FAP Agenda Number 5 & 6.

Transcription

1 FAP Agenda Number 5 & 6. CONTACT: Doug Dunlap Gary Given ddunlap@cap-az.com ggiven@cap-az.com MEETING DATE: April 21, 2016 AGENDA ITEM: Discussion Regarding Water Rates, Taxes and Rate Stabilization Discussion and Consideration of Action to Recommend that the Board Adopt Preliminary Water Rate Schedule LINKAGE TO STRATEGIC PLAN, POLICY, STATUTE OR GUIDING PRINCIPLE: 2016 CAWCD Strategic Plan Finance: Maintaining CAP's Financial Health PREVIOUS BOARD ACTION/ACTIVITY: April 14, 2016 Customer Workshop was held on Preliminary rates March 3, 2016 CAWCD Board meeting the Board discussed a plan to increase strategic reserves February 18, 2016 Finance, Audit and Power Committee meeting the Committee voted to recommend that the Board adopt a plan to increase strategic reserves January 21, 2016 Finance, Audit and Power Committee meeting the Committee discussed the strategic reserve levels and options to address the deficit to target November 5, 2015 The Board approved the Budget ISSUE SUMMARY/DESCRIPTION: As provided in the District s rate setting policy, staff has developed and proposes a preliminary water rate schedule and analysis that identifies firm rates for 2017, provisional rates for 2018 and advisory rates for 2019 through The advisory rates are made available at the request of customers and stakeholders to provide information for longer term planning. The CAWCD policy provides for publication of preliminary rates in March-April, a customer workshop in mid- April, review and development of a recommendation at the April Finance, Audit and Power Committee meeting, adoption of preliminary rates at the May Board meeting and approval of a final water rate schedule in June. The proposed rates are developed as part of a detailed 10-year financial planning model that includes previous work done during the budget cycle. The planning model considers water deliveries, fixed O&M expenses, electricity costs, capital replacements, revenue requirements, property taxes, strategic reserve levels and other concerns or situations that have potential impact on the District.

2 During this planning cycle, Elliot D. Pollack & Company was retained to assist in developing property tax valuation estimates. Based on this work, the financial planning model and the proposed preliminary rates assume that tax rates for the general ad valorem tax and the water storage tax will remain at 10 cents per $100 of assessed valuation and 4-cents per $100 of assessed valuation, respectively. The general ad valorem tax proposal includes 6-cents be made available toward water delivery programs, 1-cent be made available for reserves and 3- cents dedicated to a separate extraordinary cost reserve. In addition, Navigant Consulting was retained to provide an outlook on the power sales market for the rate period. This report shows the market remaining significantly depressed through the rate period. Strategic reserves remain below the established target level of $222 million through the rate period and are estimated to end at $193 million at the end of The reserve forecast anticipates the influx of approximately $10 million per year in back capital charges and interest in , resulting from the allocation of 46,629 AF of Non-Indian Agricultural (NIA) water. Due to the continued threat of shortage as a result of declining levels in Lake Mead, the estimated delivery volumes assume a continuation of mitigation programs of about 200,000 acre-foot per year. Capital Charges Aside from the sale of a portion of Navajo Surplus sold to Salt River Project beginning in 2012, sales of remaining Navajo Surplus are not anticipated to generate net revenues to the Basin Development Fund during this rate cycle. With the proposed capital charges increases, there remains an annual shortfall in the federal repayment after applying the Basin Development Fund net revenues and capital charges revenues against the repayment. This amount is paid out of reserves. To help address this decrease in reserves, staff is proposing to provide 1-cent of the General ad valorem property tax revenues to strategic reserves through reducing the amount dedicated to the Extraordinary Cost reserve to 3-cents from the current 4-cents. The remaining 6-cents going to strategic reserves is consumed by the Ag programs. There will be approximately $30 million of back capital charge revenues in 2017 (accrual basis) from the NIA reallocation of 46,629 acre-feet (plus approximately $20 million in interest). Consequently, reliance on the M&I Capital Charge during this rate cycle to fulfill its sole purpose of contributing to repayment has become more critical. It is proposed that the M&I Capital Charge increase slightly over the rate cycle to decrease further erosion in reserves. Fixed OM&R Costs For 2017, the District s annual Fixed O&M cost is estimated to be $90.3 million and the estimated annual billed volume is approximately 1.53 million acre-feet, which yields a rate component of $59 per acre-foot. In addition, $26 per acre-foot is included in the Fixed OM&R rate to fund capital replacements ( Big R). The rate stabilization rate remains at $2/acre-foot. In total, the proposed Fixed OM&R provisional rate for 2017 of $87 per acre-foot is the same as the advisory rates in the previous rate cycle. For 2018, the District s annual Fixed O&M cost is estimated to be $96.9 million and the estimated annual billed volume is expected to be approximately 1.54, which yields a rate component of $63 per acre-foot. The "Big R" component is proposed at $27 per acre-foot. The rate stabilization rate reduces to $1 per acre-foot. The total proposed Fixed OM&R provisional rate for 2018 is $91 per acre-foot, which is $1 per acre-foot higher than the advisory rate. 2

