5.3. ERMUSR 12-15-2009~/
Elk River -;
Municipal Utilities
13069 Orono Parkway • P.O. Box 430
Elk River, MN 55330-0430
November 30, 2009
To: Elk River Municipal Utilities Commission
John Dietz
Jerry Gumphrey
Daryl Thompson
From: Troy Adams
Subject: Industry Rate and Finance Challenges
Phone: 763.441.2020
Fax: 763.441.8099
At the October 13`", 2009 commission meeting, the commission directed staff to comment on an
article published in the September 2009 Public Power magazine. The article, "7 Rate and
Finance Challenges" v~~ritten by Dave Berg, P.E. of R.W. Beck, is attached for reference.
In the article, the following issues were discussed:
1. Special rate programs, including conservation and demand response
2. Net metering and backup power tariffs
3. Renewable portfolio standards and carbon legislation
4. Large customer/local employer incentives
5. Municipal government cash requirements
6. Infrastructure needs: debt vs cash flow funding
7. Overall rate strategy
These issues are truly relevant enough to be stand alone topics of discussion. The following is a
brief response to address how these issues relate to Elk River Municipal Utilities. The response
is as it pertains to the electric utility only, not the water. This article was written specifically
about municipal electric utilities. However, many of the issues relevant to municipal electric
utilities are also relevant to municipal water utilities.
1. Special Rate Pro rg_ ams
The rate structures that Elk River Municipal Utilities (ERMU) utilizes have been in place for
years. The residential and small commercial (non-demand) customer rates are based on energy
(kWh) use. The large commercial/industrial (demand) customer rate is based on energy (kWh)
and demand (kW). There are also well established conservation improvement programs with
many rebates and incentive programs. These are very common rate structures and programs.
They have worked well for the ERMU. However, there isn't any reason why the ERMU
shouldn't be continually assessing rate structures and new programs. One of the benefits of a
municipal utility, as opposed to a coop or investor owned utility, is the local governing body with
a localized customer base. This puts a municipal utility in a unique situation to design rates and
programs to specifically benefit their customers.
There is already awareness within ERMU to use the positives of being a municipal utility to
create an environment where ERMU, the customers, and the City of Elk River (City) all benefit.
In November 2009, the utilities approved a Low Load Factor Rate Adjustment clause to be added
to the demand tariff beginning in 2010. There is also an opportunity to partner with City to
create rates and programs to encourage local economic development. This will be further
explored and presented to the Utilities Commission in the near future. As the economy turns
around, it is mutually beneficial for ERMU and the City to promote local economic development
and to help expedite local economic recovery.
Two years ago, Great River Energy (GRE) changed their billing to a critical price time-of--use
structure. This change shifts the risks of volatile cost of energy due to time-of--use to their
customers. A number of years ago, Connexus Energy did implement a residential time-of--use
rate (which has since been cancelled). This type of rate works well to discourage and curtail
energy usage during critical price times if cost information is effectively communicated to the
end user. In the case of ERMU, our rate design does not communicate this information to the
end user. Part of communicating this is providing the customer with cost information to make
informed decisions about when to use energy. But also, the rate design needs to pass on the cost
associated with the critical peak time to the end user. Even if the customer is informed, the use
habits may not change unless there are cost implications to the end user. To implement atime-
of-use rate structure involves a significant investment in the metering and billing aspects of the
company. And although it may not be economically feasible or publically acceptable to pass on
these critical peak time-of--use prices, inevitably this is the direction the electric industry is
heading. This will be driven partially by wholesale power costs and partially by legislation. It is
important for ERMU to keep this in mind for future metering and billing upgrades. Customer
education would be critical in implementing time-of--use billing.
2 Net Meterin~Land Backup Power Tariffs
Elk River Municipal Utilities recently connected its first photovoltaic supplemented customer
and has a few wind turbine supplemented customers. These customers have net energy billing so
when their on-site generation exceeds their usage, the surplus is sold back to ERMU at the retail
rate. With government tax credits and incentives, these types of installations will occur in
greater frequency. In the future, there may be legislation that would require utilities to pay the
customers a premium fee for the surplus energy transferred back to the system. Elk River
Municipal Utilities also promotes its wind power program. In 2008, 0.24% of the total energy
sales were made through this program.
Elk River Municipal Utilities doesn't currently have any "backup" power customers. This would
require the customer to have self generation that would be economically feasible to run 24-7. Or
it would require the customer to have primary power from another utility. At this time ERMU
does not have a "backup" tariff. This is something that could be addressed if the need should
arise. We do have shared substation agreements with other utilities. The reimbursement for
energy usage is dictated by contract.
3 Renewable Portfolio Standards and Carbon Legislation
The State mandated renewable requirements do not directly affect ERMU. Our renewable
requirements are covered by GRE through 2018 when our wholesale power contract with
Connexus Energy ends. This will be considered as ERMU continues to research power
suppliers. Our ownership in generation at the Elk River Landfill provides 3.2 MW and 26M
kWh of renewable energy from four engines. Elk River Municipal Utilities sells this production
to GRE and is contracted to do so through 2022. After that the contract could be renewed or this
renewable resource could be part of ERMU's portfolio. The Landfill is currently flaring off
enough gas to support an additional 3 engines. If similar funding could be secured to expand the
Landfill Generation Plant as was used to build the original plant, it may be a good investment for
ERMU to make. This would put us in a better position when negotiating a future power contract.
Carbon tax legislation is looming. Connexus Energy, Wright Hennepin, and ERMU are served
by the same GRE generation portfolio. Some of the other local utilities have different generation
portfolios through different power agencies and therefore may be affected by carbon legislation
differently. In one form or another, utilities will see the costs associated with energy tax passed
on through our wholesale power costs. This increase in power costs impact our operating
expenses. An increase in expenses directly affects the rates. This will be a challenge for all
utilities. Keeping the customers informed will be very important. Elk River Municipal Utilities
needs to utilize the communication resources it has to proactively educate it's customers on these
changes. This could be done through our website, or our bills, or through new social
communication media.
4. Lame Customer/Local Employer Incentives
Although they can promote locate economic development, large customer and local employer
incentives can also be a slippery slope that could create an environment where the cost of service
is not fair or equitable for all customers. By creating an incentive too great, the cost associated
with that incentive is unfairly subsidized by the other customers. Yet there is reason to promote
and encourage large customers and local employers. This needs to be done with balance and
fairness in an equitable manner. A solution may be to provide a new customer an economic
development tariff that a new large customer or new local employer would qualify for the first
few months of service. This would help to promote new development and new jobs, but not
burden the rate payers for years to come.
5. Municipal Government Cash Requirements
Elk River Municipal Utilities exists because of the City. And although ERMU operates under
separate governance, it is owned by the City. With this comes a level of inherent liability and
accountability. There is also an opportunity cost in lost taxes with a municipal utility. It is fair
to the tax payers that the City realizes a return on investment. This is typically done through a
payment in lieu of taxes (PILOT) but is also often supplemented by donated utilities and labor.
For a statutory city that has established a utility governed by a separate utility commission, the
state statutes require a separation of funds. This separation gives an added level of
accountability and helps to ensure a fee doesn't become a tax. There is a need for accountability
and balance. Elk River Municipal Utilities needs to provide a return on investment to the tax
payers while providing fair and equitable cost of service to the rate payers. There are a number
of methods for a municipal utility to calculate the PILOT including, but not limited to: percent of
gross electric operating revenue, flat amount paid annually, property tax equivalent, assessment
of electric utility and city budgets, charge per kWh sold, percent of net utility plant in service,
and percent of income. According to a recent APPA study on PILOTS, percent of gross electric
operating revenue is the most commonly used method for this calculation. The study is attached
for reference. This method can create a positive relationship between a city and utility because
when the city helps the utility to prosper, the city also prospers.
