At a recent meeting, Milford City Council learned the results of an electric rate study conducted by Utility Financial Solutions (UFS). Dawn Lund, Vice-President of UFS, provided details on where the city’s electric funds were now and projections for what the funds would like in the future. After Lund’s presentation, council voted to approve a new electric rate ordinance at a slightly higher rate.
“Just a reminder that the electric utility is a self-sustaining bond, it’s an enterprise fund,” Lund said. “It should be funding its expenses, its debt, its capital replacement. So that’s why we look at these things. We make sure we are on track for a long term financial sustainable utility, which of course helps with reliability and capital replacement.”
Lund explained that there are three key areas every municipality should consider when determining if a rate adjustment is necessary. These include debt coverage ratio, adjusted operating income and projected cash balance. The municipality must be sure that cashflow is sufficient from operations to pay any debt service. In reviewing Milford’s cash flow, Lund stated that their debt coverage ratio was good throughout the projection period.
“Next target I look at as adjusted operating income. The reason I’m calling it adjusted operating income here is your audit which actually shows your transfer to the city below the operating income line. So, I have to adjust your operating income to include that transfer as that’s funded through rates,” Lund said. “So our adjusted operating income is projected to be negative throughout the projection period. It’s projected to be a loss. The loss continued to grow without any rate adjustments. And so obviously, that’s one of the targets we’re going to need to turn around in general if we’re trying to target about a million dollar operating income.”
Lund explained that was a function of two things.
“One, I’m trying to fund interest expense on debt since it’s below the operating income line. Two, I’m trying to fund the inflationary increase on the assets I have invested in the system and what do I mean by that?” Lund said. “Let’s pretend I have one asset. And it’s a million dollar asset and I got to replace that in 10 years it’s going to cost me $1.3 million or something more. The $300,000 in my example, is what I’m trying to recoup through that rate of return. You have a very low rate of return of 6.5% projected that we’re trying to meet. Certainly, you’re not meeting it. Now, you’re projected to operate at a loss. We’re just trying to walk you toward a positive operating income with a rate track that I’m going to show you on a target.”
As she continued her review, Lund explained that she wanted the utility to have cash on hand to pay bills and to have purchase power costs. The city’s Power Cost Adjustment (PCA) was excellent which helped mitigate risk to the utility. Milford also has a large percentage of revenues from a much smaller sector of customers which is a risk. After presenting the methods used to determine electric rates in the city, Lund recommended that electric rates increase by 1.2 percent in 2024 which would increase the average residential seeing about a $1.50 rate increase.
Based on the new ordinance passed by council, starting in July 2023, residential service will increase from $19.00 to $21.50 per month and in July 2024, would increase to $21.50. In the third year, July 2025, the rate would grow to $21.75. All other levels of electric user would also increase slightly over the next three years. Council approved the new rates with a vote of 7 to 1 with Councilman Brian Baer the only dissenting vote.
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