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HomeMy WebLinkAbout08/08/1988 Meeting -- e M I NUT E S City Council Work Session Wilder Room, Hilton Hotel, 66 East 6th Avenue August 8, 1988 5:30 p.m. COUNCILORS PRESENT: Emily Schue, Freeman Holmer, Ruth Bascom, Jeff Miller, Debra Ehrman, Rob Bennett. COUNCILORS ABSENT: Cynthia Wooten, Roger Rutan. The work session of the City Council of the City of Eugene, Oregon was called to order by his Honor Mayor Brian B. Obie. I. BACKGROUND Approximately 500 acres in the Willow Creek area are located within the Eugene city limits and are currently served by Lane Electric Cooperative ( LEC) , The City Council will consider whether to transfer the area to Eugene Water & Electric Board (EWEB) service along with approximately 49 customers now within the EWEB service area who are served by LEC. If the council e chooses to support the transfer of service area, it will pass an ordinance and direct the EWEB Commissioners to proceed with an offer to compensate LEC for its existing facilities, Should LEC refuse the offer, the ordinance authorizes the City of Eugene to initiate a service transfer through condem- nation. II. STAFF OVERVIEW Susan Brody of the City of Eugene Planning Department provided an overview of staff's position and displayed a map of the area in question. Ms, Brody said the 510 acres is a small proportion of LEe's total territory and represents only 15 of its 10,000 customers. She said this issue has been a concern of the City and the City Council for some time; for instance, the council held a work session in 1986 and expressed concerns that LECls provid- ing service would stand in the way of new economic development in an area where the City has already invested money for sewers and roads, etc. M~, Brody said one primary reason for the City's concern over the provision of electrical service in the Willow Creek area is the duplication of service and investment. Another reason for the City's concern is that staff sees provision of electrical service by LEC as an impediment to economic develop- ment by discouraging industry to locate in the Willow Creek area. e MINUTES--City Council Work Session August 8, 1988 Page 1 Ms. Brody said that although the City's rates are lower compared with the e rest of the country, the difference between those of LEC and EWEB are about 24 percent. Ms. Brody said that the Metro Partnership has found that poten- tial customers are concerned about LEC's higher rates in the Willow Creek area. Ms. Brody said that after the council's 1986 work session, EWEB and LEC have participated in negotiations which have since broken down. In staff's view, the reason is seen as LEC's failure to negotiate in good faith, and action by the City Council would help further these negotiations. Ms. Brody said the Willow Creek area is critical to Eugene for light indus- trial development. She said other areas in West Eugene considered for this type of development will be constrained by major wetlands issues. She said that no new wetlands have been discovered in the Willow Creek area which will therefore heighten interest in developing this area. III . EWEB'S CONSULTANT'S REPORT Laurie Power of EWEB said that after negotiations broke down, EWEB wanted to examine what would be the impact of the transference of service on EWEB's existing customers, LEC's existing customers, and the existing and future Willow Creek area customers. Therefore, EWEB hired an independent consul- tant, R.W. Beck and Associates, to answer these questions. Ms. Power intro- duced Kurt Winnerfeld of R.W, Beck. I A. Assumptions e Mr. Winnerfeld said R.W. Beck consultants prepared a forecast for LEC and EWES to examine their financial operating results, load requirements, invest- ments, and rates with and without service to the Willow Creek area and then studied the cost impact on all customers, on LEC's customers, on EWEB's customers, ~nd on customers in the Willow Creek area. Responding to Mr. Holmer's query, Mr. Winnerfeld said that most of the LEC data did come from the CH2M-Hill report. He said they also relied on his- torical published operating results and trends and on a study done by LEC staff as a part of negotiations with EWEB. Responding to Ms. Bascom's re- quest for clarification, Mr. Winnerfeld said that even though LEC was not contacted for information because of confidentiality, the sources available did provide sufficient data to accurately complete the study. Mr. Winnerfeld said major assumptions that were common to both utilities were used. He said they assumed that the same level of development would occur despite the rate differentials and that the load growth would be the same. Mr. Winnerfeld said that despite the fact that EWES would be faster, the timing was assumed to be the same in order to keep the study results at a conser\'ative level. Mr. Winnerfeld said the inflation rate was assumed to be at 4.5 percent per year. City Manager Mike Gleason pointed out that this would tend to bias the study in favor of LEC. Mr. Winnerfeld said the dis- count rate was assumed to be 8.5 percent