Making Electricity Affordable for Customers
• By Jessica C. Lumpkin, Associate Editor
Rate stabilization funds and budget billing programs are two methods utilities use to help customers control costs and keep electricity affordable. Rate stabilization is done on a utility-wide basis and impacts all customers, while budget billing is a program individual customers use to plan for and pay their monthly electric bill.
Utilities set rates to cover their costs, plus a little extra for a reserve fund. Reserves are generally used for unplanned contingencies, such as equipment failures. A rate stabilization fund is an offshoot of a reserve fund, specifically expended to make customer’s bills easier to pay by eliminating wildly fluctuating bills due to changing seasons and extreme weather. The fund would be used, for example, if fuel costs unexpectedly rise, leading to higher customer bills.
Ocala Utility Services (OUS) uses a rate stabilization fund to manage fuel costs. “As the price of fuel fluctuates, we either adjust our utility rates, or we use the rate stabilization fund to keep rates flat,” said Electric Utility Director Michael Poucher, P.E. “City policy requires the fund to have a minimum reserve level of 15 percent of the projected fuel costs, and a maximum of 25 percent to maintain flat rates. We use it periodically throughout the year to bring in revenue to strengthen our fund. We also keep a running spreadsheet to track whether our costs are over or under the target, and typically at the end of the year we are one or the other.” According to Poucher, OUS has been over-collecting the amount needed to maintain the fund, “In response, we have decreased rates and issued refunds.”
OUS also uses a budget billing program as a service to their customers. If a customer is interested in a consistent monthly electric bill, or might have trouble paying a high summer bill, the utility analyzes customer usage over the previous year to determine the average billing rate, and then charges that billing amount every month in the coming year. “We also track over or under-used services,” Poucher said. “At the end of the year, customers have the option to pay for any overages, or roll that amount into a new year. If the customer believes that their usage will be the same for the next year, we adjust the billing, and their bill will either go up or down.”
Many residents and OUS customers are retired, and living on fixed incomes. Because of this, Poucher explained, the budget billing program serves the Ocala community well. “It was very difficult for some of our customers to budget their income with the fluctuation in electrical use, particularly during the summer and winter months where we see higher bills,” said Poucher. “This program is an opportunity for our customers to budget effectively and pay for their electricity throughout the year. Overall, the comments I hear from customers on our budget billing program is that they are pleased because it is beneficial to them.”
“Customers on this program have a better chance to budget their income, and are less likely to fall subject to late payments, missing payments, or having their services cut off,” said Poucher. “This benefits the utility because we can streamline employee resources, staff that would otherwise be sent to disconnect services, or assist customers with late payments. Our greatest benefit, however, is that our customers view the program favorably, and that also translates into positive visibility for OUS and its service to the Ocala community.”
The City of Winter Park uses a rate stabilization fund to minimize the impact of fluctuating fuel costs. “It smooths out the volatility in the fuel cost components of bulk power purchases,” said Director of Communications Clarissa Howard. “The fund, in conjunction with an optional budget billing program for residential customers, smooths out the highs, generally in the summer, and lows of electricity consumption, as well as the cost of fuel used to produce electricity. Our customers can better plan for the costs of their electric bills.”
According to Howard, the City of Winter Park offers residential customers the option to use budget billing as a means to keep their bills relatively static. “The bill amount is based on the previous twelve months of actual bills,” said Howard. In an effort to keep the deferred debit or credit balance from becoming too large, every three months, the amount of the budget bill is adjusted for the previous twelve months, and any cumulative difference between actual charges and the budget bills. This helps avoid a major financial shortfall over a twelve-month period if consumption is high and payments are too low. “We designed our budget billing program as a free service to help the residential customers in our community avoid unpredictable bills, and make balancing their budget a little easier.”
Kissimmee Utility Authority (KUA) uses the Cost of Power Adjustment (COPA) tariff, along with rate stabilization funds. Joe Hostetler, KUA’s vice president of finance & risk management, explained that the utility’s COPA mechanism was developed to adjust for fluctuations in the cost of fuel and purchased power. “A few years ago the price of fuel was fluctuating so fast that we decided it would be easier if we had a self-adjusting mechanism,” said Hostetler. “COPA is a feature that you do not see utilized in every utility.”
The primary benefit of KUA’s fuel adjustment mechanism is to recover fuel and purchase power costs in a timely manner and to avoid the administrative costs and delays associated with frequent public hearings and Florida Public Service Commission (FPSC) approvals. “The COPA is reflected as a $/kWh monthly adjustment to the customer bill for the cost of fuel and purchased power above or below the fuel contained in KUA’s base electric rates,” said Hostetler. “We also determine internally how much money from the rate stabilization fund, if any, that we want to pull down into our COPA to further reduce the bills that go out to the customer.”
To offset any type of future expense—fuel, or non-fuel, KUA’s rate stabilization fund also defers revenues. According to Hostetler, KUA’s philosophy is that during the winter months when the weather is mild, customers aren’t using that much electricity and can opt to transfer any rate stabilization funds. “During the summer heat when their air conditioning is running all day long, and bill is going to be high, customers need it,” said Hostetler.
