Greenwood CPW

A regular meeting of the Board of the Greenwood Commissioners of Public Works was held on Thursday, November 9, 2006, at 10:15 a.m., in the Board Room at 121 West Court Avenue, Greenwood, SC.

I. Chairman Hancock called the meeting to order and Commissioner Watts gave the invocation.

II. Chairman Hancock gave the statement of compliance with the notification provision of the Freedom of Information Act.

E. Manager Reeves stated that each of the Commissioners had previously received copies of the rate review. Ms. Sheree Brown with Utility Advisors’ Network presented findings in the rate review for electric, gas, and water. She reminded the Commissioners of a decision a few years ago to have an ongoing update of the cost of service and the rate analyses to address ongoing concerns. Ms. Brown began by stating the purpose of the rate review which was to determine if the CPW’s present rates are sufficient to cover their costs of operating, owning, and maintaining its electric, water, and gas systems; and to determine if they should modify any rate design to more appropriately recover costs and meet market conditions. Ms. Brown stated that they tried to streamline the process and noted that they work with CPW at the time of budget preparation so that they are on the same page with revenues and the purchased power and natural gas projections so that when they do the cost of service, they do not have to redo that effort. She noted that this seems to be working well; they should be able to drop in the 2007 budget and have answers very quickly and go straight into rate design. Ms. Brown explained the method used for evaluation and how test year revenue requirements are developed. She stated that typically it is done by looking at budget and allocation of administrative costs. She added that when CPW does the budget, they have included administrative costs, certain costs that are allocated between the systems, and there are other costs that are considered unallocated. She explained that in developing the test year revenue requirements, they need to allocate those unallocated administrative requirements because they have to be recovered somewhere. She explained how they go through a process to take those unallocated A & G costs and allocate them to the three systems.
Ms. Brown stated that administrative debt service, some capital items, and the transfers to the General Fund are included in the unallocated. Commissioner Monaghan inquired as to whether debt service is allocated, for instance, to the water department. Ms. Brown responded that water debt service would be, but administrative debt service is not. She has to take the administrative debt service and make sure the rates between the three systems are sufficient to recover all of their directly allocated costs, plus the unallocated A & G. Commissioner Monaghan asked if it would be better to allocate all costs in the budget process. Ms. Brown responded that it did not matter as long as it is done in the rates. She stressed the need to be aware that there are always differences between what will be seen on an income statement and what they will use in the development of test year revenue requirements. Those two things are not going to be the same because there are differences. She explained that there is depreciation when doing a net income statement whereas they look at trying to recover debt service and throw in some construction costs because there are certain things that need to be recovered when you go out for financing and would rather recover through revenue. It would show up in the test year revenue requirements but not on an income statement. Ms. Brown continued stating that the biggest part of the budget is purchased power and natural gas cost. By implementing the PGC and the purchased power adjustment clause, most of these costs are a flow through. She noted that there may also be timing differences when what is incurred in gas costs may not be recovered until the following month or so. She stated that it should be on a kind of rolling basis for purposes of developing the base rates because everything in purchased power and natural gas should essentially be a flow through. She noted that to develop the test year revenue requirements, they are trying to isolate that and look at just what is in base rate requirements which would recover the cost of owning and maintaining the systems, or everything you do in order to operate the systems. Commissioner Monaghan referred to past years where there was a problem with the flow through concept and a way was developed to do that monthly. He asked if that had been tested to make sure it is working. Ms. Brown responded that is has been working very well and even at year end, the true-ups have been minimal. Ms. Brown then stated that revenues are calculated and synchronized with the forecast used for purchased power and natural gas. For example, they develop a forecast; every September and October you have load forecast for the electric system due to SCE&G and Duke. They first develop that load forecast; that then gives the retail sales for each class and they can apply loss factors and decide what will be needed in wholesale purchases. Commissioner Monaghan asked for an explanation of load forecast. Ms. Brown responded that they have an historical database that goes back ten years month by month and class by class. They take that and run regression analyses based on what independent variables would affect the sales for the electric system and that would include things such as the weather, some of the economic variables, and historical growth in customers. Then they develop a forecast going forward of what is expected in sales for each month, usually for a 20-year period. Then they isolate that next year and because you have losses on