3 The projected delivery volumes for 2017 and 2018 assume normal conditions on the Colorado River. Energy Costs The costs of generation of NGS are rising primarily as the result of fuel costs, capital expenditures, planned maintenance and certain regulatory costs. The energy cost projections for this rate cycle assume The Working Group (TWG) recommendations are successful and incorporates those conditions, including shutting one unit down by the end of 2019 and compliance with Mercury & Air Toxic Standards (MATS). Coal and lease extensions impact rates significantly beginning in There are no carbon tax, cap-and-trade costs or NOx spending beyond the low-nox burners already installed. There are also no shaping or displacement revenues assumed in the rate period. When the open market cost of power is below NGS variable operating costs, the rates assume some level of curtailment, as allowable, particularly in 2017 and The 2018/2019 balloon payments for the coal and lease extensions are anticipated to be made from the extraordinary cost reserve and are not reimbursed buy rates. The total estimated pumping energy spending is $115.7 million in 2017 and $121.3 million in Total deliveries are estimated to be 1.52 million acre-feet each year, which yields proposed energy rates (Energy Rate 1) of $77 per acre-foot for 2017 and $80 per acre-foot for These rates are $2 per acre-foot less in 2017 and $1 per acre-foot less in 2018 than the advisory rates in the previous rate cycle. These rates include a small NGS decommission component of $0.24 per acre-foot in 2017 and $0.26 per acre-foot in Agricultural Pool Delivery Rates On December 5, 2002, the Board approved the Supplemental Policy for Marketing of Excess Water for Non-Indian Agricultural Use through This policy provided for a single 400,000 acre-foot agricultural pool beginning in The first step-down in the Ag pool occurs in 2017 to 300,000 acre-feet. The pool continues declining to 225,000 acre-feet over time and ending in The delivery rate is the Pumping Energy Rate 1 component. During 2006, 2007 and early 2008, CAWCD held a number of discussions with its Agricultural Pool customers about concerns those customers had about the affordability of Agricultural Pool water priced at Energy Rate 1. For 2008, the Board kept the year-over-year increase in Energy Rate 1 to $1 per acre-foot by applying additional SO 2 credit proceeds, which reduced the rate for all Energy Rate 1 customers. The Board instructed staff to identify other alternatives to keep Ag Pool water affordable in order to take all available water off the Colorado River. In 2009 the Board adopted an Ag Incentive Program that would provide incentives to Agricultural Pool customers that meet their goals for Ag Pool water, Groundwater Savings Facility (GSF) water and the CAP Recovery program. Incentives are earned by meeting goals in each of the three areas outlined above. However, the incentives earned will only be applied to Ag Pool deliveries. The Ag Incentive Program is funded through general ad valorem property taxes (when available) and reserves. When it was originally implemented in 2009, it was anticipated that Ag Pool customers who met all three goals would be able to limit their Ag Pool water rate increases to as little as $2 per acre-foot per year. The $2 per acre-foot per year ceiling achievable by meeting all three goals had been retained through the 2013 set rates. As the costs of power significantly increased beginning in mid-2012, staff engaged the Board in discussions on the energy related 3

