2.6. ERMUSR 06-14-2016 Elk River
Municipal Utilities UTILITIES COMMISSION MEETING
TO: FROM:
Elk River Municipal Utilities Commission Tom Sagstetter—Conservation and Key Accounts
John Dietz—Chair Manager
Al Nadeau—Vice Chair
Daryl Thompson—Trustee
MEETING DATE: AGENDA ITEM NUMBER:
June 14th, 2016 2.6
SUBJECT:
Consulting Services for Electric Cost-of-Service and Rate Design Study
BACKGROUND:
ERMU staff is currently working with Dave Berg Consulting, LLC on a cost-of-service and rate
design study. The work is being performed to evaluate possible changes to rates and services
that are a result of changing conditions, including but not limited to; additional customers and
energy sales from the transfer of territory from Connexus Energy to ERMU, and the transition
from our current wholesale power supplier to Minnesota Municipal Power Agency in October of
2018.
DISCUSSION:
The budgeted cost of the study is $25,000 and is scheduled to be completed by September 2016.
ACTIONS REQUESTED:
No action is required at this time.
ATTACHMENT:
• Scope of Services for Electric Cost-of-Service and Rate Design Study—Dave Berg
Consulting, LLC.
• Task Order#2—Dave Berg Consulting, LLC. —March 2, 2016
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Scope of Services:
Task 1- Data Request
A written data request will be submitted to Client detailing the data required for the
study. The data is necessary to facilitate an in-depth understanding of the
relationship between Client's expenses, revenues and sales to retail customers.
Task 2 — Kickoff Meeting/Data Review
Once Client staff has compiled the information requested as part of Task 1,
Consultant will travel to Client's offices to meet with Client staff to reviewg oals
for the study and the data compiled. Any specific rate strategies requested by the
Client will be examined during this meeting and included as part of the study
effort.
Task 3 — Financial Forecast— Existing Rates
Based on projected sales to retail customers and estimated utility revenue
requirements, a 5- year forecast (the study period) of Client's electric operating
results will be prepared. Revenues for this forecast will be based on Client's
existing retail rates. This forecast will also include funding for expected capital
improvements during the study period and an analysis of the resulting impact on
Client's reserve fund levels.
Task 4 — Cost of Service Analysis
The results of Task 3 give an indication of overall revenue needs for the utility.
The cost-of-service analysis is utilized to determine how the revenues should be
collected from different classes of customers as well as through different
components of the rates within each class. To facilitate the cost-of-service
analysis, a 'test year' revenue requirement is established. The test year financial
and operating statistics provide the basis for determining the relationship between
sales and expenses for the utility. The test year revenue requirements are first
functionalized by their operational category such as wholesale power, distribution
and customer service. Within each function, the revenue requirements are then
classified as demand, energy, customer, revenue-related or direct assignment cost
related as to their classified purpose. Based on the classified costs within each
function, the revenue requirements are allocated to each of the customer classes.
Demand allocators are used for demand classified costs, energy allocators are used
for energy classified costs and customer allocators are used for customer classified
costs. Based on this analysis, the allocated cost to serve each customer class is
determined. The allocated cost to serve each class is then compared to the
revenues received from that class to determine if any class-specific revenue
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adjustments are warranted. Additionally, the cost-of-service study yields specific
demand, energy and customer related costs for each class which can be utilized in
the design of demand, energy and customer charges for each class of customers.
Task 5— Interim Report
An interim report will be prepared summarizing the analyses prepared to date.
This interim report will be sent to Client staff for review and comment. The
purpose of the interim report is to clearly demonstrate to Client the basis for
moving forward with rate design.
Task 6—Rate Design Discussion
A telephone conference call will be conducted with Client staff to discuss specifics
related to alternatives for consideration in the design of proposed retail rates.
Task 7— Rate Design
Based on the revenue needs of the utility, the results of the cost-of-service analysis
and discussions with Client staff, proposed rates will be developed for each of the
retail customer classes. The rates will be designed to meet the overall revenue
goals of the utility as well as specific Client rate design goals.
Task 8 - Financial Forecast— Proposed Rates
The financial forecast prepared as part of Task 3 will be revised to show the impact
of the proposed rates on Client's five year study period. A primary focus of the
analysis will be the resulting cash balances in Client reserve funds.
Task 9— Preliminary Report
The results of Tasks 6-8 will be added to the Interim Report prepared in Task 5 and
submitted to Client for review as a preliminary report for the study.
Task 10—Report Review
A telephone conference call will be held with Client to discuss the preliminary
report with a focus on any areas requiring additional explanation or areas of the
study requiring additional analysis.
Task 11 — Final Report
Based on the discussions in Task 10, the preliminary report will be finalized and
both electronic and hard copies of the report will be provided to Client.
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Task 12 —Report Presentation
A presentation will be prepared and delivered at a Client Commission meeting to
explain the conduct of the study and resulting rate recommendations as well as to
answer any questions.