your system, in order to serve those retail sales, you have to find more than what you are selling. Then they have to bump that up for losses and again look at the history. The look at historical losses, what we have to buy for what we sold previously, and what is that differential. They apply a loss factor that gives an idea of what is expected. Commissioner Monaghan asked for an explanation of loss factor. Ms. Brown responded that when you buy power, for example, from SCE&G and it is delivered to Duke, then it goes over Duke’s system and is delivered to the City’s delivery points. Then the City has to take it from their delivery point and send it out to all of the customers. Every step of the way, some of those little electrons are falling all over the place, the same as leaks on the water or gas systems. Commissioner Monaghan noted that in the documents Ms. Brown referred to a test series for year 2007. Ms. Brown clarified that the test year referred to throughout the review is for 2006 in an effort to leave it within the fiscal years. In going through the whole process, they had started to update month by month for the actuals. She stated that they were finding that we would pretty much break even, although at the time they found that the actuals for gas were significantly lower. They then decided to use weather normalized sales. She explained that later they turned around and caught back up, and that is why there are some positive variances. In doing this through the year they found that we were in a pretty good position except in the water system, they started really concentrating on some of the rate design issues. Ms. Brown presented information on the electric system based on projection noting that there was six months actual through June at the time it was done and the rest was forecast per the previous load forecast. Based on that and the budget for 2006, there was a revenue deficiency of only ($165,860), which is considered within the realm of a break even position. However, there were several rate design concerns, typically with the large power rate. She explained that the first concern was that we must be competitive with Duke Power for customers with similar load characteristics because Duke Power has the ability to come in and compete for new load. She noted that one thing hurting CPW there is Duke’s fuel costs have been significantly lower than SCE&G’s over the past couple of years. Even though our rates have been pretty good, there is still the issue with the fuel. Commissioner Watts asked why Duke’s fuel is cheaper. Ms. Brown responded that Duke has a lot of nuclear power and SCE&G has dealt with coal and gas. Ms. Brown then explained another concern which is with the marginal costs of larger customers with good load characteristics, the very attractive customers that almost anyone would want. She stated that the marginal cost of adding one of those customers was greater than the marginal revenue. It makes it difficult to add that load without feeling like we were losing money. Mr. Reeves gave an example naming the Metro plant where we talked about trying to annex. He stated that we would lose money by serving them because the revenue brought in was less than the cost to serve. Ms. Brown continued and stated that is created by a number of factors. The first factor is that historically in order to attract these customers, we had a rate design that allows for a very big discount for the high load factor large customers. The way that the rates are blocked, the first 400 hours use demand which gets one rate; then anything above that gets another rate. If you only had those two blocks, then that would be a very fair rate in that a high load factor customer would get a discount. There is a little bit of problem with how much of a discount, but the other problem is that within that first 400 HUD block, there are four different levels of energy at which the rates keep being reduced. With a large customer with the exact same load factor as a small customer, the large customer simply by size falls into the lower blocks and ends up getting a much bigger discount for their energy. She stated that these are the types of things done historically where we had a different rate design on our wholesale side. Now we have SCE&G whose rate is designed in a way that whatever the actual demand is, the peak demand for the system is established as the peak demand, and then 60% of that is base and 40% is supplemental. Commissioner Monaghan asked if peak demand is for the year. Ms. Brown responded that it is the highest peak you expect to incur on any hour throughout the year. Mr. Reeves added that it occurs at any one moment in the entire year. Ms. Brown continued that when they do their load forecast, they forecast that with the peak day typically in July or August. That information is then given to SCE&G each year and they take 60% for base demand and 40% becomes supplemental. The base demand has a higher rate than supplemental; however, the energy is much cheaper on base. You would rather pay the higher energy for the few hours you do use it. The SCE&G rate is structured by the same concept as if you were buying your own facilities; as if you bought a base load 60% of that peak and you bought a supplemental of 40%. Commissioner Monaghan inquired about the effect on our base rate from the new coal fired plants under construction by SCE&G. Ms. Brown responded it does not now but could if we renegotiate a rate in 2009, and might in terms of their overall fuel cost and whether they would go down or up depending on what their fuel base has been. Mr. Barnett added that they are also looking at nuclear. Ms. Brown continued that in terms of trying to add a larger customer, if you bring in a customer that has 100% load factor, they are using their energy around