4 components for years 2012 and 2013 and that there would be a large reconciliation required. Consequently, after several meetings and engaging customers and Board members, the Board adopted revised rates for 2014 and modified the Ag incentive Program to allow increases at $4/year. The proposed rates keep the $4 per acre-foot per year ceiling for Ag Pool participants who meet all three goals. The proposed incentives are shown below. $/af Firm Provisnl Advisory Advisory Advisory Advisory Ag Pool Incentive ($12) ($11) ($9) ($24) ($34) ($29) GSF Incentive (2) (2) (2) (2) (2) (2) Recovery Incentive (2) (2) (2) (2) (2) (2) Full Incentive ($16) ($15) ($13) ($28) ($38) ($33) Net Ag Energy Rate 1 $61 $65 $69 $73 $77 $81 In addition, through an agreement with CAWCD, certain customers have opted to forego their Ag settlement pool water in This program is currently known as the Ag Forbearance 3 program. The proposed rates assume the continuation of this program of approximately 43,000 acre-feet, consequently decreasing the Ag settlement pool by this amount. Underground Storage O&M Under the policy adopted by the Board in 2003, Underground Storage O&M rates are calculated annually using a 10-year look-ahead forecast of costs by AMA. This methodology is intended to smooth Underground Storage O&M rates, which otherwise might fluctuate considerably since costs are fairly fixed, but volumes can change significantly from year to year. The proposed Underground Storage O&M rates are $12 per acre-foot for the Phoenix AMA in 2017, $13 per acre-foot in Proposed Underground Storage O&M rates for the Tucson AMA for the entire rate-setting period is $15 per acre-foot. Underground Storage Capital Charges An Underground Water Storage capital charge is paid by all direct recharge customers except AWBA for M&I firming, the CAGRD, municipal providers within the CAP service area and coowners of CAWCD recharge facilities using no more than their share of capacity. The proposed Underground Water Storage Capital Charge is $15 per acre-foot for the Phoenix AMA and $9 per acre-foot for the Tucson AMA for the entire rate-setting period. The proposed Preliminary Water Rate Schedule is attached for additional detail. SUGGESTED MOTION: I move that the Finance, Audit and Power Committee recommend that the Board approve the Preliminary Water Rate Schedule. Attachment. 4

5 CENTRAL ARIZONA PROJECT PRELIMINARY RATE SCHEDULE Preliminary April 6, 2016 Municipal and Industrial Long Term Subcontract (B+C) 1 $ 161 $ 164 $ 171 $ 178 $ 203 $ 221 $ 227 Non-Subcontract (A+B+C) Recharge (A+B+C) Federal (B+C) 4 $ 161 $ 164 $ 171 $ 178 $ 203 $ 221 $ 227 Agricultural Settlement Pool (C) 5 $ 76 $ 77 $ 80 $ 82 $ 101 $ 115 $ 114 Agricultural Incentives 5 Meet Settlement Pool Goals (15) (12) (11) (9) (24) (34) (29) Meet AWBA/CAGRD GSF Goals (2) (2) (2) (2) (2) (2) (2) Meet Recovery Goals (2) (2) (2) (2) (2) (2) (2) Capital Charges DELIVERY RATES FOR VARIOUS CLASSES OF WATER SERVICE Units = $/ acre-foot RATE COMPONENTS (A) Municipal and Industrial - Long Term Subcontract 6 $ 23 $ 25 $ 27 $ 29 $ 30 $ 30 $ 30 Delivery Charges Fixed O&M Big "R" Fixed OM&R Rate Stabilization (B) Fixed OM&R 8 $ 85 $ 87 $ 91 $ 96 $ 102 $ 106 $ 113 (C) Pumping Energy Rate DIRECT UNDERGROUND WATER STORAGE (The Letter Designations in the Formulas Refer to the Rate Components Shown Below) Provi- Firm sional Advisory Units = $/acre-foot Provi- Firm sional Advisory Units = $/acre-foot Provi- Firm sional Advisory Underground Water Storage O&M 10 Phoenix AMA $ 10 $ 12 $ 13 $ 14 $ 15 $ 16 $ 16 Tucson AMA Underground Water Storage Capital Charge 11 Phoenix AMA $ 15 $ 15 $ 15 $ 15 $ 15 $ 15 $ 15 Tucson AMA Page 1 of 2

6 CENTRAL ARIZONA PROJECT PRELIMINARY RATE SCHEDULE Preliminary April 6, 2016 NOTES: 1) Long Term Municipal and Industrial (M&I) Subcontract include those users that hold a M&I subcontract. 2) Non Subcontract includes M&I users that are taking water under an agreement other than a subcontract and may also be referred to as "Excess" water. It is administered according to CAP's Access to Excess policy. 3) Recharge includes the Arizona Water Banking Authority, CAGRD, BOR and M&I subcontract holders and other Arizona entities who have valid Arizona Department of Water Resources water storage permits and accrue long term storage credits. It is administered according to CAP's Access to Excess policy. 4) Federal water may also be referred to as "Indian" water. 5) Rate is the Pumping Energy Rate 1 component. Incentives may be earned for meeting delivery goals in three areas. Any incentives earned are applied to Settlement Pool deliveries. 6) For M&I subcontract water, the Capital Charge is paid on full allocation regardless of amount delivered and not included in delivery rates. 7) Fixed OM&R charge consists of Fixed O&M, "Big R" (Water delivery capital, large extraordinary maintenance projects and bond debt service) and Fixed OM&R Rate Stabilization. Debt service on CAP's Water Delivery O&M Revenue Bonds, Series 2016 is about $3.6 million annually and is included in "Big R". 8) This rate is collected on all ordered water whether delivered or not. 9) The energy rate applies to all actual water volumes as opposed to scheduled. 10) Underground Water Storage O&M is paid by all direct recharge customers using CAP recharge sites. 11) Underground Water Storage Capital Charge is paid by all direct recharge customers except AWBA for M&I firming, the CAGRD, municipal providers within the CAP service area and co owners of CAWCD recharge facilities using no more than their share of capacity. Page 2 of 2

