COMMISSIONERS OF PUBLIC WORKS
A public hearing and meeting of the Board of the Greenwood Commissioners of Public Works was held on Wednesday, May 4, 2005, at 5:30 p.m., in the board room at 121 West Court Avenue. In attendance: Gene P. Hancock, Steve Reeves , Ron Lemon, Diana West, Michael G. Monaghan, Kenneth Barnett, Scott Banks, General Public II. Chairman Monaghan gave the statement of compliance with the notification provisions of the Freedom of Information Act. Commissioner Hancock gave the invocation. The purpose of the hearing and meeting was to present cost of service and rate study information on proposed rate increases as follows: a 4.65 % base rate for electric plus a fuel adjustment clause; a 19.63% for water; and a 6.68% base rate increase for natural gas amounting to a 1.4% increase to the consumer, including the cost of gas.
Ms. Brown explained the electric cost of service results noting that purchased power costs typically range between 70 – 80% of overall system budget. She further explained that as a result of the competition for wholesale prices in 1997, CPW entered into a power supply contract with Cinergy that enabled a 23% reduction in purchased power cost. The contract offered was a fixed contract over a five-year period and as a result CPW was able to decrease rates by about 10%. In 2001, CPW was faced with going out for a new power supply contract and things had changed substantially at that time because of the impact of September 11 and changes in the market. Cinergy had decided they no longer wanted to go outside of their service area and we were not successful with our negotiations there. We decided to go with SCE&G who provided the lowest cost power supply option, but also gave us some guarantees that allowed some comfort that we would be given credits to match up to the Duke wholesale customers in the event that their cost turned out to be higher. None of the utilities at that time were offering fixed cents per kilowatt rate so you could not bank on a certain level of purchased power cost over your contract period. Instead they were offering a fuel adjustment that any time their fuel cost went up there would be a pure pass through. We entered in with SCE&G and had estimates of what their fuel costs would be. They were heavily coal based and coal was definitely the cheapest at the time so their cost projections were very good for us. Over the past few years, things in the energy market have gone a little crazy with fuel costs rising on all fronts, and there has been a substantial cost increase associated with the SCE&G contract. These are costs we would have probably experienced under any of the other contracts and SCE&G’s offer would still be less than the other offers we received because they were based on pure gas contracts and incremental fuel costs as opposed to average system. In looking at purchased power cost for 2005, total purchased power cost are $14.5 million, which is about 83% of overall budget costs for the electric system. Of that, $6.6 million is fuel related so 45% of purchased power cost is fuel related. Back when we negotiated the contract, we expected $0.017 per kWh on fuel cost. That has risen to an increase on an annual basis of about $1.6 million over what was anticipated in 2001. There has been a 32% increase in fuel cost which is a 12% overall increase in purchased power cost. Ms. Brown then explained that on the gas side we are looking at about a 6.68% increase that is mostly inflationary effects. The gas system also has a fuel component that ranges about 84% of the overall cost of the budget and is based on actual fuel costs. Ms. Brown explained that the water system needs about $1.5 million and has represented an interesting position for CPW several years. She stated that there have been losses in the water system every year for the last five years, mostly created because of high capital costs, capital expansion necessary because of anticipated customer growth and capital improvements that have to be done because of environmental issues. In looking at the overall debt service of CPW of about $4.3 million, of that, the water system is $3.4 million. The increase there is heavily related to making that system self-sustaining and having it cover the costs associated with capital improvements to keep it up. The water system has also had a significant impact due to the loss of some large customers, the most recent being Sara Lee (National Textiles), who was contributing about 7% to the fixed costs. Unlike the gas and electric systems, there is no fuel component. These costs are overall fixed costs to the extent that if you do not have customer growth or lose customers, you have to take those fixed costs and cover them over a smaller customer base. Ms. Brown presented electric rate design issues and explained that total revenue requirements for electric and each of the costs is allocated based on a cost causative nature. She explained the five basic customer classes: residential, commercial non-demand, commercial demand, larger power, security lighting which is spread among the other classes, and CPW and Municipal that are served under the same rates as commercial non-demand, commercial