For ERMU, the PILOT is set by policy at 3% of revenues generated by Elk River electric
customers. The policy was last revised in June 2008 and specifies that this contribution level be
revisited in 5 years. The contributions to the city policy also specify that ERMU donate all
electricity to the City for all facilities not associated with enterprise funds of the City. Although
not specified by policy, there is also donated labor for such services as tree trimming and banner
hanging. This policy is attached for reference. For 2009 the projected 3% of revenue from Elk
River customers is $587,000. The 2009 donated electricity and labor are projected to be
approximately $420,000. The 2009 ERMU PILOT is projected to be approximately 4.2% of
operating revenue. According to aforementioned APPA study, the median contribution for a
utility with revenues between $20M - $SOM is 4.5%.
In difficult economic times where state aid to local government is being cut, tax payers would
benefit from an increased transfer from the utilities to the city. The result would be an added
cost to the utilities during the same difficult economic times when consumption and revenue may
be down. To provide relief for one group at the expense of another is solving one problem and
creating another. There needs to be balance and logic that can be justified to both the tax payers
and rate payers. In the article, the solution is well stated that the "...goals related to PILOT are
fairness, predictability and transparency." Communication is essential, not only between a utility
and city, but with the tax payers and rate payers as well. This can foster a symbiotic relationship
between ERMU and City that will be mutually beneficial to the tax payers and rate payers.
6 Infrastructure Needs• Debt vs Cash Flow Funding
Elk River Municipal Utilities does on going capital projects projection and system assessment.
Everything added to the system has a finite life associated with it and therefore planning needs to
be done for its inevitable replacement. Typically ERMU will budget for the capital depreciation
to offset the capital projects. However in recent past, ERMU has experienced rapid growth.
With this growth came rapid infrastructure expansion including a number of new substations and
feeders. The cost associated with this rapid growth was partially funded through bonds. One
reason to bond for big infrastructure improvements is so the customers who benefit from these
system improvements are also the customers paying for them. Also to be considered is ERMU's
debt and its impact to the City's financial rating.
The Utilities Commission had adopted a cash reserves goal of $3.SM for the electric utilities. At
this time ERMU is at approximately 43% of its reserves goal for the electric utilities. As ERMU
get closer to reaching the reserves goal, the target amount may need to be reevaluated.
7. Overall rate strate~y
In the article, the solution to the issue of overall rate strategy outlines a list of core rate-related
principles. These include:
^ Five-year financial plan
^ Setting financial ratios
^ Anticipating rate needs and developing rate change transitions
^ Developing a public relations program
^ Addressing fee structure
^ Stating policy regarding competitive pricing
^ Defining methodology related to reliance on cost-based pricing
^ Setting reserve fund policies
^ Establishing rate rider guidelines
^ Adopting a written strategy
This is an excellent and well defined approach to establishing goals and direction for a utility.
Many of these core principles are already being done by ERMU. The financial plan (10-year) is
reviewed during budget time and then again after the audit is completed. Setting financial ratios
have been done case by case but have not been defined by written policy. The Utilities
Commission had approved reserve fund goals, but is not a written policy. During budgeting and
rate design, ERMU is aware of competitive pricing, but goals are not defined. Documenting
many of these principles that are already done in practice will help with long term planning. By
having written policy, ERMU has a blueprint from which to educate and communicate.
Conclusion
Overall, this is a very well written article exploring important issues for any utility. For ERMU,
this has brought into focus industry issues of rates and financial planning that we need to
address. How we address these issues becomes the fundamental building block on which we can
achieve its purpose. The Elk River Municipal Utilities' mission statement is "To provide our
customers with safe, reliable, cost effective and quality long term electric and water utility
service. To communicate and educate our customers in the use of utility services, programs,
policies, and future plans. These products and services will be provided in an environmentally
and financially responsible manner." Rates and financial planning are important to providing
fair and equitable. cost of service and a foundation for long term viability.
~ en
Renewable energy, a sagging economy, aging infrastructure and other trials
put pressure on utility finances,
~oday, rrrany public power utilities face common rlrallenges operating in the rhaotic
utility environment. How do you compare to tyre issues and solutions adopted by our
utility?
as a city-owned electric utility serving a community twilh a population od approxi-
mately 75,000, the Municipal Utility is a theoretical but typical mid-sized n-runicipal
utility. It has a peak demand of 200 NIVV and annual energy sales of 1 million kWh. Its
customers are mostly residential and cornrnercial with some light industry and one
large manufacturing facility, whidr accounts for 7.5 percent of the annual energy sales.
The Municipal Utility meets its wholesale requirements through a combination of
owned generation and market purchases. It owns a portion of a large coal-fired base
load plant and has local peaking resources, and it is plannirry to add additional local
peaking resources in the near future. Tire utility is governed by an autonomous Utility
Board whose members are appointed by the City Council.
looking forward, the Municipal Utility recognizes that there are many important is-
sues it will need to address. These issues otter have a component that directly
impacts the utility's rates and charges to its customers. At a basic fevel, the Municipal
Utility is in the business of providing electric service to its customers. The revenue side
of this business is driven by the utility's rates and charges, +n~hich in turn can be de-
signed to affect customer usage behavior that can irnhact the cast side of the
business. The Municipal Utility has identified the fallowing issues ttaat will require rate-
related'tactics as part of the utility's broad business strategy:
• Special rate programs, including conservation and den~rand response
• Plet metering and backup power tariffs
• Renewak~le portfolio standards and carbon legislation
• Large customer/local employer incentives
• Municipal government cash requirements
• Infrastructure needs: debt vs. cash flow funding
• Overall rate strategy
16 SEPT f:AAt3f:R 2aa9 PUDLIC: POW[R
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The Municipal Utility's- current rate structurra have: bt:en in pla(:e
for fnany years. Mae rates include customer charges and single
Mork energy charges for resicfefrtial and small commercial cus-
tomers. Larc{e conurtit:rciial crrslorrsers have a <lernand and energy
rate, and the industrial custofrac:rs have a clerr)and raft: wiU) on-
and off-pea:k energy rates. Thtl utility realizes that more special-
ized rates are neeclec1 to influence customers' use of electricity.