the clock, in theory you would buy a bigger block of base load power. In reality, you are buying 60% base and 40% supplemental. She stated that in looking at these customers with a stand alone basis with the SCE&G rate, they found a gap between what we were charging at our rate with the big discounts for high load factor and what they would be on the SCE&G rate, so they found we were losing money. Commissioner Monaghan asked for further explanation. Ms. Brown explained that we give a pretty good discount for somebody with a good load factor, particularly a large customer with a good load factor, such as the hospital. Because it is a declining rate structure, first, because they have the high load factor discount because of over 400 hours use demand; second, even within their 400 just because they are big, they fall out of the first 250 and get up to where they get a really low rate even on the first 250. Now we are looking at what it would be if we put them on the SCE&G rate because incrementally we have already bought our SCE&G amount for the year; now we are adding their load to that. In the past, we were looking at putting them on the SCE&G rate. Even if they were 100% load factor customer where if we were to actually go out and buy capacity we would just buy a block of base for them which would be really cheap energy, instead we are buying 60% of the cheap energy and 40% of the more expensive energy just because of the way the SCE&G rate is structured. If you look at it on a stand alone basis and put them on that rate, then we would have had this differential and we are losing money by serving them. You cannot look at it by isolating them on that rate because you have to re-dispatch the whole system. You have all of what we are currently purchasing and have to layer them onto that and see what happens because they are filling in the valley. Commissioner Monaghan asked about the difference on our large power rate now and the SCE&G rate. Ms. Brown responded that the SCE&G rate is what we are going to have to pay to buy the power for them, so we simply said let’s assume that we bought that power at the SCE&G rate for just that one customer, we are comparing the two and saying we are not making money, we are losing money between the two. Commissioner Monaghan stated his understanding with what Ms. Brown said earlier to mean that we would be putting them on the commercial rate. Ms. Brown noted that was not the case; she added that there had been negotiations with SCE&G to get a few discounts, but we are not there yet. Basically, we are comparing our costs against what we are already doing, but you can’t really compare the cost by comparing just their loads on the SCE& G rate. She provided an example of a bunch of residential customers who have a really low load factor and most of the year are not even using up their base component. You bring this customer in, they are going to fill in that valley and use more of that 60%. She stated that in order to see how to modify the rate in order to meet all of these goals, they had to actually show the dispatch of the system. She stated that they went to the hourly loads from SCE&G and dispatched the system before and after the addition of such a customer. Commissioner Monaghan asked what was meant by dispatch. Ms. Brown explained how the SCE&G rate works. Every hour that to the extent that we came up to the base load that was established for the year, for example 50 Megawatts, then every hour up to 50 Megawatts is considered base and every hour above is considered supplemental. In order to see the real impact of this customer, you have to look hour by hour and see that we were at 50, the next 10 that customers puts on is going to be at base, anything above that would be supplemental. Basically, a load profile has to be developed to see the true impact of bringing on such a customer. Ms. Brown continued by explaining that the large power rate is disproportionate and gives disproportionate benefits to large high load factor customers. She noted that we don’t want a significant rate change for any customer, and still want to remain competitive with Duke and start having some marginal revenue when bringing on new customers relative to SCE&G. She explained that the large power class was subdivided into load factor groups so that they could see the difference between their revenues versus revenue requirement on a load factor basis. Also, this large power class has a wide range of customers anywhere from a small 50 KW customer up to 3 MW customer. Commissioner Monaghan asked if once the base rate is exceeded and you are going into the supplemental rate, if that increase in cost is spread out over the whole customer base. Ms. Brown responded that it is once it is put back into the next years cost of service and the rates re-determined. Commissioner Monaghan asked Ms. Brown if she was saying that on a given day where the load from this customer forces the whole system to exceed the base rate and it goes into the supplemental rate at an additional cost, is that additional cost then spread over the whole customer base. The impact of that large customer coming on and exceeding the base rate causes extra cost to the residential customer. Ms. Brown responded that only if it is fuel does it go into the overall bucket and then shared on an ongoing basis. If it is SCE&G’s base rate, that does not go through any true-up. Nothing changes until they redesign a rate. When that occurs there could be benefits by adding this new customer. What they are trying to do is see that they receive incremental benefit immediately. Mr. Barnett noted that if we are not charging that customer anymore if that occurs, whatever the rate that was originally established the fact that they caused us more cost at that time is actually being