demand, or large power depending on usage characteristics. She showed how these costs are allocated and compared to expected revenue under the present rates, and the overall increase required for each different class. She stated they tested the original level of fuel expected under the SCE&G and how much of that was causing the cost increase. The increase was removed from there and put into the purchased power adjustment clause. The CPW has a purchased power adjustment clause but does not always use it to take those costs and pass them through to customers, but it is existing and could be used. She explained how fuel by nature is going to be volatile and if base rates are increased to the magnitude of the total percent increase and then fuel costs increase trends reverse, then CPW would be collecting money it would not really need. By putting it into the purchased power adjustment clause, it allows CPW to cover costs or give back the revenues based on fuel costs. Ms. Brown stated that in this analysis, they looked at what would happen with the base rate increase alone if fuel was left at what was originally anticipated and instead moved fuel into fuel adjustment, showing you still have the overall percent increase; however, the base rates would be limited to allow the rest to flow through the purchased power adjustment clause so that if reductions are realized, they would be passed through to consumers. Ms. Brown stated that after looking at the cost of service analysis and determining actual cost of providing service, they then have to balance with how rates compare to others competitively. She stated there is some competition due to a South Carolina law that allows Duke Power to compete for new load that comes into the City. Whenever new load comes in, we do have to compete. She emphasized the importance of trying to compete and win those new customers because although there is a certain level of fixed cost, to the extent we can bring new customers on, we can spread fixed costs over more customers. Overall rate structure is compared to Duke and to what is happening in cost of service study to see where there can be rate adjustments and where adjustments need to be made to stay competitive. Present residential rates are substantially lower than the Duke RS rates, or those rates that are for most customers, the standard rate. Duke has a menu of residential service options; one is the Duke RE (all-electric) rate. The present rates are much lower than the RE rate but is much closer together than the RS rates so that competes with new competition for residential development. The required increase will bring CPW much closer to Duke rates, and particularly to the all-electric rates. The commercial no-demand customers are customers that are small shops that are lower loads than most other commercials and these are not demand metered. The present rates are significantly lower than Duke Schedule G; the average usage for that class, CPW is about 58% below Duke. That class needed a hefty rate increase for the cost of service and also had room to move relative to Duke. The commercial demand class was the opposite and the only class without a significant differential from the applicable Duke rates and was almost a break even between Duke and CPW at average usage for that class. For large commercial, the CPW present rates are lower than Duke G Schedule at all levels but higher than Duke OPT, which is their time-of-use rate. This is the rate typically compared when new large commercial customers come into town with the CPW large commercial rate. There was concern because competition for new load is created by Duke’s time-of-use rate and even though it is more expensive than CPW during the four summer months, it is less expensive during the eight winter months. Depending on the characteristics of the particular business, we have lost load to Duke. On the industrial rate, the CPW present rates are lower than Duke’s Schedule I at all levels and as the customer uses more energy for the level of demand they have placed on the system, our differential improves. At the lower load factors, the differential is small enough that it could be eliminated with the required rate increase. We are also looking at an economic development rate that would allow us to compete with Duke’s OPT rate. Ms. Brown then outlined cost of service in conjunction with the rate design issues. She stated that the recommendation is to implement a lower base rate increase in conjunction with the purchased power adjustment clause. The adjustment clause would reflect changes in the SCE&G fuel pass-through costs they are charging the CPW each month. Ms. Brown showed a comparison with present rates versus Duke rates, using the Duke Residential RS, which is the general rate most customers are on and the Residential RE (Duke’s all-electric rate), CPW’s present rate with a customer using 1,000 kWh would spend about $62.06 per month and under Duke’s rates they would spend $79.16 or $65.92. She then stated that there is a huge difference between CPW and Duke on commercial no-demand, there is room to move and still be very competitive. With commercial demand, we are almost breakeven; we are