Friday, October 10th– Long-Range Electric Outlook Disappoints Citizens

BERLIN – Berliners were disappointed to hear little this week about reduced electric power rates at the second meeting with Booth and Associates electric consultants, who offered plans for long-term debt reduction and making the utility profitable, but little specific action on high electric bills.

Electric rates could be reduced through a $1.5 million equity investment in paying down power system debts, said Dwight Davis, Vice President of Strategic Planning and Financial Services of Booth and Associates, but power costs are not in town control, being subject instead to the energy market. Energy costs are market driven and the market is up, but rates are expected to drop in November as the market cools.

A power-purchasing contract could level rates, said Davis, by reducing fluctuations in monthly power prices, but at this point it’s not likely to reduce costs by itself.

“The most effective thing we can do in trying to deal with your bills is not just to focus on the rate side,” Davis said.

Recent attempts to gain a power purchasing agreement elicited proposals costing more than Berlin’s average cost over the last few years without a power purchasing agreement.

“We may be able to shop around and do some restructuring and hopefully do better for you,” Davis said.    

The town will receive a new power purchasing agreement for consideration in the near future. Davis cautioned that the practice now is to lock in prices on about half the power purchased, with the rest of the price changing based on a formula.

Berlin also needs to work with townsfolk on reducing power usage, which will reduce electric bills.

While townsfolk were disappointed on rates, Davis did offer plans to improve the utility over the longer term, which will save money over the years ahead.

The town electric utility could be profitable again by 2012, the consultants said this week.

“It will take, I believe, at least three years for all the pieces to fit together,” said Davis.

 Improvements in the electric utility finances and operations are on the slate, although Davis is not recommending pursuit of all requested operations improvements outlined in the first electric meeting at the end of September.

“With the rates where they are we have to take some limitations into consideration,” Davis said.

The current base rate covers operations and administration, a cost of up to $1.5 million per year. The base rate has not been changed since 1999, and Davis would like to keep that rate static for at least another year. Currently, 3.2 cents of that rate go to power costs, with the power cost adjustment (PCA) making up the difference in the cost to buy electricity.    

Berlin has no equity in the electric system. According to Davis, the situation compares to a homeowner who does not pay a down payment and has 100 percent of a house purchase financed. That made sense when Berlin was attempting to sell the plant, but no longer makes sense for an asset to be retained.

At the meeting, Davis said he and his fellow consultants had been startled to hear so much support for selling the Berlin power plant at the first Booth meeting, having predicated their analysis on keeping the town’s generation capability.

According to Davis, the plant could be operated successfully.

“It has a long way to go though. It would be a challenge,” Davis said. “It won’t be easy.”

When asked whether it makes sense for Berlin to continue generating a portion of its power, Davis answered, “Maybe.”

Davis proposed taking $2 million from the town’s $6 million reserves and using $1.5 million to repay some of the utility’s debt, which has limited options in the past. Another $250,000 would be used to take care of outstanding operations needs and $150,000 to fund the power management partnership. The remaining funds could be used as working capital. 

Berlin has adequate reserves after that expenditure, according to the town auditor, Davis said.

“Who in the world is suggesting an equity investment at this time?” asked an audience member. “It seems like you guys are coming up with this game plan in a vacuum.”

Showing no equity on the balance sheet does not work well, Davis said, adding that the best run utilities generally show at least 50 percent equity.

There would be no impact on tax rates from the transfer of funds, interim Mayor Gee Williams said.

The argument for establishing, then retaining, the power plant was to provide competitive electricity rates to customers and to keep taxes down by providing a stream of income from electric revenues, Williams said. Neither of those purposes are being met right now, he said.

“We’re supposed to receive a quarter million dollars from the electric fund. We didn’t receive anything [the last few years],” Williams said.

Electric revenues did not meet budget last year, bringing in just $6.5 million, half a million short of the $7 million budgeted.

Capacity credits save Berlin $700,000 a year, which should increase in the future. However, it costs $900,000 to run the power plant and pay down debt.

Selling the generators would not recover the original purchase price, Davis said, probably garnering just half the money spent, leaving debt to be paid off.

One citizen said that the consultants had promised to present the bottom line on selling the power plant. Davis said that the scope of work Booth was working from asked them to look at the best options for ongoing operations and rates.

Booth and Associates offered a variety of actions toward improving the electric utility’s financial position.

Non-essential debt needs to be deferred, as the town of Berlin chose to do in the case of the failed generator in 2004, which was neither repaired nor replaced to save money, Davis said.

Rates should be sufficient to create a reserve fund for the electric utility, Davis said, particularly as more debt is retired.

Practices at the power plant also need to be reworked to ensure that town of Berlin generation is employed during peak market prices.

“This year not all of those critical hours were hit,” said Davis. “Your strike price is just not a foolproof mechanism for trying to get those hours.”

The consultants are looking into computer systems designed to make those assessments. Booth and Associates will also assist in creating a plan to increase the efficiency of the current generators.

There are also plans in the works to help the power plant staff and townsfolk to identify those peak cost hours to remind people to use less energy at those times.

The state is promoting that kind of practice and the power management program should determine how to make it happen in Berlin, Davis said.

“There’s all kinds of things you can do,” he said.

Minor actions to reduce power lost and recover about 1 to 2 percent of the power purchased will also be undertaken.

A power management partnership, a practice recommended by Maryland Gov. Martin O’Malley’s energy initiatives, to be helmed by the Berlin Utilities Commission (BUC), will work out the most cost effective approaches and find funding sources, for the utility, said Davis.

The BUC will work directly with Booth and Associates, Williams said. The BUC’s first step will be to go over the Booth reports, and members have already decided to double up on meetings, according to Williams.

No decisions have been made on actions to be taken and all options are under consideration, according to Williams.

“We haven’t taken anything off the table,” Williams. “We need to take a very deliberate and businesslike approach in making these critical decisions.”

Williams said the BUC would work at its own pace and that he would not ask them to meet an arbitrary deadline.

“These people want to resolve this problem as fast as anyone else,” he said.