7 FAP Agenda Number 5 & 6. Proposed CAWCD Rates April 21, 2016 Finance, Audit and Power Committee Doug Dunlap, Finance and Accounting Manager Gary Given, Sr. Business Analyst CAP s Two-Year Financial Planning Cycle Even years Long-range financial plan Set water rates Strategic plan Reserve strategy review Budget update (if required) Odd years 2-year Budget and Business Plan (e.g ) Water rate update (if required) Every year Quarterly financial reviews Set tax rates 2 1

8 General Fund Sources and Uses of Revenues POWER & BASIN FUND REVENUES REPAYMENT CAPITAL CHARGES OM&R PROPERTY TAXES & INTEREST* RESERVES WATER DELIVERY CHARGES CAPITAL 3 Proposed Base Case Assumptions General: No water shortage during rate setting cycle Water rates are set to recover costs, on a long term basis, net of other revenue Water deliveries ~ million acre-feet each year Continued shortage mitigation programs of ~200,000 acrefeet/year Surplus power revenues remain depressed providing no assistance with repayment beyond SRP contract through advisory period Proposing general ad valorem property tax rate held at 10 6 available towards Ag programs 1 available towards reserves/repayment 3 remains dedicated to Extraordinary Cost reserve 4 2

9 Proposed Base Case Assumptions Fixed OM&R: Continue Fixed OM&R rate stabilization rate through 2018 Capital Charges: Proposing an increase of $2/yr (each year) through 2019, $1 in 2020 and hold flat remaining years Allow revenues to remain behind cash makeup payment for federal repayment 5 Proposed Base Case Assumptions Energy: Sufficient power from Hoover & NGS for pumping needs NGS impacts Assumes TWG proposal implementation, including 1 NGS unit shutdown by the end of 2019 Coal & lease extension (balloon) payments are paid through Extraordinary Cost reserve; Significant increases for new lease and coal agreements impact rates beginning in 2020 No revenues from shaping and displacement Ag Settlement Pool Incentive program is continued to allow rates to increase $4/year (excludes any forbearance program discounts) 6 3

10 Water Volumes 7 Property Tax Revenues 8 4

11 Capital Expenditures (Water Delivery) 9 Proposed CAWCD Water Delivery Rates ($/af) 2016 Firm 2017 Firm 2018 Provisnal 2019 Advisory 2020 Advisory 2021 Advisory 2022 Advisory Fixed O&M "Big R" Shortage Stabilization Fixed OM&R Rate Energy Rate M&I Capital Charge Total Ag Incentive (19) (16) (15) (13) (28) (38) (33) 10 5

12 Proposed 2016 Rates Compared to 2014 Rate Case Fixed OM&R: Recommended Advisory (2014) Change 1 Energy: Recommended Advisory (2014) Change (2) (1) Capital Charges: Recommended Advisory (2014) Change 1 2 Ag incentive: Recommended (16) (15) Advisory (2014) (18) (16) Change (2014) (2) (1) 11 Ag Programs Ag Consideration is contractual agreement to cover Fixed OM&R for Ag Settlement Pool. Ag incentive is a discretionary program the Board has authorized to assist Ag customers by softening the impact of energy cost increases. It is currently designed to allow rates to increase $4/year. These programs consume the ad valorem property tax ($.06 of it) in (see following charts) These incentives are exclusive of any agreed upon forbearance programs Assumes continuation of Ag Forbearance 3 program (43K acre-feet) 12 6

13 Proposed Ag Incentive Program Firm Firm Provisnl Advisory Advisory Advisory Advisory Energy Rate 1 ($/af) $76 $77 $80 $82 $101 $115 $114 Less Full Ag Incentive ($/af) (19) (16) (15) (13) (28) (38) (33) Net Ag Energy Rate 1 ($/af) $57 $61 $65 $69 $73 $77 $81 Ag Settlement Pool Incentive ($/af) ($15) ($12) ($11) ($9) ($24) ($34) ($29) GSF Incentive ($/af) (2) (2) (2) (2) (2) (2) (2) Recovery Incentive ($/af) (2) (2) (2) (2) (2) (2) (2) Full Incentive ($/af) ($19) ($16) ($15) ($13) ($28) ($38) ($33) Total Incentive Program ($000) $7,262 $3,922 $3,665 $3,151 $7,004 $9,456 $7, Property Tax Revenues vs. Ag Program 14 7