looking at a 14.2% differential and a 16.6% on large power. She stated that if a full cost of service increase were done across-the-board, or the same percentage for all components of the rate, that anyone in the residential class would see an 18.89% no matter what their load characteristics were. If that were done, we would still be less expensive than Duke for the residential customer when comparing them to the Duke RS, but we would become more expensive for residential all-electric by 11%. With commercial no-demand, we would still be almost 30% below Duke; commercial demand would be a little above and large power a little below. She stated the focus has been concern with not having the fuel adjustment roll through the purchased power adjustment clause because of not wanting to see the CPW’s customers have this magnitude of increase without knowing if there is a reversal in the trend they could get the money back. She presented an option showing the same overall increase but calculated and broken down into two components where one component could actually reverse or go either way, resulting in actual fuel costs being passed through. Ms. Brown outlined the gas cost of service done in a similar manner as electric cost of service. She stated that all of the costs of providing service on the gas system are included in this cost, except the actual gas cost which runs through the purchased gas clause. That ranges about 84% of total cost and of the cost of service of $8.7 million, somewhere between $25 - $30 million is gas cost that is passed through. She noted that residential was very close to break even with 1.7%. She stated that when comparing this to your total bill, it is probably somewhere in the 1% – 2% range when gas costs are included because they are such a substantial portion of the overall gas cost of service. Ms. Brown gave an example of residential rate design showing the increase in base rates of 3.75% after adding the gas cost. In looking at the total bill, the increase is only 1.5%. She noted a significant difference when looking at the total bill as opposed to just looking at the base rate increase. While you may be looking at industrial interruptible, it ended up with an increase of 15% on base rates overall and yet the overall increase to the industrial interruptible is only 1.26%., and explained it is because gas is such a huge portion of the overall bill. She moved on to explain how some inappropriate things within the gas rate design were also corrected, such as no service charges under present rates for some of the rate classes. Also, the first 500 cubic ft. for a couple of classes were disproportionately low and there is a higher increase within the first block than other blocks. These were equaled out to make it fairer to all customers. The pipeline transportation cost in the base rates was allocated where historically the pipeline transportation costs were included in the purchased gas clause. She stated that this creates some significant issues on the overall rate design and the way it is accounted for because of how costs are incurred over the year as opposed to the way they were collected. This was moved back into the base rate a couple of years ago and that has been continued. There are some interruptible industrial customers who we do have the ability to interrupt and therefore do not allocate a full share of pipeline transportation costs; we have allocated a small portion of the overall pipeline transportation cost there because they do receive significant benefits from having that transportation capacity. She explained how this is looking at the cost causative nature of the pipeline transportation cost and the distribution cost. With present rates with the purchased gas clause, the residential and firm commercial customers are included in the monthly PGC; firm industrial has been moved into PGC since there is no difference for those customers overall. She stated that there is a new contract with SCE&G that is marketing any excess capacity CPW has on the pipeline and any credits from that would be credited back through the PGC because that was essentially done for the benefit of the firm customers who pick up the majority of those cost. She stated that they will be evaluating transportation rate offerings and could have various levels of transportation rate offerings for the interruptible industrial customers or customers who choose to purchase their own gas elsewhere. Ms. Brown then outlined the water cost of service and a breakdown of the cost causative nature of the costs. She stated the need for an overall $1.5 million rate increase for this group. She broke down the types of cost into customer availability and volume. She added that the loss of Sara Lee (National Textiles) is reflected in the overall revenue requirement. There is a contract with Ware Shoals to provide wholesale water and under that contract their cost has to be cost of service based. There are certain costs to the system that are not attributable to Ware Shoals, for example, the distribution cost within the City are not used for Ware Shoals; therefore, costs had to be allocated between retail and wholesale. In doing that, it was found