REPORT TO COUNCIL
SUBJECT
Title
Action on a Resolution Making Certain Findings and Determinations and Taking Certain Actions Related to Aligning Existing Reserves of the Electric Utility With the City’s Current Budget and Fiscal Policies for Utility Funds Reserves
Report
COUNCIL PILLARS
Deliver and Enhance High Quality Efficient Services and Infrastructure
BACKGROUND
Reserves serve as an important resource for an organization to manage risk and be financially solvent. To cover shortfalls in operating revenues, address unforeseen operating and capital expenditures, cover day-to-day operating costs during emergency situations, maintain strong bond ratings, and ease the burden on ratepayers associated with large rate increases, the City has established certain budget and fiscal policies for the maintenance of reserves in the City funds including utilities funds. In addition, cash levels are regularly evaluated by rating agencies and investors to be used in establishing SVP’s credit rating.
The City’s Electric Utility, Silicon Valley Power (SVP), currently has four reserve policies currently held as cash reserves:
1) Operating Cash Policy: In August 1997, Council approved an Operating Cash Policy for the Electric Utility, including a requirement to maintain a minimum of 60 days retail revenue (approximately $34 million) and 60 days of net wholesale transactions (approximately $31 million) for a total of $65 million in cash.
2) Rate Stabilization Reserve: In January 1996, City Council adopted Resolution No. 6106 approving the establishment of a separate account in the Electric Utility of the City, known as the “Rate Stabilization Fund Reserve.” This Electric Utility Rate Stabilization Fund is also included in the City’s Subordinated Electric Revenue Bond Indentures dated March 1, 2011. As such, the City is obligated maintain the Electric Utility Rate Stabilization Fund so long as any City Electric Bonds remain outstanding.
3) Cost Reduction Fund: In December 2010, City Council adopted Resolution No. 10-7806 authorizing the transfer of the existing balance of the Cost Reduction Fund of the Electric Utility to the Electric Utility Rate Stabilization Fund as a subaccount of the Rate Stabilization Fund.
4) DVR Plant Operations Reserve: In December 2004, the City Council approved the establishment of a DVR Plant Operations Reserve for the Electric Utility in an amount up to $4,120,000 to provide a reserve for the handling of circumstances requiring immediate action to prevent or minimize downtime of the Donald Von Raesfeld Power Plant (DVR).
DISCUSSION
After a change in accounting method in the Fiscal Year 2019/20 budget, SVP performed an analysis evaluating the utilities’ existing cash reserve policies, structure, and targets. This analysis consisted of identifying best practices in the industry, determining regulatory requirements, reviewing bond requirements, and evaluating policies of other municipal electric utility agencies. In addition, staff, along with bond counsel, have reviewed all Electric Revenue Bond Indentures to ensure that the City meets its obligations associated with any outstanding City Electric Bonds. Updating the Electric Utility reserve policies proactively establishes reserves that better align with the system needs given the significant projected growth that is expected to nearly double the load of the utility.
SVP and Finance staff have developed the following recommendations on the reserve levels for the City’s utility funds which is included in the Budget and Fiscal Policies Section of the Fiscal Year 2022/23 and Fiscal Year 2023/24 Proposed Biennial Capital Budget.
● Operations and Maintenance Reserve: This reserve is used to cover day-to-day expenses, address unforeseen cost increases or revenue shortfalls, and protect against emergency financial crises or disaster situations. The reserve target is equal to the cost of the individual utility’s operations for three months (90-day working capital reserve). Due to large fluctuations and variability in the energy market, the Electric Utility Operations and Maintenance Reserve has a target ranging from 90 to 180 days of operations.
The Operations and Maintenance Reserve serves the same purpose as the existing Operating Cash Policy. Therefore, staff recommends rescinding the existing Operating Cash Policy and replacing it with this Operations and Maintenance Reserve.
● Rate Stabilization Reserve: This reserve is used to absorb short-term revenue shortfalls and is designed to stabilize utility rates and avoid wide swings in rates charged to utility customers over time. The minimum reserve target is a balance equal to 10% of each utility’s projected current year rate payer revenue. For the Electric Utility, the Rate Stabilization Reserve, together with the Operations and Maintenance Reserve (as described above), comprise the Electric Utility Rate Stabilization Fund established and maintained by the Electric Utility for purposes of its bond indenture.
The Rate Stabilization Reserve serves the same purpose as the existing Rate Stabilization Reserve and Cost Reduction Fund. Therefore, staff recommends rescinding the existing two reserves and replacing it with this single Rate Stabilization Reserve.
● Infrastructure Reserve: This reserve is used to support each utility’s CIP or fund unforeseen and unbudgeted capital costs. The reserve target is equal to an average annual CIP budget, as calculated over a 48-month period of budgeted CIP expenses as presented in the Biennial Capital Improvement Program Budget. At minimum, the target is to reserve 20% of the average annual CIP budget amount. For the Electric Utility, this reserve is based on an analysis of critical infrastructure, the likelihood for replacement, and the estimated replacement costs, evaluated regularly by SVP. Staff recommends discontinuing the DVR Plant Operations Reserve and replacing it with the Infrastructure Reserve provided for in the Current City Utility Funds Reserves Policies.
● Special Projects Reserve: This reserve sets aside funds for large or longer-term CIP projects or other special purposes to lessen fluctuations in rates and support long-term planning efforts. While no general target is established for this reserve, the amounts will be established by each utility based on need. There is no recommended action for this reserve. As there are recommendations, they will be addressed through the budget process.
ENVIRONMENTAL REVIEW
The actions being considered do not constitute a “project” within the meaning of the California Environmental Quality Act (“CEQA”) pursuant to CEQA Guidelines section 15378 (b)(4) in that it is a fiscal activity that do not involve commitment to a specific project which may result in potential significant impact on the environment.
FISCAL IMPACT
The FY 2022/23 Proposed Budget for the Electric Utility Operating Funds incorporates the proposed changes to the reserve policy. Future proposed budgets will also incorporate these changes. Adoption of this resolution will enable the Electric Utility to continue maintaining sufficient reserve amounts while providing greater flexibility in cash management and complying with Electric Revenue Bond Indenture.
COORDINATION
This report has been coordinated with the Finance Department and City Attorney’s Office.
PUBLIC CONTACT
Public contact was made by posting the Council agenda on the City’s official-notice bulletin board outside City Hall Council Chambers. A complete agenda packet is available on the City’s website and in the City Clerk’s Office at least 72 hours prior to a Regular Meeting and 24 hours prior to a Special Meeting. A hard copy of any report to Council may be requested by contacting the City Clerk’s Office at (408) 615-2220, email clerk@santaclaraca.gov <mailto:clerk@santaclaraca.gov> or at the public information desk at any City of Santa Clara public library.
RECOMMENDATION
Recommendation
Adopt a Resolution making certain findings and determinations and taking certain
actions related to aligning the existing reserves of the Electric Utility with the City’s
current Budget and Fiscal Policies for Utility Funds Reserves.
Staff
Reviewed by: Manuel Pineda, Chief Electric Utility Officer
Approved by: Rajeev Batra, City Manager
ATTACHMENTS
1. Proposed Resolution