There has been a recent en)phasis on conservation programs to
recArce overall electricity usage and demand response efforts to
reduce peak consumptiorLThe Municipal lJtility is also hr,{!inning
to cclrrsicter advarac~cl raletering infrastnfcture 1AMq devict:s to
support smart grid {);rogra(1s-
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't'he ,\9trnic•ipal if'tilit}' bar inrfilt;rnented a broad arf,iy al~rctrdes lin•
ene-;f;~° ellic.ienc~~ (.~Iluris, :snc}r ax c~tddcient aplrli:utccs, r:onrpac! Iluo-
resc~nt lighting :tncl :irfsr+latinn prcr~m.uns. dt also ~adn~ks directly ~vi111
larger custOrnere to reduce eonsurr+ption ttrr'nugh more efl)cicnt
rnoh-r~, ,liglrtiragtrr(1 otd+r:r (rxes. J{t:cgrgnizing drat successfid c•onxer-
v:ttion J-rc>t.;ran-s reduce ralc~, x-?tridh retluec revenues, has f•exultetl
in a rc~rewed ell'art to mcrr7itttr rr:rc:nnes and rusts through tare util-
ly~ dinanci:il Pharr. The crarrxcr~~at`iora prx)grams also haul: a c•(-st
assneiated +vith the rrhxtES arul r-ttrer lrrogram costs. As c•(+nsump-
tinn Boca iloarn, the ertihty rest}' nceil to raise tales or rrrrpltsnent
sorrre. form ()f ilccontileil ratr:~x (rea'e•nnes not tied io conxurnl)tion),
rAs tirtare rate incrr;~rses rrre:rE~rdtrrc:d,.it ix conxiclerin~.r move to in-
vc:rted c:nerly r•.a,trs, +vtrc•1c: higher 'levE~ls of usage gel more
ca1)er-sive. '.Chis a.%r,r:r~rl firriher s iscatrrr~~c• Iri~;her Ievcls nl energy
ux(:,1)Ut i116''lllglter I:ISrI~.;t: r;slfkS hr:lp'olT;xet (tte Jc,~4•er res•erure (Irre to
)'ecluceil s:rdex. 1?or rale;r•edatci) ltrrc+airil rexl,clrrxr etToris, .it ix rnn-
sidc:ring both rarr'r)t .•tncl xi;icil; aly)a'oaclrt;s. "I't+f; ca+xat appraac•}r
includes giving carstorru=r:t a .cnt.i~il or,r a)/k!1' h:rxis fi.Ia- reiluc.ing
peak 1o:(il crnrxrnr,r~,tnon (vFu~n ct~rlut:sted Itry tFte nti9ity. 'f'hc stied: atr-
pr(~suh i:nc:dniles rraclre tiurc~-cli-nee telex fur rnrlrG crasiomer rlax~ts
ai7d f:Y`r.'rl hi~lrc:r .rrtt:.x ltu- c,r+-ftc•;tl, ~as"~u~:. 'ifu.: r~rtilih' is :ilvo c^c-ntern-
plating c•riticsd t.Ie:ik lrririr-1; a'i(I.t tiifrril'u.:anily higher a;~lles tlu+anf; a
snr:rll ntrmh(:r of pr:~tla !;react; drarir~ !}u; yt.1r. C:riti<•ad freak pric~irag
tviN r'erfrrire Borne kinil(If tvl~c>-*`v;t}'tornmunit;aticn) Kith custo,r+crs
to :i1e11 them That a t:ritii:r:al ~}•reril; lreritlrl h:rs hc;r..n dcc~l:u-E~cl. Ulti-
rn;rlel}; the ~itcra:icifla] CFt.idit~i• kv`rll tae movi.nt; into .(utarrardc(I
rne:lcaiur~; inJ:rastcrrctt+n-t; ~;1:~11'j s1:xtr;rnx :and will r~cs:•rl to rnnsider all
tllf:.costs asxrrrisrtxil r:±itb tt1e. ~rcc>gnnnx <ak)n~; t~iih tllrr xa+ingx real-
ized to (lclerarriru: le(»+• A'rr~r~•r~J :r~~t(; I~aeJs kvill t>E~ arrrtytrte(1. riitil7
syatt:rns also :rddow for rxr(Irc• irfreclvative rates to tinilfef• inflnenct~
customer rrxa~;e.
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The state legislature and ,ptrtrlic utility (:ommission have imple-
rnented requirements for utiliities to betgin in)plementing net
rneterir-f~ and backup power tariffs. TPre net rnete.ring tariffs are
intended ic,r smatter .renewat-te generation installations at resi-
dential an(1 comrnPrcial locations. Under this tariff, the a+stonier
is required to receive full retail rate credit for any surplus energy
injected into the Municipal iJtility system, 'fhe backup power tar-
ifts are required for larger customers who self generate all or a
portion of their own requiremerts and who need backup power
from the Municipal Utility N/iien their own ,generation pis not avail-
able or is insuffi(:ient to meet their recluirernents.
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The state hart ixsrrrd net nreterir)f;rrilcs than will (:lictatt: much of thc:
utility's nee+• ned meterirr~ tarilT.'Cht~ rvti~t~• has ;dso collected tari~lls
from alher arf:a utititicx that .are drxi~;ned to co)xq~ly ~~ith Ilfe samr:
rules. "fi-c u~ility',~nll cerlrri-t rneternnf; t.rpgr••ulex art customer loc:(-
tior+s where rr(:t metenn~; st.-vrce is rcqut~xte(I. The ne~v meters will
rnesrxure tlo+v of t:ner~ry 1)(-th into :aril not taf ihc: custonrt:r lircilii}'•
'.I'hc state ruler ,•(Ilo~x fOr eoflection of :additional teeter espcnses.
Tire \~tanicipal Utilit}' u~i11 ifnf)lernent a higfrer mont!-ly customt:r
charge far:net r;r+ett:r'rng Crcttornf::rs h:(xe(I r-n the clillerence in capi-
tal cx,st, incltadin~; installation roll di~u• Glee crew nnetrsr amortized over
the e~l,etteil till: of the rnetcr. for the hac•krrl:, r,owe:r tarS~l; the slttf-
nicif,al i`ltility rrc~eds to s~-nsidt:r ~idac )•erlrrirere,(ants of the lr<teknp
customer in an urahun(dletl sti:ry. hot itrt: gent:rxticrn coil h•ansrnis-
sian l,c-riionx (,f itrc: h:ukn~, I•frill,; it h:ts c+f-ted to rely c-n tare rnsu•;ket.
'fire uraknrnvn n:rturc (-f tignin~; .ur<1 nrnnunts ++I' t,:)e•kup generation
requi)•(rd ruake it r.lilTicnLt lur the ~Innicilssid lal'ilit}• lc- inc:luilt: provi-
xion of bacl:rrp geurer:rti,o:n i.r) its 4~;cneration s+xxet flans, '.fhe
\furricifu(i Utility :is a lrfrti,ciff:rmt n•r Llrf; rrti>;ioraal indeFu:ndent x}_r--
tern orier'ator, which avid! pr(niik roil-1'irne market po+vet• dclivert:il
to Ihc: ~turiirip:tl 1ltility din• any luu•kup ~;ener:ri'ic,:n :curl b.urxn)ission
requirerntnts. The: niidih}• ~vit>I clc, a sta.uglrt patix-(tarorrgti, ~~iQr an
alder loI' local system Icrsst s, io :M.ry hxcd:up rustr)rrrt:r a-egrairinf; en-
cr~•. for !oral tl'isU~ihuticrrr :cE:r-+~icc~x (.g+.rl)xtsrtianx., ler:der;x, ser~~ic•e
trfuhlurrners alrrl ilrs>l-s, rru:te:rs, rte.) It:lr; ;V.lr:rniripal iltility 1(1Il I'r:ay
on its frnhurullcd rust of srrrlie,e :ut:r9ytiis to cet Wised rnont:hly r.+trh
on :r ~1(1y b:txis fear ilac nra~imrr;nr) kr~vrknp :rrrr(+rrrit r-e(luest(•d k)y the
custorncrx.:ll tats arlriptt+r'd a J:ibilcncrlihk• klrrt .it rr~rrst f)Lrn Anil belle!
its loci! sy'vtem to d:+e sable t,rr sera•~' tduE k,arkrrp crrst(Irners <rt any
tif:rac:, dust litre :tr-y otter crrsto.mtc~:r.
Scr rery)eerv 2f)U~J 17
7 Rate and Finance Challenges
`~l~ . ..