that wholesale needed a 13.2% increase whereas retail needed 19.63% for an overall 19.51%. Water rate design has several issues that need to be looked at over time. The level of the required increase and the fact that there is a declining block structure were considered. She noted that declining block structure is giving water at a declining rate the more someone uses, which goes a little against conservation goals. The first 400 cubic ft. are provided at no charge and there is an outside city differential for residential and commercial so the adequacy and fairness of those and the implementation of impact fees were revisited. It was decided that based on the overall level of rate increase of 19% to cover cost of providing service, it would not be a good time to make a rate design adjustment. The time to make rate design changes is when there are small increment increases or rate reductions. They will examine impact fees to be provided as revenue credits during any future cost of service study. When new customers come into town, they would pay their fair share of the cost of any capacity needs on the system created by their coming on. Chairman Monaghan asked about rate comparison handouts of how CPW compares with other municipalities and private utilities. Mr. Reeves provided comparisons for water, electric, and gas and additional handouts showing inflationary figures since 1992. Chairman Monaghan opened the floor for public comment. Mr. Charles Helms of 109 Brookhaven Drive stated that he had taken his water bill that is based on the same rate each month and done a comparison. He stated that 18% of his bill relates to water and sewer and that 18% is now going up 19.6%. He stated that when presenting an increase, CPW should have to explain and justify the increase. Ms. Brown responded by first clarifying that CPW does not actually provide the sewer services but does provide the billing. She explained that everything presented was specific to a particular service provided and does not look at the total bill because there is such a variance in customers. Some customers have electric and water and don’t have gas, or some customers have gas but don’t have water because they are outside the system. Mr. Helms stated that it says this rate is on the water but that the water is only a fraction of the combined water and sewer, so when you combine the two it is not just on the water. Chairman Monaghan pointed out that sewer charges are based on volume and not on dollars. Mr. Helms stated that if your amount of water goes up, the collected amount of sewer also goes up. Mr. Barnett stated that if your volume doesn’t change, then the sewer amount will not change. Mr. Helms stated that the water on his bill was $6.55 and the sewer was $15.15 so that can be misleading. Mr. Reeves stated that if his water bill is $6.55 then he is paying the minimum and his bill will now go to $7.84. Mr. Helms stated that he did not have a problem with water but it is tied in to the sewer. Mr. Banks stated that it is only tied in based on consumption and therefore sewer charge would only go up if consumption goes up. Mr. Reeves stated this would not affect sewer at all and reiterated that if his consumption or volume goes up, then the sewer charge would go up. Ms. Brown stated that it is not consumption that is changing, it is the rate. He would still use “x” number of gallons of water so the rate to be applied to that will go up for water but not for sewer. Consumption will not change unless you use more water. Mr. Reeves stated that next month if the consumption does not change, his bill will show $7.84 for water and $15.15 for sewer. Mr. Michael Latham of 104 Saddlebrook Lane, representing Greenwood Mills, asked about the electric rate and whether it is going up 32%. Ms. Brown responded that just the fuel cost has increased from the time we negotiated the SCE& G contract in 2001; the estimated fuel costs at that time were about $0.017 per kWh. Those fuel costs since that time have increased 32% and that is a portion of the overall purchased power bill but other costs are also included. Mr. Latham stated that their engineer attended a Duke Power study last week and they are not projecting this kind of fuel increases because they are primarily nuclear. Mr. Reeves stated that Duke is about 70% nuclear generated. Chairman Monaghan added that there is a shortage of coal and the prices have gone up because they are getting more money by shipping it overseas. Mr. Latham stated his main concern was with water from a company standpoint. They have seen gas go from $3 to $8 - $10 per mnbtu and now we are talking about a 20% increase on water. He stated they did not see how they will be able to pass on these increases to customers and any increase will have to come from their bottom line. He added that with the depressed textile industry, they are down to two plants now. Commissioner Hancock stated that has affected CPW, also. If they do not use the utilities, that feeds our rate base here, too, because we have contracted for electric, we are producing water, and have the gas line in place to provide everything. If we don’t have the customers on the system, it impacts us as