absorbed by the whole system. That doesn’t really get reflected to that one individual customer at that time, the whole system has to pick up that additional cost. Mr. Reeves added that the other man is subsidizing his load. Mr. Meredith added that it would not happen immediately, but would fall in the next years rate design. Even when that happens, Sheree breaks everything out into different rate classes, so even then you are not really putting it on the residential customers or any other rate class unless we cross subsidize for other reasons. Ms. Brown continued the presentation stating that by dividing the large power class into the load factor groups, there is a database of all of the large power customers subdivided by those with less than 35% load factor, from 35 – 60%, and those that are above. The cost of service was reallocated to see which ones were covering their cost of providing service and which were not if there were a rate change. From there, they went into a rate design where they calculated all different types of rate designs to see which ones would meet all of the criteria laid out earlier. Each rate that was calculated was taken back to the customer database and actually applied to each customer to see if the rate would cause too much extreme change for any customer. Commissioner Monaghan stated that he did not understand load factor groups. Ms. Brown explained that if you met a peak of one MegaWatt and used that every hour of the whole year then you would have used it for 8,760 hours, then your load factor would be 100%. To the extent that all of your energy relative to that 100% is 60%, you have a 60% load factor. You are not using that capacity that you required the system to get; you are only using it 60% of the time, so those with a higher load factor are using what they are making CPW buy capacity wise more efficiently. That is why you like high load factor customers. They are charging you the same thing in capacity, but they are buying a lot more energy; whereas somebody who hits a one Megawatt peak so they are requiring you to have that capacity but only buying energy 35% of the time, they are not buying enough energy. Commissioner Monaghan requested further explanation. Mr. Reeves explained that basically it is a comparison of what the customer actually uses versus what we have made provisions for them to use. Commissioner Monaghan asked if the load factor is what we are making a provision for them to use. Mr. Reeves responded that if something is made available to you as a customer to use and you only use a percentage of that, then that is your load factor. Commissioner Monaghan expressed his understanding and asked how load factor is subdivided into groups. Ms. Brown responded that it is done by the percentage of their load factor that they use because they have the demand information on each customer in a class, they have the energy information on each customer in a class, they know each customer’s load factor and take that particular class and break it down into those who have bad, medium, and good and reallocate the cost of service with that class broken down. That allows them to see who is really covering their cost under the current rate and who is not. Ms. Brown stated that she can then design the rate to meet the conflicting objectives without having extreme change for any particular customer. She added that they did come up with a workable rate design that at least maximizes all objectives. She stated that because we are in a near breakeven position and because year-to-date actuals indicate sufficient margins to delay implementation of a rate change, they did not want to “pancake” rate changes. Based on discussions it looked like the 2007 budget may be significantly higher than 2006. Commissioner Monaghan asked why the 2007 budget would be higher. Mr. Reeves responded that there were anticipated costs that were thought would end up in 2007 budget that were not faced in 2006, and added that more will be known and presented during the budget work session on December 7. He added that at this point, they will present a balanced budget but it will come with a caveat that we are probably looking at a bond issue to cover some extraordinary costs over the next three to five years. He noted that Ms. Brown was provided information to make her aware that this 2007 budget could be higher. He added that after it was completed, they realized that as long as there is another bond issue, it may not be that much higher. Ms. Brown continued by stating that until the 2007 budget level is known, you would not want to implement anything and then turn around and have a rate change so that you are hitting them twice in a short period of time. You could give someone an increase through the rate design and then turn around in the first quarter of 2007 and hit them again if you decide you need a rate change. Mr. Reeves added that once the budget is finalized, Ms. Brown will compare it against the test year information and see if what is proposed here still makes sense before we have a public hearing and make an announcement. Ms. Brown then reported on the water system rate review findings. She stated that it is the only system where the cost of service analysis indicated a need for an 8.84 % increase in retail rates, and 7.26% in wholesale. She noted an ongoing pattern for years where water has been supported by the other two systems. Although the increase is needed, they are looking at the impact of the 2007 budget. Commissioner Monaghan noted that a lot of complaints are received already on the cost of water. He added that they broke even the past couple of months with water. Ms. Brown stated that there are differences between net income and cost of service; what is seen as positive net income may not be carried over into the 