Tie Municipal Utility is concerned about the rate impala of
putenrial environmental legislation. Implementation of re-
newable portfolio standards (RI'S) and potential legislation
or regulation to limit rarhon dioxide emissions are of partic-
ular concern.7he Municipal Utility has added wind resources
to its yeneratipn portfolio and currently provides 4
percent of its energy sales from wind. Flowever, it also rec-
ognizes that (here has been a net cost to add these
resources. The utility is concerned that if RPS mandates 70
percent to 3(} percent of energy requirements from renew-
ables, there may be a significant cost impart. Tltis cost
impact could he driven by numerous factors including higher
Capllal COStS dUe to InCI'caSP,(1 demitnd, increased UanSn11S-
sion requirements, and expanded operating challenge"s.
Potential carbon (fioxide legislation is a source of rate iml)act
anxiety for the Municipal Utility. t\ny proposal Io limit carbon
dioxide emissions will likely increase costs to the Municipal
Utility and its customers. This cost increase could be sub-
stantial. The challenge for the Municipal Utility is how to
prepare when the outcome is largely unknown.
'blur 1lunicijxd Utilil~ hats ahcath intj)Ict-x?ttk'tl SICj)S to tltiuti-~r jl5
huwcrul,hlc Lnul;ranr to mininrirc• nc•~!atisr cost intlrtc•I Irum lrentl-
iu~ cuvironntcnlal rc~;nl;tlions. tielaliye lu the rate si(Ir of the
business, it has decided hr iucrcase its crrslonu'r a~y;uc•ness pre~~rauts
btu lnrlrue c•nslnnters h,r ch:ut};e. cyh:de~cr that ehanl;e n,•,ty he. 7•he
nlilily lint (Iccided lu inq,lcmm~t an "cuyironnu•ntal a(Ijuslrncnl" h) its
~alc schedules. "phis :older will he similar to a fiu•I or lnuc•hased power
adjusbncn(. 'fhc cnyirunnu•nlal adjustntcnt mill I)el;in appcarigt; on
hills inuncdiatcly, htrt the inili;tl aruututt of the ;tdjnstment will he
zero. "I'he uccy hills will incln<.Ie infornrttiun about the rationale li)r the
adjusbncnl (il will rellecl inc•rc:tsed rusts to meet new eurirounrcntal
rc~<;ulalirmsl. "I'hc• adjustnecnl ~yill he a shai~;ht pass-lhrunfh un a pcr-
k\1'h basis, applied erlualk to all costumer class(~s. As e•usts arc
incurrc(I, the adjuslnrcut will hr~;in lu impact (till ;unuunts, :ut<I the
bills syill inclodr specilic inli>rntaliun abutd the jttstilicalion and c:dcu-
laliun of the adjuslmeul. ']'he \lunicipal Utility ~yill also add
infitrneUion to its nurtnal cunuuuniraliuu outlets such ;ts its \I'eb site,
e-mail, mctlia unllcls :uul ronumutih organization prctc~nlutions. In
addiliuu, it has he t;nr, to imcsligalc uutre andenrpora,v con-numica-
tiunssuch at a hk~~, a Iracc•huuk page and'I\yitler.
18 Srr rEr~Nen 2009
PUnLIC POWER
ISSUE 4
Tie Municipal Utility leas a largr; mAtnufacatuirag lat:ility lloc~tte;rl
in its community that accounts for 25 percent of the utility's r:n-
ergy sales. it is also a significant ernployc;r za.nd pis a a:ritiraal
piece of t]re local economy. The rnanr+fatauring farzility is fn•
cased on controllinfl its operatbrg rosfs and }ras rrrar~e ,dirF,~ct
recEttests for electric ratr; relief.The rrtantrfacttuing facility rrJter-
ates three slrltts and takes advarst~rge of the lirner-of-.use ratrs
availat~le front ttte Municipal Ulilly. Ttre ~'lunicipaJ Udiill'i~iy
knows wt will he implementing our:rall rate iirtcr.eases going 1or-
w~rd. The primary issue has beanrne the witlinyness crf :the
Municil~~l Utility to grant ra4e corrcr;ssions to t!tre :nranufe,r:urr
ing facility and pass additional costs onto tfte renr.ain~img
custor7rers.
( ~, ,
•~ `:
The Uunir:il.r;d Utilitp• ,tclarc.+~~•Ietlt;es tlrr;• iruprsxl::tnc~e of Ilrt.• rrrArrrr(ac•-
turitr[; Gtcility Ur the lucid t:conorny ;uul to ths• sr4ality. l..crss c T (Eris
cyrsinrner crrcdtl h.ne:+ rfe~;ttlatin, iugru•t nn ihe~ t:xrenrsrcrnity,tnol tsn
all u1iE,ity rxtepayet•s. On a 1'~hilosuliEsiatl basis the '~lurnreif+:il ![bti}ity
is rtalEirt}; to consider r,dr; t.•rmsitle+:+tious (c+r (Eris cr+stcrtrst:~, E.aarticu•-
l:ul}' as it rehttt;s to dhe e>-eds ui• fuhrre r~•tte ii.+rreztses. 'I'hC~:cr'rait^al
issrrc+ Ib.r the utility ,is Ihsd it rnakrs inCc>rrne•tl ilec•isinns relatc~il to
rates;uttl ccrsls to la•tn~itlc sc•n~icc.'fhis ~~°ill rr•rlnirx• a t.lr.+t.rilct3cirst-riE•-
sEr~•itt; •turihsis to esliuratt; (Itc true east trs sere reEl'ils cnrsturnesrs.
'1'Ire Udi.ity Eioard hats a~t;rectl in prinrilrle inss<•c•ept ;tsrn~rlksr:cw~errlll
rarargin firr (Iris c~stornrr srrul n Esi~Escr rn;rr~;in lin• nr;rrrraisnn~ Crrrs-
Inrnenti..Ilnu•r~+~er', the ho;rrtl ~+•i.ll nut Errrt ils .rc•rnairiigt; err~iorcrers in
tlrc lrnsrtinn oE;sulniclicint; r'nerE,~}• s;tles to tltc nr,~rnif;tcturirr~:lacility.
Iiy ear~rnrg :the rnar~irrs lry rttc t:l;tss in the tryst-ol'-ser~icc~ ;trrd~~si~e,
l'he utility cau ;(Hive rrt a r;-tion;tE ;rl+praacfs lirr p.+:cnclinr; a•atc rt•liesl•~to
all 1177f)rn'tilnt local I~tc•ilty.
l'h~ °Lltility Board has a.gree,d in ~rincapl;>a tto arccopt a smallQr ouerall margin fo~,r 'th'is
customer and a 1'igher ~a~a.ra,~iin for roemtai~:ng ,cust,n+ners.
vvww.APP~nel.ortr 5ernrl<,ruer+:2oS39 '79
7 Rate and ~irtartce Challenges
T,e Municipal Utility is owned by the rily an(I the citizens it
serves. As such, the city is entitle(I to a reasonable return on its
investment. The Municipal Utility makes a payment in lieu of tax
(PILOT) contribution to the city every year. Historically, the
amount of the f ILOT has been more or less neyotiatecl between
the Municipal Utility and Ule city. The Municipal Utility believes
the historical PILOT amount has been reasonable. Rec(:udy, the
city has come under economic pressure to increase fclnding and
has requested a significant temporary increase in the I'lLOT pay-
ment from the utility. The Municipal Utility is concen)ed that the
new f ILOT amount is unreasonable, the increase will not br: ten)
porary, and the utility may be viewed as a source for future
increased funding needs.