well. We get hurt by those we have already lost and any others that we may lose like Greenwood Mills. Mr. Latham asked about the primary cost in water. Ms. Brown stated it is in capital, the water treatment plant, and keeping up with environmental regulations and issues. Mr. Latham stated he did not see how we will justify passing this on to other customers when we lose customers because of the fixed cost in there. Mr. Reeves stated we are faced with nearly $3 million in capital expenditures at the water treatment plant just to stay within regulatory requirements. He pointed out that CPW has not had a water rate increase since 1998. Before we learned of the closing of National Textiles, we were not looking at a 19% increase but closer to a 10% - 12% increase. If you figure that over the seven-year period since the last rate increase, it comes to around 1.5% per year, which is not a bad inflationary cost. He pointed out that chemical prices have increased, as well as cost of insurance, and fuel cost; we face the same things you as an industry face. Mr. Reeves stated that we are paying more for natural gas today than this past winter and there is no explanation. We are paying at least triple what we were paying in late 1999 on the wholesale market. Mr. Latham asked about the $3 million in capital projects and whether they are done in one year or done like depreciation and spread over the years. Mr. Reeves stated the payments are spread out through a bond issue. Chairman Monaghan added that since 9/11 there is a national security mandate to protect the water plant. Mr. Reeves stated that we were mandated to go through a Vulnerability Assessment of the water treatment facilities. That assessment has been completed and a good portion of the $3 million bond issue will fund upgrades and changes just to meet those requirements to make the water plant more secure. Mr. Helms stated that the amount of increase in the Medicare deduction from Social Security since 2000 is 86%. He asked whether CPW’s insurance contribution had increased 86% over five years. Mr. Reeves stated that CPW is self-insured and our insurance cost has increased 50% in the last five years. Chairman Monaghan stated that legally we can pass the cost of wholesale gas on to our customers. He went on to explain how we are trying all kinds of devices in an effort to buy gas economically. We are buying forward in the summer for winter, we have storage and we are trying to hedge our gas on the market, and all of this is done to minimize the impact on the local consumers. Mr. Reeves pointed out that other utility systems have not necessarily met the regulatory requirements. He stated that he had recently read an article in The Greenville News about other water systems who are being cited and penalized by DHEC because they have not kept up with requirements. Our water treatment plant ranks annually at the top of the chart in meeting all the standards imposed upon us. DHEC comes in and does sanitary surveys annually and complements us on the effectiveness of what we have done. We have won national awards for our water treatment facilities. Mr. Reeves stated that we are out to protect the consumer and assure that they get the best product for their dollar. He stated that Fuji is a perfect example and water quality is one of the reasons they are in Greenwood. When Monsanto first came here, one of the main attractions was the water and the water quality. Mr. Jim Barton with Fuji stated that they consider CPW to be a great partner. He stated they enjoy the reliability, support, and appreciate having a good quality product. He stated he heard some things today that he liked to hear such as cost causative nature. That is important to them when working on rates, you want to drive down to what the actual cause of the cost is and that is what they like to see. Load factor is another thing they consider important, and the transportation rate is also a big deal and so is declining block structure. He stated that a 15% gas increase and a 19% water increase is not exactly what they want to hear and they would look at that real close to try to find ways to get out of that. He commented on the water rate being driven by capital largely and asked how that would be prorated out. Mr. Reeves pointed out that the 15% gas is a base rate, but the overall effect to industrial customers will be 1.26%. Ms. Brown stated that capital related cost which would include debt service and capital construction is 43%. With water, almost 100% of costs are really fixed and not something where we have variable cost that is commodity related as with gas and electric. Mr. Mike Kernells of 6201 Highway 25 North asked about city cost and out of city cost for water, and out of county cost. He asked whether they pay more for gas going up Hwy. 252. Chairman Monaghan responded that only with water do they pay more than in the City. Mr. Kernells stated he was against the water rate increase. He noted that the water main breaks a lot along where he lives between National Textiles and Ware Shoals. He stated that every time the water line breaks and is down for a couple of hours, he has to replace a $40 valve in his icemaker. Chairman