2007 budget. Hopefully, they will be able to hold it down, and if some of the capital items are done through financing, it will change the overall revenue requirement structure. Chairman Hancock commented that water had not operated in the black in the 53 years since he had been at CPW. Ms. Brown stated that it would in 2009 when some of the bond is paid. Mr. Reeves noted a net positive income of $1 million shown in the report back in 1999 -2000. Chairman Hancock noted that when he was elected he tried to get completely away from subsidizing and especially on the electric system because it was all inside. Ms. Brown continued with the presentation by stating that in making the decision with what to do in terms of rates for the water system you may want to look at the anticipated decrease in debt service. Because it is smaller revenues overall, even though water needs an 8% increase that is around $700,000, not quite the same magnitude as with electric and gas. Commissioner Watts asked if the 8.84% increase would be both inside and outside of the city. Ms. Brown responded it would be across the board. She further explained how they also looked at potential revenues from capacity fees. Based on the existing facilities which have excess capacity, the cost would be about $940 per ERU (impact fees). There would probably only be about $200,000 in additional revenue if it were implemented at the $940. That analysis needs to be updated to look at the new capacity items and some financing may be needed since a good portion is for water system improvement. Whether or not these are improvements that qualify to be recovered from capacity fees needs to be examined to see if it should be more than $940 and then implement in conjunction with the rate change. Commissioner Monaghan noted that we do not currently have an impact fee but probably should. Ms. Brown agreed and Mr. Reeves noted that Ms. Brown is saying the level would be at $940. Commissioner Monaghan asked about having two tiers; one tier that pays up front and the other tier of the impact fee would be when they hook up. Ms. Brown noted the difference between charges to hook up and capacity fees. Commissioner Monaghan stated he was not talking about tap fees; he was talking about impact fees. He stated that he read somewhere that there can be a two-tier impact fee. One is paid by the developer to reserve the capacity and another that can come later. He stated that the advantage is that the developer does not have the big impact fee. He noted that the way we are doing it now is not fair in that we are charging current rate payers for future expansion. Ms. Brown noted that it is not fair but noted that it is typical. She added that it could likely be designed with two tiers; the problem to address is the need for a legal opinion before implementation because of court decisions and legislation criteria. One of the concerns has been double dipping. She gave an example where costs are already rolled into base rates and then you charge new customers coming on the $940, but then they come in paying the same base rate, would that then be considered double dipping. She stated that those types of issues would need to be addressed. She expressed a need to look at capital improvement, modify that and determine what kind of cost to add, and it should be reviewed by legal counsel. Chairman Hancock noted that this would mainly become an issue with a very large water customer and then an impact fee would be needed. Ms. Brown then presented an issue for discussion involving inside city rate differential for customers taking only water service. Right now customers inside the City but buying from Duke are basically taking a lot of the benefits away because we have subsidies between the systems. She pointed out a need to look at that because there is justification for some difference. Mr. Reeves added that it could be upwards of 50% higher for those that do not take our electrical service and an 80% surcharge for outside; at least those inside the City that do not take our electricity pay a higher rate. Commissioner Monaghan noted that the rationale is that electricity is supplementing our water costs. Commissioner Watts asked if a legal opinion would be needed and Mr. Reeves responded that it probably would and could be discussed with Mr. Patrick later. Ms. Brown continued with discussion on charging master-metered accounts based on residential units and noted that the wastewater side is doing the same. She noted a concern with the potential to have more administrative problems because there is no way to track the units behind the meter. These potential customers have vacancies and that always changes month to month. She stated they would look at this but pointed out this is not as “clean” as it may seem on the surface. Commissioner Monaghan stated the desire to look into eliminating the minimum volume charge. Ms. Brown responded that if we were to go to this, we would eliminate the minimum charge and get rid of the “freebie” 400. Commissioner Monaghan asked Ms. Brown what was meant by “freebie”. Ms. Brown pointed out that the first 400 cubic feet are free; you have a meter charge and then the first 400 do not have a charge; anything over that is charged for water. Commissioner Monaghan stated his understanding that the customer pays for the first 400. Mr. Reeves responded that it is built into the minimum charge. Ms. Brown stated that you cannot go in then and say that you are going to start charging one meter charge for each residential unit on a master meter without also giving them the “free” 400 for each residential unit. Commissioner Monaghan stated that was also on the sewer side, and then suggested a separate customer class for multi-family apartment complexes. He noted that the meter charge is based on the