CITY COUNCIL AGENDA ITEM
ACTION REQUESTED:
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Conduct the first reading of an ordinance amending Title 8 (Public Utilities) Chapter 1 (Electricity) Article C (Electric Service Rates) of the Naperville Municipal Code
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DEPARTMENT: Electric Utility
SUBMITTED BY: Brian Groth, Electric Utility Director
BOARD AND COMMISSION REVIEW:
The Public Utilities Advisory Board (PUAB) reviewed the proposed Electric Utility (Utility) service levels and capital plan at its May 9, 2024, meeting and unanimously approved staff’s recommendations.
The Financial Advisory Board (FAB) reviewed funding recommendations aligned with the PUAB-approved service levels on Sept. 4 and Oct. 28. At the Oct. 28 meeting, the FAB approved a recommendation to adjust electric rates as presented here.
BACKGROUND:
The Utility provides high-quality, reliable electrical service to more than 62,000 residential and commercial customers. Detailed financial planning, including annual budget development and periodic rate studies, is essential to provide continuity of services and sustainable capital investment.
The Utility’s last rate study was conducted in 2021 to address its operational and capital financial needs through 2024 and ensure that each rate class is paying its fair share of overall system costs. In 2021, the City Council approved rate increases that went into effect in January 2022. Additionally, slight adjustments were made to the fixed charge on each customer’s bill; these fixed charges ensure that the utility has a consistent source of revenue to maintain the utility’s operations and infrastructure regardless of fluctuations in the amount of electricity used by customers.
With the Utility now in the final year of the 2021 rate study, staff contracted with Utility Financial Solutions (UFS) to perform a rate study providing an appropriate financial plan for the Utility through 2027.
DISCUSSION:
Study Goals
The primary goals of the 2024 rate study were to stabilize cash reserves in light of declining energy sales while sufficiently funding escalating capital improvement costs.
Since 2021, the Utility’s cash balance has steadily declined due to lower-than-expected energy sales. The decrease in energy sales can be attributed to the general trend in energy efficiency and the move toward self-generating solar energy. Even with the higher-than-average number of electric vehicles owned by Naperville utility customers, the energy utilized to charge these vehicles has not offset the overall decline in energy use.
Although customers use less energy, the demands on Electric’s system remain constant. The Utility must continue to provide reliable service to customers, including investment in infrastructure and emerging technology to operate the utility.
That issue has been exacerbated by supply chain issues and resulting cost escalations that have persisted since the pandemic. Long lead times for critical system components, such as transformers, cables, and switches, have forced the Utility to maintain much higher inventories at far more significant costs. Before 2020, the Utility maintained a warehouse inventory of 12 weeks and now operates a warehouse with three years of material. The Utility relied on its cash reserves to increase these inventory levels and implemented new ways to obtain materials, including refurbishment, which previously did not make financial sense.
Study Recommendations
Through the 2024 rate study, the Electric Utility developed the following recommendations to achieve approved service level and capital improvement goals, maintain compliance with the City’s financial policies, and maintain rate competitiveness in the residential and commercial spaces.
1. Implement staff-recommendation rate increases across all customer classes in alignment with service-level and capital improvement program goals.
The attached schedule of rates and charges will provide sufficient revenues in the study years to address anticipated operating expenses and the staff-recommended capital program. The rate study calls for an average 6.5% rate adjustment in 2025, 5.1% in 2026, and 5.1% in 2027. Rate adjustments would occur on January 1 of each year.
The study also considers a cost-of-service shift to ensure large commercial and primary customers are not subsidizing residential and small commercial customers. The impact on rates by percentage for each class, as recommended, is shown in the table below.
|
Customer Class |
2025 |
2026 |
2027 |
|
Residential |
7.1% |
5.7% |
5.7% |
|
Small Commercial (GS1) |
6.3% |
4.9% |
4.9% |
|
Large Commercial (GS2) |
6.0% |
4.6% |
4.6% |
|
Outdoor Metered Lights (OLR) |
6.4% |
5.0% |
5.0% |
|
Primary - Industrial |
5.7% |
4.3% |
4.3% |
|
Transmission |
5.5% |
4.1% |
4.1% |
The recommended adjustments result in an increase of approximately $8 per month on an average residential bill, defined as a customer who uses 844 kWh of electricity monthly. Naperville would continue to maintain rates lower than ComEd for the foreseeable future, with the average $129.06 monthly residential bill in 2027 lower than the average ComEd bill today.