Hancock stated that he is getting a stoppage, the waters gets stirred up and trash gets in, no water is getting in there and it burns out. He told Mr. Kernells that he needed a new filter. Mr. Kernells asked if they could be notified when the water will be cut off and Mr. Banks stated that normally we do notify those customers. Mr. Banks also stated that once the water is turned back on, something is stirred up in the line. Mr. Banks stated they can try to go a little further each direction from where the water is cut off to flush the line. Mr. Kernells stated that no one had told him about the filter before and thanked Commissioner Hancock. Mr. Kernells said that someone from Ware Shoals complained to him that their water was discolored. Mr. Reeves responded that Ware Shoals has not done any distribution maintenance in years. They have talked with CPW about the possibility of taking their water system over and we told them of a number of improvements that would have to be made. Mr. Kernells stated that he had talked with someone on Circle Street in Ware Shoals who has to buy water from Wal-Mart for drinking. Mr. Latham asked about the water rate increase at Saddle Hill and Mr. Reeves responded it would still be 19.63%. Mr. Barry Boggerro of 205 Penn Avenue asked whether the rates would lower when the $3 million bond is retired, or will there be something else to raise them up. Commissioner Hancock stated that if the state does not require us to do anything else, according to what Mr. Reeves has told him, we should make a profit in water in 2009. Mr. Boggerro asked why the residential and small businesses are carrying the brunt of the increase. Ms. Brown stated that with the electric, if you look at the overall cost of providing service, what actually causes the cost, a residential customer uses power in a manner that is a lot less efficient than someone using power around the clock, for example, Fuji. If you have a certain amount that you are reaching at the maximum hour that you are putting energy on the system, you go home and turn on the air conditioner, all the lights, hot water heater, and that is happening at 5:00 p.m.,. but during the day you are not using much power at all. SCE&G has to provide a lower capacity which is in their coal units to meet your need at the time when you turn it all on. Yet, you are not buying enough kWh over the entire day, whereas, a customer like Fuji might have a very high load factor. For that same amount of load capacity they have to buy for them, they are buying energy for 24 hours a day and what happens is we have certain capacity costs we are having to pay in our purchased power that is not actually disproportionate but causes you to have to take more capacity in order to serve your energy needs. When industrial utilities design their rates, they look at this for their cost of service to recognize the cost you are actually putting on the system as a residential customer. Mr. Reeves stated that for what you pay versus what an industrial customer pays, it costs us more proportionately to serve you than to serve them. Mr. Boggero asked if rates would come down if fuel costs come down. Mr. Reeves stated that the base rate would not come down, but the fuel portion will be passed back to the customer, the same as with gas. Mr. Boggero asked if CPW still created their own gas and Commissioner Hancock stated that we still have a propane air plant for peaking purposes. Mr. Boggero asked if it cost more for CPW to produce it from their plant. Commissioner Hancock stated that it does sometimes like in the dead of winter when you don’t have any more gas or can’t buy any more, you use that plant to peak it off, but we haven’t used that plant in a long time. Mr. Boggero asked if the CPW could be more efficient with costs such as vehicles and using them for personal transportation. Mr. Reeves stated that a lot of our vehicles have been parked; those still being driven back and forth are in emergency services positions where they are called out on the job site at night, and certain supervisors who might need to be available. Mr. Latham asked if CPW had an electric interruptible rate structured like Duke. Mr. Reeves stated that we do not but have talked about implementing one. Chairman Monaghan stated that legally by state law we cannot sell electric outside of the city limits. Duke can serve inside, but we cannot serve outside. Commissioner Hancock stated that the schools are big customers and as they rebuild, they are building outside of the city. CPW is buying up right-of-way to try and retain our market there to keep from driving up cost by losing them as customers. The Commissioners noted that we furnish the City’s utilities and those are not paid by tax dollars. With no further comments from the floor, Chairman Monaghan closed the public hearing. IV. A motion to approve the rate increases to water, gas, and electric as recommended by the consultant was made by Commissioner Hancock, seconded by Commissioner Watts, and unanimously approved, effective with the July 1 billing for June consumption. IV. With no further business, the meeting was adjourned.
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