Date: October 5, 2016 To: Public Works Commission From: Jon Gunnerson, Geothermal Coordinator Subject: Geothermal Rate Structure

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1 Date: October 5, 2016 To: Public Works Commission From: Jon Gunnerson, Geothermal Coordinator Subject: Geothermal Rate Structure Issue During the December 2015 PWC meeting, the Commission directed staff to develop a method for setting geothermal rates independent of gas rates. Background History of Geothermal Rates: The Geothermal Ordinance currently requires staff to review geothermal service rates any time natural gas rates are adjusted. Historically, the geothermal ordinance sets service rates to ensure a 30% energy cost savings over the use of natural gas. In 2009, the Geothermal Ordinance was modified for geothermal rates to be set based on the cost of service, while maintaining at least a 20% savings from natural gas. However, this 20% savings has been difficult to achieve as natural gas rates have been continuously decreasing since this modification. In fact, over the last 8 years, natural gas rates have decreased over 42%, and another 7.11% rate decrease is currently being proposed to the Public Utilities Commission. Natural Gas Comparison: Currently, geothermal rates are 4.2% more expensive than natural gas. However, comparing natural gas and geothermal rates requires many assumptions. One major assumption is the efficiency rate of natural gas boilers. Old, low-efficiency heating systems typically range between 60-70% efficiency. Average heating systems range between 80-85% efficiency, and highefficiency systems range 95% or higher. Basically, a higher efficiency boiler means that more energy is extracted from a unit of natural gas. Currently, we are using a boiler efficiency rate of 80%. Another significant assumption when comparing geothermal and gas rates is the amount of heat removed from the geothermal water. This is commonly referred to as the building s Delta T ( T). We currently set geothermal rates based upon a T of 50 degrees Fahrenheit. A higher or lower T significantly impacts the cost relation compared with natural gas. For example: Currently T = 50º F equates to geothermal costing 4.2% more expensive A T = 56º F would equate equal costs between geothermal and gas A T = 60º F equates to a 4.6% cost savings of geothermal compared to natural gas 1

2 Building efficiency is critical in determining whether or not there is cost savings compared to gas. Also, as technology advances, and as buildings become more energy conscious, it is safe to assume a building s T will continue to increase, on average. Current Geothermal Rates: Geothermal rates were last changed in 2012, and reduced 9% in response to a decrease of Intermountain Gas rates. This latest geothermal rate decrease was also partially in response to a valued building customer who claimed that a savings could be accomplished heating with gas instead of geothermal. Geothermal Rates are currently set at: Administration Fee - $4.00 per account, per month Supply Water - $ per 100 Gallons Collection Water - $ per 100 Gallons (10% rate decrease for LIV District) Collection Water, by Therms - $ per therm (10% rate decrease for LIV District) Options and Recommendation In December 2015, staff and the Public Works Commission (PWC) agreed that due to the uncertainty in the future of natural gas prices, it is in the City s best interest to establish rates independently of prevailing natural gas rates and to set geothermal rates based upon our cost of service. Cost of Service: For the purpose of this assignment, the cost of service is the required revenue needed to operate and maintain the geothermal system, cover capital expenses and fund the administration activities necessary to gather and print monthly bills. The cost of service varies month-to-month and year-to-year as additional buildings and pipelines are added to the system. Staff proposes the cost of service would be recovered with the following billing components: 1. Billing Fee: The monthly Billing Fee is proposed to be applied to all buildings connected onto the geothermal system, regardless if they are currently using any water. The fee covers a portion of the expenses for gathering the meter readings and processing the billing statements. The Administration Fee varies from month-to-month, and ranges from $708 to $1445 per month. This equates to an average of $1076 per month or $11.50 per building per month. Staff recommends keeping the Billing Fee low, currently set at $4 per building, and establish an Administration Fee based upon gallons sold to recover the remaining administration costs. Following this approach, a large building would pay more towards the administration than a small building. 2. Administration Fee: The Administration Fee would recover the unfunded portions of the billing services. The Administration Fee would be included as part of the overall rate charged for each gallon of geothermal water sold. The difference in the revenue received from the Billing Fees and the total administrational costs would be divided by the total gallons expected to be sold; to establish a cost per gallon. 2