per year to account for opportunity costs or the present value of the dollars being spent. He said this is e MINUTES--City Council Work Session August 8, 1988 Page 2 consistent with the borrowing cost of publicly owned utilities and with the e discount rate used by Bonneville Power in doing analyses. Mr. Winnerfeld said it was assumed that there would be no change in the current retail rate design because there was no way to estimate what rate changes would occur in future years. He said that since they were studying a broad range of impacts, rate design cannot be changed for one set of custom- ers because it would affect all customers. He said that the ramifications of lower rates for one group would mean higher rates for another since this is a zero-rate game. Mr. Winnerfeld said that if it was assumed that all rate benefits to other LEC customers were given through lower rates to Willow Creek customers, they would find that there was no benefit to their Non-Wil- low Creek customers and that EWEB would still be able to offer lower rates. Therefore, the only way for LEC to serve Willow Creek customers at a lower rate would be for other LEC customers to be worse off. Mr. Holmer asked how close would the rate calculations come if the other customers suffered no disadvantage. Mr. Winnerfeld said this was not covered in the report but there would be about a one cent differential, but assuming all rate breaks, it would decrease to a 3/10 of a cent differential. B. Comparisons Mr. Winnerfeld said that, using the inflation estimate, new distribution investment for LEC would have a present value of $3,7 million. He said their interest rate on external financing would be a combination of 5 percent REA funds and 15 percent based on commercial rates for a 5.75 percent average. e Mr, Winnerfeld said LEe's cost of service would go up at historic rates, even though it was assumed that LEC would capture the same economies-of-scales used by EWEB. Mr. Winnerfeld said LEC would have to make an additional purchase of power from Bonneville Power at their priority firm rate, includ- ing a five percent low-density discount. Mr. Winnerfeld said the distribution investment for EWEB would have a present value of $2.7 million. He said that EWES would not need any external financ- ing because it would be able to finance out of its current revenues. Mr. Winnerfeld said EWEB1s cost of service would be based on historic ratios and their source of power supply would also be Bonneville Power, but they could mitigate costs by using their own hydrosystem. C. Study Results Mr. Winnerfeld said service to the Willow Creek area by EWEB would result in an overall savings to utility customers and the community as a whole because of reduced distribution investment and related expenses into the future due to a duplication of services. There would also be lower power supply costs to serve the Willow Creek load because of the use of hydro-resources and purchases used by EWES. Mr. Winnerfeld said there would be lower electric costs to customers in the Willow Creek area due to EWEB's lower current rates, which are a result of e MINUTES--City Council Work Session August 8, 1988 Page 3 --- economies-of-scale and lower resource costs. There would also be a slight e decrease in rates to EWEB's other customers, given the assumption of constant rate design. Furthermore, Mr. Winnerfeld said there would be a small in- crease in rates to LEC's other customers. Mr. Winnerfeld said that some of the key factors influencing the study re- sults are the rates paid by customers in the Willow Creek area: higher rates mean fewer benefits to Willow Creek customers but greater benefits to other customers. Two other factors would include new investment and the pace and level of local development. Mr. Winnerfeld displayed a graph of LEC's average electric rates over a 20-year period. Depending on the timing of new investment, the benefits of LEC serving Willow Creek would be mixed for the first 10 years or so, but the latter 10 years would mean 6/10 of a cent benefits. The average over the 20 years would bring a 2-1/2 percent rate reduction. Mr. Winnerfeld displayed a graph of EWEB's average electric rates over 20 years. The first 10 years would be about the same, while the latter 10 would show a barely noticeable benefit to customers. Mr. Winnerfeld said the bottom line of the study says it would be difficult for LEC to offer rates lower than EWEB. D. Questions and Answers I Ms. Ehrman asked what EWEBls motive is for wanting to serve this area since the impact of the next 20 years would be miniscule. Ms. Power said there e would be no real gain for EWEB. Mr. Gleason said there would be a 25 percent rate reduction for customers in the City and a tremendous cost differential of $4-$5 million; so the rate is only one analysis. Ms. Brody said it is in the City's overall best interest for economic development to have EWEB pro- vide the service. She said EWEB concurs that they are considering it because of the overall public benefit. Ms. Power added that EWEB could absorb the Willow Creek area without a