American Water Works Association number, and that it should be tested against what we actually have. He pointed out that multi-family complexes are on 2-in. meters and we know how many individual REU’s are within that, so simply test that against the American Water Works factor we are using as a basis for any size meter to see if we are within reality. Ms. Brown stated that there would still be inconsistencies within there because there may be one customer on a 2-in. serving twice as many as somebody on a 2-in. meter. Commissioner Monaghan stated that if the average for the actual average REU’s is different from the American Water Works analysis which is the basis used now, then that could be adjusted. Ms. Brown noted the desire to bring all of this back showing exactly that, but also to include the impact of eliminating the 400 on everybody. She added that if you eliminate it, you need to eliminate it on everybody. Commissioner Monaghan stated that he did not understand “free”. He stated that he understood that there is a base charge and we charge for the first 400 cubic feet the same as is done with sewer. Ms. Brown stated that they were not, but proposed doing that. Commissioner Monaghan responded that is what they say they are doing. He then provided an example of a small business with only a bathroom and charged $24 per month for water. There is the basic charge plus the charge for the first 800 cubic feet. Chairman Hancock stated that is not the charge for water but sewer. He added that with water the 400 we give is actually in the first block of water. Commissioner Monaghan stated that they are paying for 400 cubic feet of water whether or not it is used and he stated his belief that this is an inequity. Chairman Hancock stated that if you go back to zero, you pay on the first 100, 200, or 300 cubic feet. Commissioner Monaghan stated concern that there could be a little lady in a mill village who may only use 100 cubic feet who is subsidizing those people who use 500 cubic feet. Ms. Brown responded that would depend on whether the meter charge is sufficient to cover the volume charges of the first 400, or if those volume charges of the first 400 have actually been thrown into the all of those in excess of 400. It could be that everybody else in the system is subsidizing everybody there. Ms. Brown stated that they would be looking into that. Ms. Brown then reported on the gas system review findings. She noted losses were experienced in the early months of 2006 due to weather and the desire to avoid any rate impact going forward by establishing rates based on really low test year usage. She stated that they developed a weather normalized sales forecast and used that to modify the revenues and gas costs in the rates and the cost of service. Based on that it was found to be pretty much break-even on a weather normalized year and was not necessary to have a rate level adjustment. In looking at rate design issues, it was determined that there is excess pipeline transportation capacity. She noted that the question becomes whether to get ride of the excess transportation capacity because it is in excess of what firm customers need and if you don’t have it to serve the interruptible customers, they just get interrupted. Ms. Brown stated that the next question is what amount is fair to allocate for the pipeline transportation cost and noted that about $2.5 million is paid per year. The fact is that once you get this pipeline transportation capacity, you do not want to let it go because it can hurt you to try to get it later. She stated that the best you can do is balance between the two and try to sell the excess at the most profitable margin, which Mr. Lemon has already done. Commissioner Monaghan noted the danger in making it too high because these customers can switch to alternate fuels. Ms. Brown continued with stating that everything charged to these customers is in a variable rate. By having a pure variable rate that includes margins, it sends an inaccurate price signal for fuel switching. For example, all of the cost of the system itself is built into the variable rate but when they want to switch to an alternate source of fuel, they are comparing our rate that includes that to somebody else’s oil cost, or whatever so there is an inaccurate price signal. She noted a concern with permanent switching to electric in order to get Duke’s discounted rates; so moving away from the variable was not taken just yet. She further explained another issue with a distribution only rate that is a way to allow interruptible industrial customers to arrange for delivery of their own gas supply to the City gate instead of purchasing gas from us. In that way, we do not have to worry about pipeline transportation. The main difference between a distribution only rate and an interruptible rate is simply that we don’t have the pipeline transportation charges. Everything in our system is to deliver from the City gate to the customers for whichever type of customer. Commissioner Monaghan asked if the customers would price their own gas and how we would get any money out of it. Mr. Lemon responded that we move it across our system and would release the capacity on a one-year basis, and we charge them for transportation. He provided an example with Fuji whereby should this happen, they would be told that we will release the capacity we had been shipping to on Transco. Commissioner Monaghan asked how we would recover the cost of the gas we buy, plus the factor added for overhead, if they price their own gas. Ms. Brown responded that margin would still be recovered because it is built into the cost to transport on our system. Commissioner Monaghan asked if our markup would also be included. Ms. Brown stated that the markup is basically an amount put on in order to cover