I t, .~ }, r ` ~ ~
t~
ISSUE 6
he Municipal Ulility has onyl:)inct capital nee(Is to (anti infrastruc-
ture improvements and a(IdiGons to its system. It has outstanding
debt relate(I to past capital a(Iditions, and it maintains a favorable.
aril stable rating from the rating agencies. The utility is projecting
a steady increase in capital needs in the future for renewable re-
sources, ~1N11 systems, peaking generation and other local system
additions. The Utiiily Board is not debt-averse, but it prefers to pay
for capital needs out of reserves anll cash flow as much as possi-
ble. As increasing costs and opposition to rate increases combine
to diminish available margins, the board is concerned about its
ability to rnaintafn the utility's band rating while relying more on
debt financing of capital items. The Municipal Utility needs to
strike the light balance r•.onc(?rniny funding of capital.
~r I` ' ) 1~ ti~ ~ IAI' .I~'
tt ,~ ~ ~,~
The Municipal Ulility detrnniu(•d Ihat its goals rclate(I in the
'
'
' I'hr, ,lhlnicipal l,)tilil~~ currently funds (lepreeialion through its
t
ILO
1
;u'e lairntss, predictability an(I Ir:ulsparency. I'airncss \vill rides. It tuts decided to establish a policy to use the cash Ilo\v avail-
hc resoh'ed llu'aut;h dircl•t (liscussious \vith the city. The ,\tunil•ip;d ;Ihlc born llllldlllg IIOII-C:ISII Ilow (lepreciation tv fun(I normal
Utility \vill collect infornrdiun ref;:u(ling other nunlil•ipally o\vned
" uul;r,ing capital nee(ls. 1f capital nee(Is in a given year arc Icss than
utilities xnll their P1LO
I' pa}7nenls ;LS well as lrancllise an(1 Drop- (leprcl•i;)1ion, the excess funds \vill bc: added to ;( c;lpihd rescr~'c ac-
erty taz inforn)alion li)r communities selve(I by investor-owned colrl)t. 11•capital nee(Is exceed depreciation funding av;lilable
utilities and Iota) electric lvoperati\'es. Once a lair lcmlrihuliun is ,
capital r<'se)~-c ,lands \vill be utilized as \vell. If these !ands are not
dcterlninc(l, the issue of prc(lictability caul be addressed. i'rc- snlTiricnt, the nlility will rely ou issuing a
ll(litional debt It \vill in-
(hcfal.)le 1CVClti Ol 1'1L01 pa~'nlt'lltti al'C a(h';111fagCnllS (U both tllr'
' l
l'1'C:IS(' ILC 17)teraetlQll O'Itll ItS 111U1I1Clal alll'ISCI' ;11111 the rallllg
city and !hl? 1Lmiripal Ulility.
fhlrrc :ue unnu•rolls ntclho(Is av;lil-
able li)r (revising a predictable c.•alcnlatiun of P11.0"I; iucludiug as a :lger)cies to ensnrc it mailtlaius or improves its clurent ratJng. 'hhe
uGlily also phrns to \vork with its
;o\'ernin
hlxl
t
k
I
1
~..._~ perl•ent;lge of revenue, an auu)unl per energy sol(1, a percl•ntagc of
l l
g
y
o ma
e sure
-loar(
rnl•Inbcrs nndersland the need to maintain a fn•rnable rating; ;uul
p
ant iu sen'ice, :( lixcd anlounl with :ul csl•alalor an(I olhecs. f;ach the et(•I)s ne•cessar) to a(•1lievc fhal goal.
81L't11Ud 11:IS adValltag('ti allO (hSnd\'alllagC~, belt 11 hlll'lICSe 0;111 be
CY)Illhllle(11\'Ilh prelllClal)dll)', 111(.' ~'11It1ICIp:11 Uhhly U'lll Ilil1'(f 81'r't\'E'(1
Ut :)Il OptCO)nC that hl;'st S(?Il'('ti Il5 nltl'p;l}'L: rS. 'l•IIC IStiIIC Ul ll'allti-
p;a'elicy can he a mor(r dillicnh political l•hallenge. "there .are nuuly
a(Ivordes of pla(•illg a separate line item un the utility hill In ulrulilti~
the PILOT p:lynlent, so the Municipal Ulility has decided that it
~+~11 adopt ibis pr,•lclice. ,\s nlilily hills get more conq)licaled arul
costs increase for a v:a'icty of re;uous, thl:' \qunicip;ll lJlilily has dc-
tcrminell that it \v:nlts its custunlcl:c to h;n'c ae nnlc:h infirrn)atioll ;ls
possible to understan(I the indivi(Inal l•omponents that make li
p
their bills. The utility also Icels that if the !'ILO'! paynlenl is de-
len(l:lble, there is no re<I-eon nut to list it scpar:dcly.
As atilt#y bills get more complicated and costs increase for a variety of reasons, the
Municipal Utility has determined that it wants its customers to have as much
information as possible to understand the .individual components that make up their
bills,
ZO SEPT[tv1(1F:R 2009
t~UBLIC Ppwf: F1
.r+.\.s~r.w.u.:w- - ...W.........,......»...._....._....,..........~...--~------__.._._..._....._~_....._...,J...~.~.._....._._.....,,._.......~..~..~.~,.~.~,..~.s,..,y......w.....~.»w..z,.~,;...::.....,....r......,m.r,..,._...w...,..~~.;..u:
T-,e MuriiciYra9 !utility has many issues to (leal avith relative to its
fuscil arld operational trealth. Most decisions impact thf: utility's
finalrcEa, Which u'Itimately affect rates. The Municipal Utility is
concerned at)out how ii -vill -nanage its rates and pricing pro-
gram to keep (I,p vvith the changes :in its operating environment,
send tare correct price signals and be fair ul customers.
,-
f
'flm ~(.llrnic~p;il Utiait}' h<IS ileci(Icil it needs 9n o\cer;III rat4• slrilte~ry
t(1 hfap grli(le Ls ra4c:'ision-:making process going Icllwar(I. "fhc rrltr
str;dc~' -ull pror•ide (fiirecUnn lclr 1 dE~-rel9t4i1 decisions. Ctolh the
utility rn9nage.a74'nt and goverrlirlg body \-'ill 64 rurol\'ed in (Ic\'clol>-
'I:ng t~#1.15 SY.r9te~)'. '.Che titr9t6~y IS E:IIt'IS10rIG(l t(1 he' 9 Ilsl OI C(rl'e
1,~Ite-rcl9te(I plarlcples u7cludrlg;
~• ~~BY'C~ltll)Ing'9rld mAl'r1t;11flllr~~ r1 •11\'e'yE:ll ' h119r1f'lill pl;ll{
• ;~f'tlfrlg lrllrli rrllanl Ir1i1nC191 'I'9f IC,S ~LE.'. , (lel.ll SBI\9CC CO\'E I`il~e,
d(~htlE:rldi#y rl-d'i(a, I:nargirrs)
• ;tlnticp9timg rate neeils and ilevelr ,ping apllr(Ipri:lte rate
cll9nge transitirnls
• C)(:rcaopiggantalecti-e plililic: rela- r
r
t1UrIS plClgl';l'Il9 th9t Slll)pol'ts r' ~
~ ~~~si
con\4r\^at.iail„ flenrlnd response and 'art
~
oth(rl:niru'Igulxlxroaches • ~'
• ,~fllh'f15tillil~ :lf:e 5t1'IICI'1:11'C ~l.f:., Ilfr\\' {
C(Irlllf('lS,-p4C.liLIS41l7Cf'S,) ~~ 9 h r! f~L.?