rate increase. Ms. Ehrman remarked that it should be made clear to the public that this move would be for the public benefit, not because of EWEB's self-interest. Mr, Holmer said the report from LEC suggests that they were not given equal opportunity. Mayor Obie said that LEC has been asked to submit information and have a representative meet with major potential firms. He said LEC has said to these potential customers that they would be glad to provide service to the Willow Creek area, but only if a substation were built which the provider would pay for at $2.5 million over a 10-year period of time. Ms. Brody said the Metro Partnership has been actively promoting the Willow Creek area for potential industry and has not been disparaging LEC's service. Ms. Bascom said that in the historical context, the issue in the 1930s was how to provide electricity to rural people, but there is now a different game in which we are trying to provide urban electricity at the lowest possible costs. She said it seems that inclusion of this pocket within EWEBls terri- tory makes sense. - MINUTES--City Council Work Session August 8, 1988 Page 4 Ms. Brody provided some examples of testimony that may be heard from LEC at e this evening's public hearing. She said LEC will claim that their operating costs are lower. Ms. Power said that EWEB's cost of service over the period of 1984-1987 has been lower in all areas. Ms. Schue asked if the overall averages are from all kinds of customers or from different types. Ms. Power said that EWEB does have different rate categories for each class of customer because that is the legal standard and it could be assumed that LEC does likewise. Mr. Winnerfeld said that all utilities have large number of fixed costs that will not change with the amount of sales, but the utility business has found out in the last 10 years that a lot of the costs in new load growth were variable costs, not fixed costs. Ms. Bascom said it was difficult to read LEC's tables. She said it was complicated to compare rates. D. Quality Comparisons Mayor Obie asked for a contrast of the quality of service provided by each utility. Ms. Brody said Metro Partnership testimony will give emphasis to the stabili- ty and reliability of EWEB and how new development prospects are very inter- ested in long-term stability and reliability. Ms. Power said backup systems provide continued service in the case of power outages. She said that EWEB averages 20 minutes per customer per year of power outages, while the rural cooperative average is over three hours per e customer per year. Ms, Power introduced Ken Beeson to talk about backup systems, Mr, Beeson said that EWEB has a backup at three levels: at the transmission system, between substations, and on the electric distribution feeders. He said that loop backup at the substation level means that one substation transformer can be lost and the load can still be carried and one distribu- tion feeder and the other half of the the loop can be lost with the load still being carried. He said the transmission lines are also looped, which is called single contingency reliability. Mr. Beeson said LEC1s is a rural electric system and he is familiar with the system LEC is planning for the Willow Creek area. He said that at the trans- mission level, they will tie into an existing Bonneville transmission line which would have the same reliability. At the substation level, they would install a single transformer and then add a second one later; this will not have the same level of reliability, At the feeder level they plan to loop 15-20 percent of their feeders to a second transformer later; the feeders planned for the Willow Creek area are "radial feeders", or feeders without backup. Mr. Beeson summarized by saying that he is not sure there would be the same level of reliability at the distribution and substation level, but they would have it at the transformer level, Ms. Ehrman asked if EWES would also have to put a substation there. Mr. Beeson said there is already the Willow Creek substation and the Bertelsen e MINUTES--City Council Work Session August 8, 1988 Page 5 substation there to serve the area. He said the Willow Creek substation can e carry 20 megawatts, while the Bertelsen could carry 33. Neither is fully loaded, he said, so they can accommodate growth. He said the CH2M Hill load forecast for the new area is at 30 megawatts, and the proposed LEC substation is 2.5 megawatts. Mr. Holmer said he received a letter from Ed Fadeley which stated that since 1984, when service was extended to Willow Creek, there has been one outage in Willow Creek. In contrast, there has been multiple service interruptions at LEC's headquarter, which is within EWEB's west electric area. LEC currently has a substation 4/10 of a mile from the Willow Creek industrial park and is designing one directly adjacent. Mr. Holmer asked if these facts will change the comparison. Mr. Beeson said the CH2M Hill plan for LEC service in this area initially had construction on the substation in the park, but it was the installation on a single transformer, not