our cost of providing that system; instead we would charge them the cost of providing that system. Commissioner Monaghan asked if they are going to pay a supplier directly rather than us and we put our regular markup on that, and if that includes some kind of margin. Mr. Lemon responded that if their delivered cost is $10 of which $9 is gas cost, then $1 is for transportation on our system. When they are using a third party, they are going to deliver gas to CPW’s system. He stated that we don’t care about the cost because in theory, there is still the $1 that will be added. He might have a $9 cost or a $12 cost. Ms. Brown added that with the interruptible rate margin as it is now, that margin is not just a number thrown out or guessed at, because it is used to cover the cost of the distribution system. It is a contribution to that distribution system which lowers the fixed cost for everybody. In the distribution only rate, we would still recover that margin, but it is not a tapped on number, they actually have a share of the distribution system cost. What we are taking as a margin is actually to cover the cost of the distribution system. Commissioner Monaghan asked if some provision is included to allow for a margin after we price the gas and a factor is added. He noted that we do not sell everything at just complete cost without some kind of a margin. Mr. Reeves responded that is covered in whatever margin is determined. Commissioner Monaghan noted that Ms. Brown indicated that she did not agree. Ms. Brown stated that capital cost is put in when designing what we need; when talking margins, we are getting over and above net income because of capital items built into the cost of service. Mr. Lemon added that it is terminology; we recovered our cost in that added factor. Commissioner Monaghan asked if that same amount is then added to gas pricing which includes transportation to the City gate. Mr. Reeves responded that the same factor is added to every decotherm of gas they purchase, we just don’t have to go out and buy it, and they are. Mr. Barnett noted the importance of being aware of the fact that we are not controlling the gas coming over. Commissioner Monaghan asked if the hospital is already doing this. Mr. Lemon responded that no one is yet. He explained how the hospital and three others are using a pricing mechanism whereby they are fixing their price. Instead of taking gas daily average, they chose the option to have part of theirs first of the month index. Commissioner Monaghan asked if they place the order themselves. Mr. Barnett stated that we place the order; they are interruptible but actually for part of their usage, they are fixing that and are committed to that with us. Ms. Brown pointed out that what she reported earlier would be a new rate offering. Mr. Barnett added that we don’t have that type of rate structure now but would like to offer it because some interruptible customers have indicated they would prefer that option. Ms. Brown continued with discussion of the release of excess capacity, noting that had already started in October. She stated that it is not right yet to go to a full fixed variable rate based on the actual allocation of fixed and variable cost. Ms. Brown recommended moving toward the development of a cost-based customer charge for the interruptible industrials. Ms. Brown recommended implementation of a distribution only rate, and added that Mr. Lemon would like to have that go into effect before the first quarter. She added that the 2007 budget should be evaluated before making any other changes. Commissioner Monaghan asked Ms. Brown what was meant by developing a cost-based customer charge. Ms. Brown explained the concern with variable rates sending an inaccurate price signal; there are fixed costs on the system and if a customer decides to switch to an alternate source of fuel, they get to avoid our fixed costs because those are in a variable rate. There is some concern over making that switch because of the permanent switching to Duke. Rather than making that full switch, they at least want to move the fixed cost of the meter to something more market based. She stated that this moves the meter charge from $40 to $440, noting that this is miniscule and still well below competition. Mr. Barnett added that in using Fuji or Solutia as examples, whether they use gas at all each month, we have costs associated with giving them the opportunity to use gas. There is a portion of that cost they are avoiding right now that they should not be including in that decision because we are giving them an opportunity every month to use gas that is a cost to us. If they choose not to use gas at all, they avoid that altogether, yet we still have the cost. We don’t want to put all of that cost out there right away because we do not want them to completely change over to electric, but to begin to move in that direction because there are some fixed costs they should have every month just for having the opportunity to use our system. He stated that moving the meter cost up from $40 to $440 is not a big impact on these customers, but begins to get that idea and rate structure out there. Ms. Brown noted that she would like to see a fixed charge, but until the impact that will have on their decision to switch to Duke is known, we do not want to make that change. Mr. Reeves concluded by recommending they wait and assess the impact of the 2007 budget against the rates, update the rate study, and then come back in the first quarter of 2007 with recommendations. He noted that Mr. Lemon wants something ahead of that; however, that would require a public hearing for just that one bit and that it can probably wait. Commissioner Monaghan stated that he would like to schedule time with staff to go over the review paragraph by paragraph.