KUA’s fiscal policy requires a $5 million minimum and a cap equal to 25 percent of the largest annual operating budget. “Historically we have used this fund to decrease the COPA by drawing down funds resulting in a lower cost to our customers,” said Hostetler. A lot of our customers in Kissimmee earn a moderate income, and were really hurt by the recession in 2008. If we did not have this mechanism in place, their summer electric bill might have been more than they could bear.”
In Jacksonville, JEA offers their customers “MyBudget,” a levelized payment plan that evens out customers’ monthly utility bill by taking a rolling average of their last 12 bills. According to Manager of Customer Solutions Brian Pippin, “The rolling average allows our customer’s utility bills to be about the same amount each month, making it easier for them to set their utility budget. MyBudget is a great option for our customers who live on a fixed income, don’t like seasonal bill fluctuations, or want a more predictable utility bill from month-to-month.”
JEA’s MyBudget includes all utility services—electric, water, and sewer, and payments are sent out the same date each month. “Customers should expect their payment to fluctuate slightly from month to month due to the rolling average,” Pippin explained. “Their actual consumption and MyBudget payment will differ. Actual consumption is typically higher than their MyBudget payment in the summer and winter, and typically lower than their payment in the spring and fall.”
While enrolled in JEA’s MyBudget, customers accrue an account balance that represents the difference between their monthly consumption and their MyBudget payment. According to Pippin, “their account balance may be positive or negative, usually dependent on the season and consumption, and will be credited or collected if they should un-enroll from the MyBudget program. It’s best to stay on the JEA MyBudget program for at least one full year so we can use the fall and spring to level out the high usage customers typically experience in the summer and winter.”
Keys Energy Services (KEYS) uses a power cost adjustment fund, rate stabilization fund, and budget billing program to provide its customers with levelized billing. According to Jack Wetzler, assistant general manager and chief financial officer, KEYS estimates its power costs at $80/MWh. “Each month we’re billed by the Florida Municipal Power Agency (FMPA) from the All Requirements Projects (ARP) bill,” said Wetzler. “Whenever our power costs fluctuate, we either have an over-collection, or an under-collection. We track fluctuations on a monthly basis, and try to keep our over or under-collections to a minimum. We also try our best not to change the Power Cost Adjustment (PCA) more than twice in a year so that customers do not have fluctuating bills each month.”
According to Wetzler, if FMPA were to charge more than $80/MWh, KEYS would have to go back to the customers and charge them more. On the other hand, if FMPA were to charge less, they would return it back to customers. As the price of fuel and oil has gone down, KEYS has been over-collecting for a time. “We are now returning these over-collections to our customers with a credit on the bill through the PCA,” said Wetzler. “Currently we are charging $80/MWh—the base rate, and we’re giving them back $24.53 to the PCA credit each month and it’s reducing their bill. We’ve been doing this for the last five or six years because of the lower power costs from FMPA.”
According to Wetzler, in the early 1990s, KEYS used to adjust the fuel adjustment every month. “If one month the oil prices were low and we needed oil, we’d immediately give money back to the customer, lowering their overall bill,” said Wetzler. “The next month, if we needed to buy oil again and it was more expensive than we originally estimated, then we would raise their bill by charging a fuel adjustment.” Irregular billing became a lesson for KEYS to learn and grow from. “At one point in time, staff made a recommendation to the utility board to only adjust the bill twice a year,” said Wetzler. “Today we are helping our customers by providing a consistently levelized bill.”
The purpose of KEYS rate stabilization fund is to disperse a potential rate increase down the line. “Our rate stabilization fund has a $3 million balance that is determined by the utility board,” said Wetzler. “We always budget five years out, and rather than raise our base rate for two years, and then lower our base rate, we’ll borrow from the rate stabilization fund to level out bills or our revenue without needing to ask rate payers to pay more of their bill.”
KEYS does not borrow from their rate stabilization fund very often, they maintain their $3 million balance, Wetzler shared. “We don’t have to raise our customers’ bills to be able to pay our bill,” said Wetzler. “We can borrow, and pay back.” Another residual effect from borrowing from the rate stabilization fund is what KEYS refers to as a “Debt Service Coverage” requirement. According to Wetzler, Debt Service Coverage requires KEYS to have net revenues of 125 percent each year. “If our debt is $10 million, we are required to have net revenues of $12.5 million to clear the debt,” said Wetzler. “The rate stabilization fund counts as revenue, so if we borrow, it is helpful to manage Debt Service Service Coverage requirements, and satisfy our bondholders.”
According to Wetzler, KEYS has implemented a budget billing program since the early 1990s. “I wish that we had more customers on it,” said Wetzler. “Before I got on it, my bill fluctuated from $180 in the winter months, to $350 in the summer months. Right now my bill is around $230 a month, and it doesn’t go up or down too much.” KEYS’ budget billing program operates on a “rolling” twelve months. “We look back at the customer’s consumption for the previous 11 months, add their current consumption, then calculate bills that would be appropriate for those various consumptions,” said Wetzler. “We charge customers the 12-month average.”
“Our customers benefit when we give them several ways to make electricity more affordable,” said Barry Moline, executive director, Florida Municipal Electric Association. “Energy rate stabilization funds, budget billing programs, KUA’s COPA tariff, and power cost adjustment funds are diverse techniques public power utilities use to not only help customers succeed financially, but also benefit their entire communities.”