• ~t9tinf; pu#ics' r4~nrlint; carlrpcliti~e ' t'~F, 4 w))`Y :;i ,
A i.
prit.in~{i.E.., to:ils tornparE'(I lu nci~hla(n- ~
?~r\ ~ ;' f~ ` , ~~ ' ~'
`
rlglrtilities) t,',~~~i ','
f ,~
• l_)Ehlllfl { ffl(a114{d(,IU I'c191c'd IO T'lt- r
~ r; ~{r ~
~
li uu E; ou crrtit.b,u~E(1 pricing ~ "t`
• SF.,`ttlll ~ 165E'IY4 .Irlrld )fYIlClftS
~
i .1.. L
r
.
,
• hat9hlisllirlt; raft: rifler gui(Ic~lirlcs ~ r.;Y ,f 1 z
r; ,
,1k'"~
,', ;"
?,-7;
~i.c., J~uel ulp.h~trc-cn.ts, re~!ulatnry :r('- ,
jl,r't,-~'~
~
8
i ~
rpulementt) ,
1
i
',.i- }l~
a!.
• .IIdC till ll4'~1' \\'ll he in \\'ritin~ :lily qq
{ r;
~~{7'~~~Itrf ~!~'1{! lF)t~~
rUlc,l',)l~c'(11)r t.l:le lIG,17'd 10 Sf r\C 9ti .Irl C,II- } F ~lti.
ye
1 ,2
j
~l~
~fllrl~ kr11dB l(',:I' t~IB •1>U211d -911(.1 Iltlllt\' '
l
~3i)i~:
C L,^y tl`li+•i;~;J` k
~llif~
.
~
'
~
rn urrgr:rncrd :ual N ao c(hlc (tlon.(1 tot:ll ~s {'
cif ~~ff~t
" 11
llY t If I Ilrl~ IS-
lot IIP 14' lK{'t1Y1 (1141141,41 \. t
~
~ 1 t~ 4ti~~l
( +
~
4
'
SIIC'h ,1:1 l{art f1l .1 lylt(. St1.9t44;1' h4f(,1'C' tllcl~ l ~
)
~
T
lt
~
~ ; ~ 1.~{ x,11,,,+ I
( SSS
I
9nse, tIIC 7~fIlrllCllY11 1.1 trlLt~' \1111 hl: hl (t(.'1' , ., 7' {~J~)i~~~'
~~
l-IeJrlreil fo (It'aa \1'ith its r,Ite-rclat('d ~,' EI',iJ~ln~
~~f:'~`
{
wwvv. s\P 1?An n't. o.r~,l
`s ,
t ~ I t'~k~~ t±~~~~~ ~ ti.,
T#ie~Municipe) Utiiity.fi
s u es i t h ate- a ffact~ ui i k ty;; f
'siaccessfully~fnar~a ~ra~
~_ , ,,,~ .
ang~yze~~itt
{r
i understarl
•-.diligent; al
tom~flt3e;i
as'part of
thQ:impQH
l,to It~ej~k~i
.t.~tn,•u,, ,~'ia.9
`,i1i::
. ~r,, t`.
,. (
David fiery, P.E., is a prin(~pol in the SI. Peal, Mina, oflice of R.W. Beck,
a SAIC cempaoy. Ho is national direclf>er of thD Rates. Valuation aad
Finance Group ul R.W. Buck, pa SAIC cftrr-ptlny.
~~ YY ~^`
CNGINC_ERS
SFI''F rr~ADEF{ 2f,t/J 2'1
' ,.,i {
~i a'. a r t .,. r 1 _. ~ ,
Payments and Contributions by Public Power Distribution Systems
to State and Local Governments, 2006 Data
Pblic power systems provide a direct
benefit to their communities in the form
of payments and contributions to state
and local government. The total value
of the contributions made by the pub-
licly owned utilities often comes in many
forms and is not always easily recognized.
In addition to payments such as property-
like taxes, payments in lieu of taxes, and
transfers to the general funds, many utili-
ties make other contributions in the form
of free or reduced-cost se»rices to states
and cities. APPA calculated net pa}nnents
and contributions for 382 public power
utilities in the most current data year of
2006 and determined that the median
amount contributed was 5.0 percent of
electric operating revenues.
In 2006, investor-owtred utilities paid a
median of 4.2 percent of electric operating
revenues in taxes and fees to state and local
governments.
It is a common misconception that in-
vestor-o~med utilities provide a benefit
to the local communities by paying taxes
that the publicly owned utilities do not.
This report demonstrates just die opposite.
When all taxes, tax equivalents and other
contributions to state and local government
are considered, the median amount con-
tributed by public power utilities in 2006,
as a percent of elecMc operating revenues,
was 19 percent higher than im~estor-owned
utilities (5.0 percent vs. 42 percent).
(.Overview
Public power utilities provide a direct
benefit to their communities in the form
of payments and contributions to state
and local government. Using the most
recent data (for 2006), APPA calculated
net payrnerfts and contributions for 382
public power utilities for fiscal year 2006
and determined ±hat the median amount
was 5.0 percent of electric operating
revenues. The payments are property-
like taxes, payments in lieu of taxes, and
transfers to the general funds. The con-
tributions are made in the form of free or
reduced cost sen~ces provided to states
and cities.
Many communities are not fully aware
of the payments and total value of con-
tributions made by their publicly owned
electric urility, and some utilities do not
quantify all their payments and contribu-
tions. APPA conducted a detailed survey
of public power utilities .in order to get a
more accurate estimate. The results are
presented in this report, which focuses
on die "rate" and "type" of payments and
contributions made by public power distri-
bution utilities.
The report includes:
• Summaries by revenue size class and
region of the country for both publicly
owned and investor-owned utilities;
• Details on which types of payments
and contributions are most common;
• .A listing of the tj>pical methods used
by utilities to calculate the amount of pay-
ments in lieu of taxes or transfers to the
general fund of die city.
Caution should be used v<~hen mak-
ing direct comparisons ~>ith the pre~~ious
reports (publis.hed biannually bet~~een
TABLE 1
Net Payments and Contributions
as Percent of Electric Operating Revenue, 2006
-Publicly Owned Utilities by Revenue Class-
Number First Third
Revenue of Utilities Median Quartile Quartile
Less than $2 ...... ........... 58.............. ........... 4.1............. ...........1.6............ ...........9.1
$2 - $5 ................ ........... 59.............. ........... 5.3............. ........... 2.6............ ........... 8.7 7
$5 - $10 .............. ........... 51.............. ........... 5.0............. ........... 3.4............ ........... 9.3 i
$10 - $20 ............ ........... 64.............. ........... 5.1 ............. ........... 2.5............ ...........7.1
$20 - $50 ............ ........... 80.............. ........... 4.5............. ...........2.7............ ...........6.0
$50 - $100 .......... ........... 31.............. ........... 4.9............. ........... 2.8............ ........... 6.5 ;.