1. Manager Reeves informed the Commissioners of meetings with electric power suppliers for both electric and gas on December 5 & 6. He noted that the contract with SCE&G would expire at the end of 2009. He added that SCE&G has promised a proposal on the gas side such that there may not be a need for other proposals.

2. Commissioner Monaghan inquired about the base rate charges for gas, water, and electric for volume and stated his desire to understand the components of that base rate. Ms. Brown referred to the study showing development of the test year requirements and a schedule for electric, water, and gas. She explained that the overall revenue requirement is established by taking the budget based on whichever forecast is used for that budget, plus the revenues associated with that forecast, and the expected purchased power or gas associated with that forecast. Commissioner Monaghan asked if the base rate is in the facilities charge. Ms. Brown responded that in talking about all of the systems together, there are volume charges, availability charges; for example, some customers on electric have a demand rate while others do not. If they have a demand rate, you are recovering more of the fixed charge. She stated that basically facilities charges (meter charges) anything that is customer related is identified that way. They look at total number of customers times twelve bills, then divide that into all of those customer related charges on the system, that gives an idea of what the meter charge should be. Mr. Reeves asked if the meter charge is the basic facilities, everything except the commodity itself. Ms. Brown responded that it is not; customer charges are things that are only incurred on a per customer basis, for example, billing. In looking through each of the cost of services, it shows what is customer, what is demand, and what is energy related or capacity or volume related. She explained that because of the way certain customers are billed on a volume basis, the capacity or volume charges are rolled together into a volumetric rate. Only the customer related costs are rolled into the customer charge or meter charge. Commissioner Monaghan noted that it would be impossibly expensive to put all fixed costs into the meter charge or basic charge. He asked what goes into the basic charge and what goes into the volumetric charge, and how those are determined. He stated that is where there could be some inequities, especially with apartment complexes. Ms. Brown stated there could be with anything in a cost of service, and if you are not establishing them as individual units and having to base it on meter size. She stated that it is a question of whether the meter charge is sufficiently higher for the 2-in. meter than for the other one so that it takes that into account. Mr. Barnett pointed out that with a master metered customer, we are only dealing with that from a billing standpoint and some of those things that go into the customer charge that goes to that facility. You are only dealing with one customer and not having to do 200 bills, read 200 meters, etc.; therefore, you can make an argument both ways. Commissioner Monaghan stated there is more that goes into that basic charge than just reading the meter and that is where the inequity comes from. He expressed the desire is to see how close the American Water Works Association factors are to what our reality is here in Greenwood, and if it is possible to tweak it a little, and to do the same for the sewer side. Ms. Brown responded that she would look at both.

3. Mr. Gentry provided information on advertising and incentives. He noted a change to the previous ads to include what is not included in the incentive. He stated that information on the possibility of the $300 energy tax credit with hot water was also added. Mr. Auman informed the Commissioners that the new website is ready for review and stated that he would send them a link to it. Chairman Hancock commented on hearing something about grants in the Ninety Six area. Mr. Gentry responded that it is mostly resources like land, but he had a call in to find out. Manager Reeves noted that Mr. Auman had received new information from SC.GOV about credit card payments and it looks like it could be resolved within the next couple of weeks.

A motion was made by Commissioner Monaghan, seconded by Commissioner Watts, and unanimously approved to go into Executive Session to discuss legal and contractual matters pertaining to the Grace Street property and a sewer contract for Jim Timms.

Manager Reeves noted that Mr. Patrick was not present for the first part of the meeting due to a conflict earlier in the morning and had asked to be called when they were ready to go into Executive Session. The meeting was recessed briefly for lunch and to allow for Mr. Patrick to attend Executive Session.