Seattle City Light ratepayers will likely get whacked with rate surcharges later this year, the CEO of the utility said at a City Council meeting on Wednesday. Low natural gas prices, pushed downward by increases in hydraulic fracturing, are partly to blame for the looming electricity bill bump, which could happen sooner or later depending on winter snowfall in the Pacific Northwest.
The surcharges are designed to replenish City Light’s “rate stabilization account,” which acts as a reserve to buffer unexpected drops in the utility’s revenue. A city ordinance requires surcharges to kick in if the account dips below certain balances. The fund is on track to hit one of those balances later this year.
Exactly when the surcharge would occur is uncertain. But City Light general manager and CEO Jorge Carrasco and a council staffer indicated at Wednesday's Energy Committee meeting that customers would probably see the charge tacked onto their electricity bill by August.
A 2010 city ordinance set the target size for the account at $100 million. A balance-drop to $90 million triggers a 1.5 percent rate surcharge. The surcharge increases to 3 percent if the account balance declines to $80 million, and to 4.5 percent if it dips to $70 million. As the fund balance is restored, the surcharges are removed.
The current account balance is roughly $90 million, according to City Light spokesman Scott Thomsen. To avoid an immediate surcharge, City Light plans to transfer $8 million of leftover money from its 2013 budget into the account. The transfer will require City Council approval.
In the past, City Light has relied heavily on selling surplus electricity to wholesale buyers — like other utilities — to maintain the balance. But in recent years, cheap, domestically produced natural gas has driven down energy prices and, as a result, City Light’s wholesale cash flow.
Meanwhile, an unusually low mountain snowpack is creating further financial uncertainty for the utility. Roughly 90 percent of the City Light’s power comes from hydroelectric dams. A thin winter snowpack can reduce river flows and, ultimately, the amount of water available to produce electricity. Extremely dry years can leave City Light with less power to sell and can sometimes force the utility to buy electricity itself on the wholesale market.
Snowpack levels are below normal so far this winter in the Pacific Northwest, which could affect hydroelectric power production in the region. This map compares the amount of water contained in the regional snowpack to a historical median amount. Source: Natural Resource Conservation Service.
As of Jan. 22, the amount of water contained in portions of the Cascades snowpack amounted to less than 70 percent of the median level measured between 1981 and 2010, according to data compiled by the United States Department of Agriculture's Natural Resource Conservation Service.
The timing of the surcharges could partly depend on how much more snow falls during the rest of the winter.
“If the council authorizes the transfer and we have a normal water year for the rest of the year,” City Light's Carrasco said during the meeting, “Then the surcharges are likely to kick in August, I believe, and then another one in November.”
“If we don’t have a normal water year,” he added, “They could kick in earlier than that.”
This year would not be the first time the council has authorized City Light to transfer money from other parts of their budget into the account. “If we had not moved $45 million in the last two years, we would be in a world of hurt right now,” council staffer Tony Kilduff told the Energy Committee. “We’ve had three years of experience telling us this thing isn’t working.”
Average net wholesale revenue for Seattle City Light between 2002 and 2010 was around $104 million. “That got built into City Light’s spending plan,” Kilduff said, “and its budget and into the retail rates.”
Since 2011 though, City Light's average net wholesale revenue has plunged to around $70 million.
The City Council took notice of the problem in 2012, passing an ordinance that changed the formula City Light uses to forecast wholesale revenue. The new formula was designed to produce more conservative estimates and, in doing so, lower the likelihood of surcharges.
But even those estimates proved to be too rosy. Under the revised formula City Light’s 2014 wholesale revenue target was reduced by about $15 million to $85 million. But Kilduff said during the meeting that revenue would be closer to $47 million. Similarly, in 2013, the target was $90 million and actual revenue was approximately $50 million.
In recent years, City Light's wholesale electricity sales revenues have generally been lower than they were prior to 2009. Chart: Bill Lucia
“It is a chronic problem,” Kilduff said, referring to the fund balance. “Unless the council does something about either City Light’s spending plan over the next six years, or its revenue from retail customers over the next six years, we’re going to have surcharges kick in through this mechanism, which will be random and unpredictable.”
Natural gas prices have not shown signs of rising. The price of gas used for electricity production fell from $5.27 per 1,000 cubic feet in 2010 to $3.54 per 1,000 cubic feet in 2012, according to the Energy Information Administration. During the last 10 years, prices peaked at $9.26 per 1,000 cubic feet in 2008 and then dove to $4.93 in 2009.
The persistently low gas prices are largely the result of an uptick in domestic hydraulic fracturing, or “fracking.” The practice has unlocked previously unrecoverable pockets of natural gas, which is used to fire turbines in some power plants.
A rise in domestic fracking has resulted in an abundance of cheap natural gas, driving down wholesale electricity prices. Source: Energy Information Administration. Chart: Bill Lucia
Councilmember Mike O'Brien noted the snowpack level and fracking were outside the Council's control.
"Unfortunately these two issues," he said, "are having very direct negative impacts on our reality right here in Seattle and are forcing us to make some really, kind of, hard decisions about how we keep the utility strong going forward."
The council originally decided to fund the rate stabilization account after City Light experienced about $130 millions of dollars of revenue shortfalls between 2009 and 2010. In January 2010, the utility hit customers with a 13.8 percent rate hike that the Council approved to meet obligations in agreements with bondholders. A 4.5 percent surcharge went into effect to fill up the stabilization account in May of 2010 and remained in place until December of that year.
City Light says that among the nation’s largest 25 cities, Seattle has the lowest electricity rates and that a typical household pays a monthly bill of about $60.
At the meeting on Wednesday, Carrasco hinted that permanent rate hikes could be on the horizon.
After mentioning a 2018 revenue target, he said: “We need to consider whether there’s the need for any kind of earlier action on rates, to lessen the likelihood of surcharges, and make it more predictable for customers as to what their rate levels are going to be.”
“You can either wait to see whether things improve,” he added, “or conclude that this is not a short-term phenomenon.”