3 In this case, keeping the Billing Fee at $4 per building, would equate to a shortfall of approximately $696 per month for administration services. And, expecting to sell an average of 257 MMG, the Administration Fee would equate to $ per 100 gallons. The difference in the revenue received from the Billing Fees and the total administrational costs would be divided by the total gallons expected to be sold; to establish a cost per gallon. In this case, keeping the Billing Fee at $4 per building, would equate to a shortfall of approximately $696 per month for administration services. And, expecting to sell an average of 257 MMG, the Administration Fee would equate to $ per 100 gallons. 3. Operational and Maintenance Fee: O&M costs were evaluated over the past 5 years to recognize behaviors and trends. The following trends were identified: Expenses Increase 1.3% annually Revenue Increase 2.0% annually Additional gallons 11 MMG/year (adjusted to 10 MMG per upcoming Water Right) % Gallons Sold Average of 72% of water pumped is being sold. These trends were then applied to the forthcoming six years, per the budget build process. Therefore, based upon the trended expenses and revenues, as well as the actual percentage of allocated water being sold, an average cost per gallon is calculated at $ /per 100 gallons, using the following equation: Total Expenses = (Supply Gallons)(Rate) + (Collection Gallons)(0.4Rate) Rate = Total Expenses / (Supply Gallons + 0.4Collection Gallons) Rate = $ per gallon (Collection water provides 40% of the energy than Supply Water) WY17 WY18 WY19 WY20 WY21 WY22 Total HR Costs (N.C.) $107,042 $107,042 $107,042 $107,042 $107,042 $107,042 Expenses (AVR % Growth) $455,456 $461,377 $467,375 $473,451 $479,605 $485,840 Total Expense $562,498 $568,419 $574,417 $580,493 $586,647 $592,882 $3,465,356 Gallons allocated 325,000, ,000, ,000, ,000, ,000, ,000,000 Gallons sold (Supply Water) 215,885, ,885, ,848, ,812, ,776, ,740,703 1,394,949,288 Gallons Sold (Collection Water) 17,413,701 17,413,701 18,217,410 19,021,119 19,824,828 20,628, ,519,296 Total Sold 233,298, ,298, ,066, ,833, ,601, ,369,240 1,507,468,584 % collection water 7.46% 7.46% 7.46% 7.46% 7.46% 7.46% % sold of allocation 71.78% 71.78% 71.78% 71.78% 71.78% 71.78% Expenses Supply Water $520,512 $525,991 $531,542 $537,164 $542,859 $548,629 Expenses Collection Water $41,986 $42,427 $42,875 $43,329 $43,788 $44,253 Cost per Gallon (Supply Water) $ $ $ $ $ $ $

4 4. Reliability & Improvement Fee: Based on anticipated capital projects, or reliability improvements to the system, identified for the same period (upcoming 6 years), and dividing by the anticipated total gallons to be sold in the same period, a cost per gallon equated can be calculated. However, the suggested reliability costs vary significantly from year-to-year. Therefore, an average value of $350,000 per year was used. These expenses equate to a Reliability Rate of $0.137 per 100 gallons. Actual CIP Budget R&I Fee WY17 WY18 WY19 WY20 WY21 WY22 Total $160, $150,000 0 $1,800,000 $2.11M $350,000 $350,000 $350,000 $350,000 $350,000 $350,000 $2.10M Therefore, Reliability and Improvement Fee = $2,100,000 / 1,507,468,584 gal = $ per gallon. Summary of Geothermal Rates Keeping the Administration Fee unchanged at $4.00 per building per month, the following rates were derived for supply water: Administration Fee = $ per 100 Gallons O&M Fee = $ per 100 Gallons Reliability & Improvement Fee = $ per 100 Gallons Total Supply Water Rate = $ per 100 Gallons Collection water sales account for approximately 7.5% of the total operating expenses. In addition, a gallon of collection water provides approximately 40% of the energy than a gallon of supply water. Therefore, the Operational Rate and Reliability Rate shall be discounted 40%, while keeping the Administration Rate constant. Administration Fee = $ per 100 Gallons O&M Fee= $ per 100 Gallons Reliability & Improvement Fee = $ per 100 Gallons Total Collection Water Rate = $ per 100 Gallons Proposed Rates: These proposed rates are a 9.5% increase from current geothermal rates. This increase would make the cost of service approximately 14.4% greater than gas, using our standard efficiency assumptions. Geothermal Cash Flow Projection: Under the current geothermal rate structure, there is an obvious shortfall in the cash flow for the current and approved budget build period. Increasing rates 9.5% will addresses this concerns and provides funding for the reliability (capital) improvements. 4

5 Minimum Cash Reserve: A minimum cash reserve is currently not established for the geothermal fund. Because of the unpredictable causes of pipeline failure, staff believes a minimum reserve of 20% of the annual expenses should be maintained. For example, the total expenses budgeted for FY17 are $562,498, and therefore a minimum cash reserve would be established at $112,500. Update/Review Frequency: Currently geothermal rates are reviewed and staff provide a recommendation to Council whenever prevailing prices of gas are changed (Ord C.4). If the geothermal rate structure is directly tied to the Operating costs, the geothermal rates should be reviewed annually. Each year, staff would have the opportunity to review the prior year s expenses, budgeted versus actual, as well as future operating costs, number of buildings connected, anticipated water sales, and other factors that may influence the cost of service. Current Rates Compared to Proposed Rates Current Rates Proposed Rates % Increase Administration Fee $4.00 $4.00 NC Supply Water Rate $ $ % Collection Water Rate (gallons) $ $ % Collection Water Rate (therms) $ $ % 5

6 Suggested Motion I move that the City of Boise establish geothermal rates based on the cost of service, including: 1. Increasing the base rate 9.5%; and increasing supply water rates to a cost of $ per 100 gallons. 2. Analyzing the geothermal rates annually with the budget build process, not to exceed longer than two years. 3. Establish a target of having 20% of the annual expenses as a minimal cash reserve for the geothermal fund. 6