Utility fiscal health studied
by By RICK NORTON Associate Editor
Jan 06, 2014 | 950 views | 0 0 comments | 16 16 recommendations | email to a friend | print
Operating margin erosion, blamed partially on rising materials and equipment costs, has prompted Cleveland Utilities to contract a longtime management consultant who will review the Electric Division’s financial health and conduct a detailed rate analysis.

Chris Mitchell Management Consultants, a financial adviser based in Norris, has already completed part of the overall review requested by Cleveland Utilities, according to Bart Borden, vice president of CU’s Electric Division.

In the opening phase of its work, the firm — which currently provides 47 of 155 TVA power distributors with support in rate development, financial and risk analysis — has confirmed that CU is operating on the most appropriate wholesale power rate with TVA for a utility company of its size and service demand.

“Our present wholesale rates from TVA are based on ‘Time of Use’ and our retail rates are ‘Seasonal Demand and Energy,’ except for our large industrial customers [over 5,000 kilowatts] who can elect either TOU or SDE,” Borden explained.

This means CU, like most other partner distributors who buy electricity from TVA, is making power purchases at wholesale prices then billing individual customers at retail rates. TVA is billing Cleveland Utilities based on Time of Use (TOU), but CU is charging its customers based on Seasonal Demand and Energy (SDE) which is a common practice within the utility industry.

“We wanted confirmation that we are on the correct wholesale rate ... which we did get,” Borden said.

CU representatives met in December with Chris Mitchell who leads the consulting group. Before branching out into his own business, Mitchell worked 20 years for TVA and managed the regional utility’s Risk Management, Economics and Financial Analysis as a vice president.

“In that meeting [in early December], Mitchell did confirm we had made the correct selection to go with wholesale Time of Use rates ... it was the best fit for our load makeup,” Borden explained. “There are very few local power companies that are on Seasonal Demand and Energy [for wholesale purchases]. The vast majority are on Time of Use rates. Evidently, it’s the best fit for most utility companies.”

Time of Use rates vary because they are based on time of day or time of night that electricity purchases are made. Heavy-demand periods, like early morning and late afternoon, are the most expensive. Lesser demand periods, like nighttime and midday, are the least expensive. SDE rates are more traditional and the pricing is more consistent regardless of the time of day and night.

A few years ago, TVA began a campaign to have its power distributors charge customers based on TOU and not SDE, but this initiative has not as yet gained full momentum. This is mostly because customer demand for power over the past few years has not increased as much as originally projected.

One reason for CU’s consultant review is because of the complexities of dealing with the TOU and SDE systems.

Buying power from TVA based on wholesale TOU — and then billing its own customers on retail SDE — is complicated for Cleveland Utilities when developing budgets, Borden explained.

“This difference in billing methods complicates the process in structuring our retail rates to cover our TVA wholesale bill and our Operations, Maintenance and Capital Projects costs,” Borden explained.

The Electric Division leader said the firm’s analysis will include far more than just the review of TVA wholesale TOU and SDE rates, and determining which is the best fit for Cleveland Utilities.

The detailed study also will include a monthly margin analysis (a reference to Electric Division revenue versus operating costs) and will cover several specifics. Some include:

n Power cost recovery analysis;

n Financial forecast and analysis;

n Wholesale rate structure analysis, including two possible billing changes by TVA that are presently under consideration;

n Cost of services study to determine customer classes contribution to the wholesale bill; and

n A written report of recommendations based on analysis findings.

“Chris [Mitchell] has determined he can provide this information prior to our FY15 budget preparations,” Borden said. “This will be very valuable information to couple with our existing financial processes. It will also provide feedback and checks on our present procedures.”

Like most businesses that rely on revenue, and a suitable monthly margin to pay its bills and creditors, Cleveland Utilities is facing higher costs for materials and equipment, Borden noted.

“Our materials costs keep going up ... as well as our trucks, tools, insurance ... inflation continues to go up,” he stressed.

It’s not about making a profit because CU is a nonprofit organization, Borden said. It’s about bringing in enough monthly revenue to pay the utility’s bills. It’s no different than operating a household budget, he suggested. If a household’s income can’t cover the cost of bills and other expenses, then two choices await: either increase the income or decrease the expenses.

Cleveland Utilities faces the same challenge. If expenses can’t be cut enough to allow the utility to pay its creditors or to plan for future growth, then increasing its revenue is the forced alternative.

This is one of the purposes of the Mitchell analysis — to determine if the utility is doing all it can to maintain full solvency without raising electric rates.

The last local rate increase authorized for the CU Electric Division by the Cleveland Board of Public Utilities came about five years ago, sometime around 2008, Borden said. This does not include pass-through TVA rate increases that were handed down to CU’s customers by the local utility.

Although the term “rate analysis” may send chills down CU ratepayers’ spines because it suggests a future rate increase, Borden said this is not necessarily the case. However, he stressed if the consultant’s numbers don’t add up — that is, if CU’s margin erosion can’t be reversed using other options — then an Electric Division rate increase is possible.

“Chris [Mitchell] is looking at our budget numbers for bond issues, project requirements — he is monitoring our financial health as a company,” Borden said. “He will provide us with monthly reporting. We do have concerns about the margin issue and we’ve asked for TVA’s assistance to help us look at that.”

He added, “We felt like we needed [someone] to look at this with us to make sure we have a clear understanding, someone who is purely objective.”

Borden said the Mitchell firm was selected for the exhaustive review because of its experience within the utility industry. The consultant came highly recommended, he added.

“We’re very excited about working with Chris Mitchell because we think he’ll give us a clearer picture of where we need to go with our budget preparations,” Borden said. “He is a very trusted consultant in the Tennessee Valley area.”