$100 or more ..... ........... 39.............. ........... 5.6............. ........... 3.1............ ...........6.8 -~
TOTAL 382 5.0 2.6 7.2
Net Payments and Contributions
as Percent of Electric Operating Revenue, 2006
Publicly Owned Utilities by Revenue Class
e.o%
~.o%
s.o%
5.0%
a.o%
3.0%
z.o%
i.o%
o.o%
5.3%
5.6% -
40 American Public Power Association • 2009-10 Annual Directory & Statistical Report www.APPAnetorg
Lessfhan 52 $2-$5 $5-$10 570-$20 $20-$50 $50-$100 $100 or more
Revenue Class (in millions of dollars)
~:
TABLE 2
IUet Payments and Contributions as Percent of Electric Operating
Revenue, 2006
-Publicly Owned Utilities by Region-
Number First Third
Reason of Utilities Median Quartile Quartile
Northeast ................... ........ 40............. .......... 3.1........... ...........1.7........... ........... 6.1
Atlantic ....................... ........ 35............. .......... 5.6........... ........... 2.7........... ..........10.4
East North Central ...... ........ 57............. .......... 2.9........... ........... 2.1 ........... ........... 4.7
East South Central ..... ........44............. .......... 5.8........... ........... 5.5........... ........... 6.7
West North Central.... ..._..114..._ ....... ........... 4.9.......... ...........2.8......._.. ........_. 8.3
West South Central ... ........28 ............. .......... 7.1........... ...........3.2........... ..........12.1
Mountain .................... ........18 ............. .......... 7.2 ........... ........... 3.9 ........... ..........10.7
Pacific Northevest ...... ........32............. .......... 5.3........... ...........3.0........... ........... 6.1
Pacific Southwest ...... ........14............. ..........3.6........... ...........2.5........... ........... 6.8
TOTAL 382 5.0 2.6 7.2
Net Payments and Contributions
as Percent of Electric Operating Revenue, 2006
Publicly Owned Utilities by Region
e
+•
=F
~.
a.o%
i.o%
1992-2004) because the utilities included
in each year's report are not identical.
In addition, in previous reports APPA
included information collected from the
U.S. Energy Administration Administra-
tion's Form EIA-412. However, EIA hers
discontinued that form, so payment and
contribution data are now collected ex-
clusivelyfrom the APPA survey. Thus the
number of public power utilities included
has fallen from 5 i 3 in the 2002 report to
382 in the 2006 report.
II. Payment and Contribution Rates by
Revenue Size Class
Net payments and contributions as a per-
cent of electric operating revenue are
wwwAPPAnet.org
~.t~ ~.zx
_ _..lif
summarized for seven revenue classes.
Medians by revenue class range from
4.1 percent to 5.6 percent, compared to
the national median of 5.0 percent. (see
Table 1).
The median is defined as that value
where 50 percent of the utilities had pay-
ment and contribution rates greater than
the median and 50 percent contributed
less than the median.
Quartiles are another common tool
used in analysis. By definition, one-half
of utilities fall between the first and third
quartiles. For example, 50 percent of the
382 systems in this report made payments
and contributions between 2.6 percent and
72 percent of electric operating revenue.
III. Payment and Contribution Rates
by Region
Regional variations in median net pay-
ments and contributions range from 2.9
percent in the East North Central to r.2
percent in the iYlountain Region. (See
Table 2).
IV. Comparison with Investor-Owned
Utilities (IOUs1
In 2006, investor-owned distribution utili-
ties paid a mediae of 4.2 percent of electric
operating revenues in taxes and fees to
state eurd local govenunents. The 50 per-
cent of utilities in the middle range made
payments r~mging from 3.1 to 5.9 percent.
In comparison, publicly owned distribution
utilities paid a median of 5.0 percent in net
p~vments and contributions as a percent of
electric operating revenue, with a middle
range of 2.6 to r .2 percent.
In this study, most IOUs (91 percent)
had more than $100 million in operating
revenues while most of the publicly owned
systems had less than X100 million (90 per-
cent). The median values of taxes paid by
IOUs and tax pa}nnents and contribution
by publicly owrred systems (as a percen.
age of electric operating revenue) vary by
utility size and are summarized below:
Investor- Publicly
Owned Owned
Large Utilities
(over $100 Millionl........ 4.4% .......5.7%
Small Utilities
(under $100 Million)......3.1 % .......4.9%
The median value for investor-owned
utilities was the largest in the Atlantic <md
West North Central regions, and small-
est in the East South Central and Pacific
Northwest. Table 3 presents data grouped
by geographic region for investor-owned
utilities.
The number of investor-owned utili-
ties has fallen from 144 in the 2000 study
to 122 in the 2006 study. This is primarily
the result of mergers and the elimination
of several utilities in r~Iaine and Texas that
no longer report sales to consumers. Retail
choice laws in those two states change
how utilities account for sales.
American Public Power Association • 2009-10 Annual Directory & Statistical Report 41
Table 3
Net Taxes as Percent of Electric Operating Revenue, 2006
-Investor-Owned Utilities, by Region-
fJumber of First
Region Utilities Median Quartile
Northeast ~ 29 4.3% 2.4%
Atlantic 18 5.3% 4.0%
East North Central 29 3.8% 3.4%
East South Central 8 3.3%
West North Central 12 4.5% 4.1
West South Central 11 3.7% 2.8%
Mountain 1 NA. NA
Pacific Northwest 5 3.6%
Pacific Southwest 7 4.0%
Total 122 4.2% 3.1
° Quutiles not pro~~ded for fewer than 9 responses.
Note: Hawaii is included in the toterls, but not in am• of the reb one
Net Payments and Contributions
as Percent of Electric Operating Revenue, 2006
Investor-Owned Systems by Region
s.o~°
o%
6.g%
5.g%
a.o%
3.g%
z.o°~
t.o%
o.o%
Third
uartile
5.6%
6.9%
6.0%
*
6.0%
5.1
NA
*
5.9%
5.g%
i The 34S utilities received $12.4 million in con-
Yributions and sen~ices from the nnmicipalih~.
This amount does not include any contributions
or services for which the cit}' has been reim-
bursed, either through direct billing or a trans-
fer of fiords. Free or reduced cost office space
and water are the major services provided,
while operations and maintenance: legal ser-
~~ce, information technolobm,~ senrices, engineer-
ing services and financial ser~~ce employees are
the predominant type of employee contribu-
tions received by the utility. The $12.4 mil-
lion in free or reduced cost contributions and
sen~ces pro~~ded by the municipalih to the
utilih is subtracted from the 51,OSS.3 billion
in pa} ments and contributions from the utility
to state and local government. The result is
51,045.9 billion in net payments and contribu-
tions by the 34S utilities in 2006.
V. Summary of Amounts and Types
of Payments & Contributions
The study is based on a survey sent by
APPA to all publicly owned utilities. The
next two sections (sections V and VI) of the
report summarize results for 348 public
power utilities that completed the survey.
(Excluded from the summaries are 34
`Tennessee Valley Authority distribution
utilities, because these utilities' pa}~rnents
and contributions are limited under the
terms of their wholesale power contract
with 'TVA. )
These 348 utilities made a total of just
over $1.0 billion in patinrrents and contribu-
tions to state and local government in 2006.
As shown in Table 4, the overwhelming
majority of pa}~rnents are pa}m~ents in lieu
of taxes (also called transfers to the general
fund). The second largest category is gross
receipts taxes; these taxes are collected by
the utility, included in the utility's operat-
ing revenue and expense accounts, and
remitted to the state or local government.
In some states the gross receipts tax may
be called a public utility tax or privilege tax.
The number of utilities making each
type of pa}>rrient or contribution is detailed
in Table 5.
VI. Methods Used To Determine
Amount of Payments in Lieu of Taxes
Payments in lieu of taxes are gen-
erally thought of as payments to local
government. However, some utilities,
particularly those in Kentucky and ~A~ash-
ington, make payments in lieu of taxes to
the state government.