14 Capital Charges Capital charges are paid on M&I allocations, regardless of water delivery Capital charges are charged on all excess deliveries Not paid by federal and Ag Pool Must be used toward federal debt repayment Basin Development Fund net revenues are applied toward repayment first (surplus power sales, land sales, etc.) Balance must be made up as a cash payment (makeup payment) Capital charges are utilized for makeup payment Any shortfall in makeup payment from capital charges are taken from reserves Proposing $.01 property tax be dedicated toward repayment instead of extraordinary cost reserve to relieve downward trend in reserves Power market impacts capital charge rate e.g. lower market price less toward repayment more needed from capital charges 15 Surplus Power Sales Price versus NGS Rate 16 8

15 Capital Charges vs. Federal Debt Cash Payment 17 Strategic General Fund Reserves 18 9

16 What s changed on strategic reserves? Current proposal compared to Jan 2016 base case projects strategic reserves being $27 million lower in 2022 Jan 2016 estimate used projection from 2014 financial plan, end of 2015 balances and a couple of known significant changes Surplus power market revenue has deteriorated by $76 million Property tax (6-cents) revenue has decreased by $20 million Capital charges increase by $16 million (based on proposed rates) Additional $35 million from 1-cent of current extraordinary cost revenues moved to general fund to address make-up payment and reserves Ag forbearance 3 program extension increases reserves $31 million Interest income decreases by $17 million Other minor estimates changes net to ~$4 million increase 19 Outcomes Proposed rates are in line with advisory rates Proposed rates are in line with projected long term rate trends Strategic reserves are lower than targets and are not projected to get to target within rate period Customers remain responsible for the cost of service water delivery costs 20 10

17 Recharge O&M Maintain stable rates Absorb water volume and cost fluctuations by smoothing the rate with recharge O&M reserves Proposing 2017 and 2018 recharge O&M rates be held the same as prior 2017 and 2018 recharge O&M advisory rates Proposing to increase recharge O&M rates slightly for Phoenix AMA to $12/AF in 2017 and $13/AF in 2018 due to overall decrease in water availability Proposing holding recharge O&M rates flat for Tucson AMA through the rate-setting period at $15/AF 21 Proposed Recharge O&M Rates Firm Firm Provisnal Advisory Advisory Advisory Advisory Rates ($/af) Phoenix AMA $10 $12 $13 $14 $15 $16 $16 Tucson AMA $15 $15 $15 $15 $15 $15 $15 Reserves($ 000) Phoenix AMA $ 3,241 $3,532 $3,629 $3,633 $3,248 $3,149 $3,041 Tucson AMA $ 1,456 $1,398 $1,677 $1,997 $2,173 $2,413 $2,

18 Shortage Case Rates For planning purposes only 23 Shortage Case Assumptions Base Case: 1.44 kaf kaf (About 200 kaf of forbearance) Tier 1 water shortage: 320 kaf shortage reduction Tier 2 water shortage: 400 kaf shortage reduction Tier 3 water shortage: 480 kaf shortage reduction Assumes water shortage has no impact on the CAP Energy rate 24 12

19 Water Volumes-Shortage 25 Tier 1 Through Tier 3 Water Shortage Rate Sensitivity Analysis (Excludes the impact of applying rate stabilization funds) Combined Fixed OM&R and Energy Rate Base Case ($/af) $161 $164 $171 $178 $203 $221 $227 Tier 1 Shortage ($/af) $172 $179 $187 $213 $231 $238 Tier 2 Shortage ($/af) $185 $194 $220 $239 $246 Tier 3 Shortage ($/af) $202 $228 $247 $

20 Example of Application of About $28M Fixed OM&R Rate Stabilization Funds During a Water Shortage Can be applied over one to several years Year 1 Year 2 Total ($/af) ($/af) ($/af) Tier 1 Shortage ($14) ($7) ($21) Tier 2 Shortage ($15) ($7) ($22) Tier 3 Shortage ($16) ($8) ($24) 27 Example of Application of About $6.7M of Voluntary Rate Stabilization Funds During a Water Shortage Can be applied to participating customer volumes (Est. at 600 kaf) over one to several years Year 3 Year 4 Total ($/af) ($/af) ($/af) Tier 1 Shortage ($5) ($6) ($11) Tier 2 Shortage ($5) ($6) ($11) Tier 3 Shortage ($5) ($6) ($11) 28 14