including the installation of a second backup transformer. Mr. Beeson said EWEB keeps detailed outage records and can match reliability with virtually anybody. Ms. Power said that of the two outages at LEC's headquarters, one was planned for during the construction of the building, and the second was a 25 minute problem this spring. Ms. Ehrman asked if it is a normal practice for potential customers to pay for the substation. Mr. Beeson said costs for substations are built into the rate structure. Mayor Obie said that LEC has subsequently changed its policy and they have had the opportunity ~o provide a substation for five years now and have not done so. He said residents have paid over $12 million for sewer lines and transportation lines and EWES can serve immediately and protect e these City investments. Ms. Bascom asked if the City gets an in-lieu-of-taxes payment if LEC provides service, She said this would help offset the costs other urban dwellers assume. Mr~ Gleason said the City does not get a franchise fee from LEC. Mayor Obie said the City has the authority to franchise. Mr. Holmer asked if the City gets REA benefits as EWES goes out into the rural areas. Ms. Power said the City gets no benefits from the Rural Elec- tric Act. Ms. Schue asked why the City does not charge LEC for easements like the use of poles and streets. Mr, Gleason said he thinks the City does not, but said it may not be consistent with the City Charter. Ms. Schue asked if it would be possible to charge a service fee rather than granting a franchise. Mr. Gleason said the City can. Mr. Miller questioned the legal ramifications. Mr. Stan Long of the City Attorney's Office said there is statutory authority for the City to impose charges to franchise the use of the streets and to condemn the property, but challenges to the exercise of that authority can be made. He said the City Council must decide whether to take action, The City has the authority to take the property by eminent domain proceedings, if necessary. The statutory framework, based on state law, is predicated on the assumption that that is how the City would change allocation to utilities as more property comes into e MINUTES--City Council Work Session August 8, 1988 Page 6 the City. He said it is apparent in the legislature to have cities pay for e it. Mr. Long said negotiations are understood and that the City declares its intentions to acquire by passing an eminent domain resolution. Responding to Ms. Ehrman1s query, Mr. Long said that technically the City is condemning personal property. He said that State law recognizes that bounda- ries change. He said theoretically the City could go back to the PUC or eject the utility, but that still leaves the question of who is to pay. He said it would be best to purchase the personal property, and then the legal effect is to reallocate the territory. Ms. Ehrman asked if the City condemns, would EWEB pay. Mr. Long sa i d ut il i- ties operate under the same charter as the City, so EWEB would pay the bill after the City Council authorizes the move. Mr. Holmer asked whether the EWEB or LEe boards have taken a formal position on the issue. Ms. Brody said EWEB is scheduling a public hearing for August 15, after which they will make a formal declaration. Ms. Schue asked if it is appropriate for the City Council to act before the EWEB board makes a decision. Mr. Long said that has been the customary practice. Mr. Holmer said that section two of the draft ordinance makes a reference to lithe stated amountll; he asked to know that amount now. Ms. Power said the EWEB board will determine a reasonable offer when it meets after August 15. Mr. Gleason said the amount will be made by the two parties in agreement or by the court which must determine the market value. He said this figure is not made by governing bodies. Mr. Holmer said it makes a lot of difference e for making a decision if the council knows this number up front. He said he believes that condemnation is a difficult, serious, political action, and he would like to be sure that it be done in a fair and equitable terms. He added that it is difficult to make a rational decision when LEC has not been given time to make its case, Mr. Bennett said that staff is briefing the council and providing its recommendation. Mayor Obie added that this is the way work sessions are usually run. Ms. Ehrman said she shared Mr. Holmer's concern about the cost and agreed that condemnation is a serious business. Mr. Gleason suggested that an executive session would be required to disclose the figure to the councilors. The group informally agreed that a confiden- tial memo would suffice. Ms. Bascom requested that information on the utili- zation of this property over a certain time period be included in the memo. Ms. Brody distributed a letter from Richard Butler of Atherly, Butler, and Burgott who is representing LEC. The meeting was adjourned at 7:10 p.m. Re$pectfully submitted~ ~~ .... , ',. ..~~ .t .'-1 Mi chea f"G1 eason City Manager e (Recorded by John Makowsky) MINUTES--City Council Work Session August 8, 1988 Page 7