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TASK ORDER#2
This Task Order #2 dated March 2, 2016 provides that Dave Berg Consulting, LLC
("Consultant") will provide Consulting Services for Electric Cost-of-Service and Rate
Design Studyto Elk River Municipal Utilities ("Client") under the general terms and
g P
conditions outlined in the Professional Services Agreement between Consultant and
Client dated July 23, 2015.
The scope of services, fee for services, schedule and other provisions for this Task
Order are as follows:
Scope of Services
Task 1- Data Request
A written data request will be submitted to Client detailing the data required for the
study. The data is necessary to facilitate an in-depth understanding of the
relationship between Client's expenses, revenues and sales to retail customers.
Task 2 — Kickoff Meeting/Data Review
Once Client staff has compiled the information requested as part of Task 1,
Consultant will travel to Client's offices to meet with Client staff to review goals
for the study and the data compiled. Any specific rate strategies requested by the
Client will be examined during this meeting and included as part of the study
effort.
Task 3 — Financial Forecast— Existing Rates
Based on projected sales to retail customers and estimated utility revenue
requirements, a 5- year forecast (the study period) of Client's electric operating
results will be prepared. Revenues for this forecast will be based on Client's
existing retail rates. This forecast will also include funding for expected capital
improvements during the study period and an analysis of the resulting impact on
Client's reserve fund levels.
Task 4 — Cost of Service Analysis
The results of Task 3 give an indication of overall revenue needs for the utility.
The cost-of-service analysis is utilized to determine how the revenues should be
collected from different classes of customers as well as through different
components of the rates within each class. To facilitate the cost-of-service
analysis, a 'test year' revenue requirement is established. The test year financial
and operating statistics provide the basis for determining the relationship between
sales and expenses for the utility. The test year revenue requirements are first
functionalized by their operational category such as wholesale power, distribution
and customer service. Within each function, the revenue requirements are then
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TASK ORDER#2
classified as demand, energy, customer, revenue-related or direct assignment cost
related as to their classified purpose. Based on the classified costs within each
function, the revenue requirements are allocated to each of the customer classes.
Demand allocators are used for demand classified costs, energy allocators are used
for energy classified costs and customer allocators are used for customer classified
costs. Based on this analysis, the allocated cost to serve each customer class is
determined. The allocated cost to serve each class is then compared to the
revenues received from that class to determine if any class-specific revenue
adjustments are warranted. Additionally, the cost-of-service study yields specific
demand, energy and customer related costs for each class which can be utilized in
the design of demand, energy and customer charges for each class of customers.
Task 5— Interim Report
An interim report will be prepared summarizing the analyses prepared to date.
This interim report will be sent to Client staff for review and comment. The
purpose of the interim report is to clearly demonstrate to Client the basis for
moving forward with rate design.
Task 6— Rate Design Discussion
A telephone conference call will be conducted with Client staff to discuss specifics
related to alternatives for consideration in the design of proposed retail rates.
Task 7— Rate Design
Based on the revenue needs of the utility, the results of the cost-of-service analysis
and discussions with Client staff, proposed rates will be developed for each of the
retail customer classes. The rates will be designed to meet the overall revenue
goals of the utility as well as specific Client rate design goals. Specific rate design
issues to be addressed include:
• Distributed generation net metering
• Solar access charge
• Wholesale cost shifts
• Time of use and off peak rates
• Load management programs
• Economic development
• Standby tariff
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TASK ORDER#2
Task 8 - Financial Forecast— Proposed Rates
The financial forecast prepared as part of Task 3 will be revised to show the impact
of the proposed rates on Client's five year study period. A primary focus of the
analysis will be the resulting cash balances in Client reserve funds.
Task 9—Preliminary Report
The results of Tasks 6-8 will be added to the Interim Report prepared in Task 5 and
submitted to Client for review as a preliminary report for the study.
Task 10 —Report Review
A telephone conference call will be held with Client to discuss the preliminary
report with a focus on any areas requiring additional explanation or areas of the
study requiring additional analysis.
Task 11 — Final Report
Based on the discussions in Task 10, the preliminary report will be finalized and
both electronic and hard copies of the report will be provided to Client.
Task 12 —Report Presentation
A presentation will be prepared and delivered at a Client Commission meeting to
explain the conduct of the study and resulting rate recommendations as well as to
answer any questions.
Fee for Services
Consultant will perform the scope of services outlined above for a fixed fee of
$25,000 plus actual applicable expenses. Applicable expenses are for items such as
mileage, lodging, meals, copying services and shipping. Consultant will bill Client
for the $25,000 fixed fee in two installments: 1) $15,000 following the submittal of
the interim report in Task 5; and 2) $10,000 following the report presentation in Task
12 or completion of the study. Itemized expenses are estimated to be less than $300
and will be added to each applicable fixed fee invoice.
Schedule
It is estimated that the study will require 15 weeks after notice to proceed to
complete. It is anticipated that study will begin in mid-April 2016 when Client's
audited financials for 2015 are available.
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TASK ORDER#2
Other
Not Applicable
IN WITNESS WHEREOF, the parties have signed this Task Order the date first
written above.
Elk River Municipal Utilities
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Its: 6 r vt e rr S lAAA t er
Dave Berg Consulting, LLC
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Its: Principal /
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