2. Adjust the monthly customer service charge over three years to better reflect the cost of service.
The utility’s monthly customer charge recovers a portion of the fixed costs of operating the utility. This includes costs such as meter reading, billing, customer service, and a portion of maintenance and operations of the distribution system.
Currently, the Utility’s customer charge for each class is not aligned with the cost of service. To address this issue, the rate study calls for Naperville’s residential monthly customer charge to be increased to recover 36% of the utility’s fixed cost. This percentage remains below the 40% to 60% fixed cost recovery average for U.S. utilities. The recommended monthly customer service charge impact for each class is shown in the table below.
|
Customer Class |
2025 |
2026 |
2027 |
|
Residential |
$19.26 |
$21.52 |
$23.78 |
|
Small Commercial (GS1) |
$37.71 |
$41.77 |
$45.83 |
|
Large Commercial (GS2) |
$110.00 |
$130.00 |
$150.00 |
|
Outdoor Metered Lights (OLR) |
$30.65 |
$30.65 |
$30.65 |
|
Primary - Industrial |
$188.00 |
$196.00 |
$204.00 |
|
Transmission |
$500.00 |
$600.00 |
$700.00 |
3. Increase yearly capital investment to a total average of $30 million annually to maintain current service levels using a blended pay-as-you-go/debt financing model.
Over the next five years, the Utility will undertake numerous capital improvement projects. Capital work would be funded primarily through rates; however, the Utility would issue new debt in 2025 and 2026 totaling $17.5 million to support this work.
Work includes improvements at its Tollway substation necessary to reliably supply energy to downtown Naperville and large customers along I-88. Additionally, the Utility will dedicate more financial resources to replace the growing amount of end-of-life cable installed in the 1980s and 1990s, which were Naperville’s high-growth decades. This work is anticipated to reduce customer outages.
Finally, a budget is included for undergrounding the remaining overhead lines in the Utility. This process would start by undergrounding primary cables in the right of way, benefiting the greatest number of customers, and then, over a decade, beginning to underground primary cables in residential backyards.
4. Maintain the Purchased Power Adjustment (PPA) base rate at $0.0860
Power is a commodity, and power prices fluctuate throughout the day due to many factors. These include supply and demand and the ability of the Utility’s regional transmission organization, PJM, to get power from one area of its territory to another. A PPA is a tool utility use to help ensure that customers are not over or under charged, over time, for the electricity they use. The PPA will recoup or credit the difference in purchased power costs to be revenue-neutral over the three-year rate study.
Staff and the Utility’s rate consultant have analyzed the average energy cost from IMEA over the past three years and recommend that the baseline purchased power cost amount that determines the PPA be kept at $.0860 to be revenue neutral. Residents can expect that power prices will generally be lower in the winter months and higher in the summer months. The Naperville PPA is averaged over six months to help ensure that any swings from month to month are averaged over a period of time.
With the implementation of the above recommendations, the Utility’s projected cash balance at the end of the rate study period is $13.9 million. The analysis completed through the 2024 rate study recommends a minimum reserve requirement of $13.9 million, with a PPA in place.
Public Outreach
The Utility has begun discussing the proposed increases with its top 20 commercial customers. Following ordinance approval, the Utility will work closely with the City’s Communications staff to inform customers of the changes through the Connected resident newsletter, utility bill mailings, and the City’s website.
FISCAL IMPACT:
Under the proposed rates and financial plan, the average residential electric customer bill (someone who uses 844 kWh of electricity per month) will see an approximately $7.92 monthly increase on their bill starting Jan. 1, 2025. Across all rate classes and averaged out, customers will see rate adjustments of 6.5% in 2025, 5.1% in 2026, and 5.1% in 2027.
Naperville would continue to maintain rates lower than ComEd for the foreseeable future, with the average $129.69 monthly residential bill anticipated in 2027 lower than the average ComEd bill today.