policies
. Establish policy that reflects the City Council's perspective with respect to Utility
involvement in ancillary business ventures and their potential impact on the
community and local business development
. Develop policies that recognize the amount of time provided or required for decisions
and approval in a competitive environment
. Give the Utility the authority to meet any competitor's offer within a reasonable time
frame if the Utility management deems it to be financially prudent to retain the
customer
4.2.2 Debt Position
. Recommend that debt be reduced
. Fund should accumulate sufficient cash to call the bonds, without overcharging its
customers, until 2002
. Keep the Utility in good financial condition
4.2.3 Stranded Costs
. Recognize that stranded cost potential exists
. Investigate State Fish and Wildlife opportunity with respect to Morse Creek and
pursue if viable
. Monitor BPA conservation program cost exposure post 2001 and evaluate least cost
solutions
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4.2.4 Organization
. Integration of the Electric Utility into the Public Works Department has resulted in
staff reductions while service has remained high
. Deregulation may place potential demands on the City that make the transition more
difficult with this integrated organization
. Need for FERC type accounting to provide for separating distribution and power rates
. Potential for Washington Utilities and Transportation Commission to gain regulatory
. . oversight
. .Future need for real time decision making for customers, suppliers, and competitors to
. retain customers,. execute power swaps or other resource transactions, and aggregate
loads for power purchases
. Delegation guidelines that will hold individuals accountable for their decisions are
required
4.2.5 Systems
Accounting Systems
Develop a supplementary set of procedures to reclassify costs from the existing system into
a functional format using the job cost system
. Uses existing resources with very little disruption to the current system; will not only
result in the smoothest transition, but also the lowest cost
. Implementation should be planned using the current FERC system of accounts and an
unbundled COSA model in order to determine the components necessary for a
successful system
. Begin this process as soon as possible in order to allow enough time for
troubleshooting and tracking of detailed costs over a period of time to gather enough
information to properly establish historical costs and subsequent customer,
transmission and distribution charges.
Financial Systems
The statutory requirements outlined in the recently signed E2SHB 2831 follow the basic
cost of service procedures. The new statutes will require an Unbundled Cost Study from all
qualifying utilities. The study will require, at a minimum, identification of the accounting
treatment for the following items:
. Generation and energy supply
. Delivery service by transmission, distribution and control area
. Metering and billing
. Customer account services
. Programs supporting conservation or Non-Hydro renewable resources
. Fish and wildlife mitigation
. General administration and overhead
. Taxes
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These various cost items will need to be functionalized, classified and allocated to
customer classes based upon traditional cost analysis techniques. The process used to
develop this information will also need to be adequately documented as to the particular
study approach (embedded, marginal, etc.) and procedures used.
Management Information Systems (MIS)
.. Begin immediate investigation of other software options, including upgrading the
current software
. Consider probability that an upgrade will put the City on a completely different
platform that may require complete re-training of the staff
. Evaluate other software packages to determine the best overall solution for the City.
4.3 Summary
In addition to customer and employee interviews, this report has discussed a number of other issues
that relate to the current situation of the City's Electric Utility. Based on the interviews, the indication
is that the Electric Utility has been effective in providing rel~able service at a low cost. A financial
review indicates that the Electric Utility is financially sound and in a good position to be competitive
in the coming economic climate. Policies and procedures have been examined for their soundness,
appropriateness and flexibility. Stranded costs are discussed in regard to their possible implications
to the Electric Utility. The organizational structure of the City and its Electric Utility is examined to
identify potential issues that could impede efficiency. The systems that support the operation of the
Electric Utility are also discussed in light of future needs. Finally, a discussion of a fiber optics system,
to enhance utility communications and to possibly provide a future business opportunity, was
developed at the request of the City.
The electric utility industry is entering into an unprecedented period of change, from which will
emerge winners and'losers. Utilities that have firm strategic and action plans in place will contend
success~y against competitors. While the details of deregulation may not yet be clearly defined
in Washington, it is certain some form of restructuring will occur. One immediate response to
this will be the customer's need for information to understand and participate in the process.
The City, which has been shown to run a successful and competitive utility, will need to maintain
that level of achievement and competitiveness. In order to do so, it must comprehend the new
demands that will be placed on it as a participant in a competitive market. This strategic planning
effort has identified the options available to the City in the new environment and decisions must
now be made regarding the direction the utility will take in the future.
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