RATE SETTING DONE THE RIGHT WAY

North Alabama Public Power Association

Terry Mitchell | Jackson Thornton

DisclaimerThe information contained herein is general in nature and based on authorities that are subject to change. Jackson Thornton guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Jackson Thornton assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein. This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations.

Circular 230 DisclosureThis analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer.

REGULATION OF PUBLIC POWER UTILITIES

• MUNIS• COOPERATIVES

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MUNIS

• BOARDS ARE EITHER ELECTED OR APPROVED BY ELECTED OFFICIALS

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COOPERATIVES

• BOARDS ARE ELECTED ON ROTATING TERMS USUALLY BY DISTRICT

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GOOD OR BAD?

• POLITICS COME INTO PLAY WHEN SETTING RATES

BOARDS SERVE DIFFERENT STAKEHOLDERS

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BOARD

City Government Lenders

Regulatory Agencies

Community

Employees

UtilityCustomer

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BOARD MEMBERS SERVE A FIDUCIARY ROLE

• MUST SERVE THE ROLE OF MANAGING RATES FOR CUSTOMERS

• MUST SERVE THE ROLE OF KEEPING UTILITY FINANCIALLY SELF-SUSTAINABLE

Customer Needs

Financial Needs for Utility

BOARD’S ROLE IN RATE SETTING

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Mission Statement

“Our Utility’s mission is to provide the safest, most reliable and dependable source of energy to our customers at the lowest cost”

Customer Needs

Financial Needs for Utility

BOARD’S ROLE IN RATE SETTING

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Financial needs of the Utility must be driven by financial policies and goals

Annual Revenue Requirements

• O & M (Budget)• Power Cost (Financial/Power

Requirements Forecast)• Debt Service (Loan Covenants)

• Pilot/Capital Credits (Defined) • CIP (Work Plan) **At Least Annual Depreciation

Must develop financial goals and policies

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Financial Policies and Goals

• Set guidelines that help determine revenue needs to make Utility financially self-sustainable (Take emotions out of Process)

• Provide Board and management with boundaries on important issues

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Cont’d

• Helps to minimize politics on setting rates• Reflects financial stability to lenders/bond

holders• Increase credit value• Strengthens role as a valuable asset to

your city/community

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Financial Policies to Consider

• Rate Policies• Financial Planning Policies

– Debt/Margin Policies– Capital Funding Policies– Reserve Funding Policies

• Financial Forecasting

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Rate Policies• Are rates set based on costs-to-serve?• Do you have plans for annual inflationary

increases?– Try to avoid “Rate Shock”

• Time-sensitive rates• Economic development rates• Line extension policy

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Financial Planning Policies• Budgeting Policies• Debt Coverage Requirements• Margin/Equity Requirements• Capital Project Funding• Reserve Requirements• Financial Forecasting

– Rate Stability

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Use annual flow of funds to help guide financial policies

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Why financial goals and policies are required/important

Rate Agency Guidelines• Very strong DSC (Avg. 5 yrs 5.2 times)• Strong cash position• History of taking rate action to meet

financial needs

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Steps To Take• Meet with Board to assist in understanding

and setting financial goals and policies• Set periodic dates to examine goals and

policies to determine their effectiveness• Review your flow of funds statement to

see if the financial goals and policies are meeting the financial needs of your Utility

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Financial goals and policies can:• Provide guides to set the financial needs

(Annual Revenue Requirements) of your Utility

• Minimize the impact of politics on rates• Make your Utility financially self-

sustainable– *Increase credit value

Note: Most important to memorialize the financial goals and policies

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QUESTIONS ???W. Terry Mitchell, Principal

Jackson Thornton Utilities ConsultantsMontgomery, Alabama

334.240.3647

ANSWERS KEYWORDa. Cash flow from investing 297396b. Cash flow from normal operations

297399

c. Cash flow from asset sales 297407

d. Cash flow from financing 297408

Text a KEYWORD to 22333 or Submit responses at PollEv.com

Which is not a major component of the annual cash flow statement?

ANSWERS KEYWORDa. When you build a new substation

297438

b. After an election 297439

c. Annually with inflation 297447

d. When financial policies are going to be violated

297453

Text a KEYWORD to 22333 or Submit responses at PollEv.com

How often should rates be adjusted?