Table 4
Net Payments & Contributions to State & Local Governments
Amount Percent
Millions of To al
Payments in Lieu of Taxes ................................ ..............$711.5....... .......67.2%
Gross Receipts Tax ............................................ .............. $166.2....... .......15.7%
Other Taxes and Fees ....................................... .............. $126.7....... .......12.0%
Free or Reduced Cost Electric Services ............ ................ $40.7....... .........3.8%
Use of Employees ............................................. .................. $5.8....... .........0.5%
Other, including Equipment and Materials ........ .................. $7.4....... .........0.7%
Total $1,058.3 700.0%
Less: Services & Contributions RECEIVED $12.4'
by the Utility FROM the Municipality
Net Payments & Contributions $1,045.9
''
t
42 American Public Power Associati°n ° 2009-10 Annual Directory & Statistical Report www.APPAnet.org
NE Atl ENC ESC WNC WSC Mtn PNW PSW
Region
Of the 348 utilities defined in Section
L', o~.~er "r3 percent (255) made payments
in lieu of taxes (also called transfers to the
general fund), and the median transfer as
a percent of electric operating revenue was
:3.5 percent.
The most common method used to de-
ternune the amount of payments in lieu of
taxes was percent of gross electric operat-
ing revenue, as shown in Table 6.
The category "assessment of electric
utility and city budgets" includes utilities
~; with payments set by the council, mayor,
TABLE 6
Methods Used to Calculate Payments in Lieu of Taxes
Percent Number
of Utilities of Utilities
Percent of Gross Electric Operating Revenue ........... .......... 24%.......... .............62
Flat Amount Paid Annually .......................................... .......... 19%.......... .............49
Properly Tax Equivalent .............................................. .......... 17%.......... .............44
Assessment of Electric Utility and City Budgets ....... .......... 16%.......... .............40
Charge per Kilowatt-hour Sold .................................... ........... 8%........... .............20
Percent of Net Utility Plant in Service ........................ ........... 2%........... ..............6
Percent of Income, (Net, Operating or Total) ............. ........... 2%........... ..............4
Other ........................................................................... .......... 12 % .......... ............. 30
Table 5
Types of Payments & Contributions (2006)
Percentage of Number of
Survey Utilities Utilities
I. Payments & Contributions Provided ......... ...........................
Payments in Lieu of Taxes ........................................ ................73.3% ..... .................255
Taxes and Fees ...................................................... ................51.4% .... .................179
,;
;~
Gross Receipts Tax ....................................................
................23.9% ....
...................83
. State Public Utility Assessments .............................. ................17.2% .... ...................60
.; .
ti ' Franchise Fees ........................................................... ................13.8% .... ...................48
,~ Property Taxes ........................................................... ................11.5% .... ...................40
Other .......................................................................... ................11.2% .... ...................39
:,
Free ar Reduced Cost Electric Service .........
................45.4% ....
.................158
Streetlighting .............................................................. ................35.6% .... .................124
Lighting for Municipal Buildings ................................. ................24.1 % ... ....................84
•; Recreational Facilities ...._ .......................................... ................18.7% ... ....................65
`; ' Water or Sewer Treatment Facilities ........................ ................13.5% ... ....................47
Traffic Signals ............................................................ .................11.8% ... ....................41
`a
: Water Pumping ......................................................... .................10.9% ... ....................38
,
,
°_
Other .........................................................................
.................14.4% ...
....................50
Use of Employees ............................................... .................63.5% ... ..................221
Installation of Temporary Lighting ............................ ................ 42.0% ... ..................146
Putting Up City Signs & Banners .............................. .................41.4% ... ..................144
~' Electrical Repair for Other Departments .................. .................27.0% ... ....................94
Traffic Signal Maintenance ....................................... .................24.4% ... ....................85
;; Tree Trimming for Other Departments .................... .................20.7% ... ....................72
'~ Non-Utility Locates .................................................... .................11.5% ... ....................40
~~. Technical Expertise ................................................... .................10.1 % ... ....................35
~' Rewiring Municipal Buildings ................................... .................t..5.7% ... ....................20
;' Reading Water Meters ............................................. .................11.2% ... ....................39
Other Services .......................................................... .................11.8% ... ....................43
Other Resources ..................................................... .................40.4% ... ..................141
Use of Vehicles & Equipment ................................. ..................31.2% .. ...................109
:..
.: Use of Materials & Supplies .................................... ..................15.8% .. .....................55
~: Other ........................................................................ ..................11.8% .. .....................41
,,
II. Services & Contributions RECEIVED ...............
..................25.6% ..
.....................89
Use of Employees ................................................... ..................14.4% .. .....................50
';~' Free or Reduced Cost Service ................................. ..................12.9% .. .....................45
. Use of Vehicles & Equipment ................................. ..................12.1 % .. .....................42
r
`~' Use of Materials &Supplies .................................... ....................6.3% .. .....................22
www.APPAnetorg
or commission, and utilities that make pay-
ments on an as-needed basis. The most
common responses in the "other'' cate-
gory are utilities with payments based on
more than one criterion. Tennessee Val-
ley Authority distribution utilities are not
included in die data above. State law deter-
mines payments in lieu of taxes for utilities
in Tennessee. The calculation is composed
of two parts: (1) percentage of three-year
average operating revenue less power cost,
and (2) properly tax rate applied to net u'
ity plant.
REGIONS The regions specihed in this report are
defined below: Hawau:is~ not included in any of the
.nine regions, but is included in national totalsand in
summaries by revenue class:
Northeast Connecticut, Maine, Massachusetts,
New.Hampshire; New Jersey, New York, Pennsylva'
nia, Rhodelsland; and Vermont
•Atlantic Washington, D:C., Delaware, Florida,
Georgia, Maryland; N6rth Carolina, South Carolina,
Virginia and WesTVirginia
East North Carrtial Illinois, Indiana, Michigan; Ohio
and Wisconsin
EastSordh Cemral Alabama, Kentucky, Mississippi
and Terxiessee.
WestNorth:Central Iowa, Kansas,.NlinnesotaaMis-
souri, Nebraska, Nbrth~Dakota;and South Dakota
West South,CentraF:Arkansas, Louisiana, Okla-
homa,and Texas
Mountain Colorado, Montana, New Mezico; Utah
.and Wyoming
Pacific Northwest Alaska, Idaho, Oregon; any
Washington
Pacific Southwest Arizona, California and Neyada
American Public Power Association • 2009-10 Annual Directory & Statlstical Report 43
ELK RIVER MUNICIPAL UTILITIES
CONTRIBUTION POLICY TO CITY OF ELK RIVER
The Cash Transfer from Elk River Municipal Utilities to the City of Elk River shall be
three percent (3%) of the revenues generated by Elk River customers. This contribution
level shall be reviewed every five years.
The Elk River Municipal Utilities shall donate all electricity to the City of Elk River for
all facilities not associated with enterprise funds of the City of Elk River. As an example,
this will include buildings such as City Hall, Police and Fire Departments, Library, Park,
Street Department Buildings, street lights, and signal lights, this shall not include such
buildings as Liquor Stores, Wastewater Treatment Plant, or lift stations.
The ERMU's and City of Elk River shares expenses for the Minnesota Municipal
Utilities Association safety compliance program as follows:
a) ERMU shall pay the entire fixed cost charge from MMUA.
b) ERMU and the City of Elk River shall each pay the per employee unit charge
each contribute to the program.
Adopted 12-06-94
Effective 1-1-95
Revised 6-10-08