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UTILITY COMMITTEE AGENDA May 12, 2008 - 5:00 P.M. - Council Chambers - City Hall - City of Dover Public comments are welcomed on any item and will be permitted at appropriate times. When possible, please notify the City Clerk (736-7008 or e-m ail at Tm cdowell@dover.de.us) should you wish to be recognized. AGENDA ADDITIONS/DELETIONS 1. PACE Wholesale Power Supply Review 2. Electric Cost of Service Study by Burns & McDonnell 3. Rate Stabilization Reserve Funding 4. Amendment to Regulation 1146 Agreement 5. Adjournment by 6:30 P.M. /tm S:\ClerksOffice\Agendas&Minutes\Committee-Agendas\2008\05-12-2008 UTILITY.wpd THE AGENDA ITEMS AS LISTED MAY NOT BE CONSIDERED IN SEQUENCE. THIS AGENDA IS SUBJECT TO CHANGE TO INCLUDE THE ADDITION OR THE DELETION OF ITEMS, INCLUDING EXECUTIVE SESSIONS. Page 1 of 43

City of Dover Utility Committee Meeting Dover Wholesale Power Supply Budget May 12, 2008 Page 2 of 43

Summary • For the 2008 / 2009 budget power supply costs increased 5.4% over last year’s budget. This increase was primarily caused by: – Extraordinary increases in wholesale energy prices – Higher cost of purchased generation capacity to meet self-gen shortfall • By proactively managing these challenges Dover has contained the cost increases to its rate payers saving the rate payers millions of dollars. – 13% increase in power supply costs was mitigated via risk management, saving rate payers $5.2M – Additional savings associated with active energy management, reduced management fees, reduced generation plant O&M and higher emissions sales revenues further reduced the necessary budget increase • Regional energy prices are rising – Fuel, generation and environmental related costs continue to rise – Dover is located in a high-priced capacity constrained region • The City of Dover is planning ahead and will continue to use every available approach to managing cost for the City’s rate-payers Page 3 of 43 2 The Power of Integration

Challenges Page 4 of 43 3 The Power of Integration

U.S. Energy Imports Continue to Increase Source: EIA Annual Energy Outlook 2008 with Projections to 2030 (Early Release) • US crude oil production declined 13% • US natural gas production basically flat since 2000 since 2000 • US total coal production flat since 2000 • Significant increases in non-hydro while Appalachian coal has experienced renewables, but starting from small declines base Page 5 of 43 4 The Power of Integration

Environmental Pathways and Impacts • Legislative and regulatory uncertainty limits new generation – CAIR permanently caps emissions of sulfur dioxide (SO2) and nitrogen oxides (NOx) in the eastern United States. – CAMR creates cap-and-trade program to limit mercury emissions from coal- fired power plants. – Lieberman / Warner caps GHG emissions from the electric power, transportation and manufacturing sectors. • New rules and changing enforcement raising generators’ costs – Delaware regulation 1146 creates the need for significant capital investments in certain power plants. – Standards and enforcement of New Source Review have been tightened. – RGGI creates cap and trade on GHG in ten NE states. Page 6 of 43 5 The Power of Integration

Increasing Operating Costs + Limited New Capacity = Escalating Electricity Prices Generators Fuel Costs PJM’s Capacity Market $12.00 • Designed to provide long term price $10.00 signal for new generation. • To date capacity markets have $8.00 exhibited mixed results $/MMBtu $6.00 – Has created excess supply • reducing net exports, $4.00 • reversing de-rates of old, high cost generation, and $2.00 • interruptible load. – High capacity prices have failed to $- attract new resources, but market not 1999 2001 2003 2005 2007 fully implemented Coal Petroleum Coke Nat Gas – Resulted in over $6 billion in capacity costs paid by load for FY 2009 Source: Energy Information Administration Page 7 of 43 6 The Power of Integration

A New, Higher Price Floor for Energy 25 Factors Driving Energy Prices: • Energy demand growth • Higher E & P costs 20 • Globalization • Supply chain constraints • Currency exchange US$/GJ (nominal) 15 • Electricity deregulation Step change in energy prices • GHG & environmental will not revert; energy prices • Trading & speculation will remain high and uncertain. 10 A New Higher Energy Price Floor 5 0 1989 1994 1999 2004 2009 2014 2019 2024 Crude Oil, WTI (1st) Crude Oil, Brent Gas, Henry Hub Coal, ARA Marker Fuel Oil, 1% S, ARA Gasoil, #2, NYH Page 8 of 43 7 The Power of Integration

Ratepayers facing steep increases across US & Region State, Power co-op Constellation reach truce raises rates [BG&E] 1.1 million residential Delaware Electric Coop has raised customers, … will pay 85 percent more electric rates by 8.86 percent for electricity than in 2005 Baltimore Sun, March 30, 2008 Delaware Online, March 30, 2008 Dominion Pursues 18 Percent … Hike …largest one-time rate increase … since the 1970s … necessary to offset … fuel [purchases] Washington Post, May 7, 2008 Con Ed Ameren Seeks to Increase … Up to 17% requests 12.1% … rate increase …by 17 percent for … residential … and Ameren Corp., will file … for a 12.1 by 10.7 percent for … business percent … rate increase The New York Times, St. Louis Business Journal, May 5, 2007 April 4, 2008 Page 9 of 43 8 The Power of Integration

Wholesale Power Market Prices for Dover Prices have nearly tripled since 2002 100 90 80 70 $/MWh 60 50 40 30 20 Jan- M 2 ay Se 2 0 -0 p- Ja 2 n- M 3 00 ay Se 3-0 p- Ja 3 n- M 4 ay Se 4 0 -00 p- Ja 4 n- M 5 ay Se 5 0 -0 p- Ja 5 n- 0 0 M 6 ay Se 6 0 -0 p- Ja 6 n- M 7 ay 0 -00 Se 7 p- Ja 7 n- 0 08 Dover Monthly Avg Power Price Long-Term Trend Page 10 of 43 9 The Power of Integration

Managing the Challenges Page 11 of 43 10 The Power of Integration

Risk Management Defensive Hedge Market-Based Triggers Pricing Opportunistic % of Total Hedge $/Unit Budget Defensive Hedge Contract Volume Foundational Hedges Opportunistic Hedges Time Time Developed systematic program based on Dover’s risk tolerances: • Improves budget certainty • Creates opportunity to participate in favorable price changes, while minimizing exposure to adverse market conditions • Keeps decision making with Dover Page 12 of 43 11 The Power of Integration

Impact of a Hedged Portfolio on Cost of Service Forward Annual Market Strip Versus Forecasted Cost of Service 90.00 100% 80% Hedge Ratio 80.00 $/MWh 60% 40% 70.00 20% 60.00 0% on -1 -9 -6 -3 T ths 2 T T T M T -1 5 Forward Market Proj. Cost of Srvc Hedge Ratio T Page 13 of 43 12 The Power of Integration

Energy Management Reducing time & resources by bolting on an Energy Management function that manages $2 billion in transactions. Reducing counterparty premiums by utilizing the competitive wholesale marketplace and maintaining a diverse set of counterparties. Minimizing costs associated with balancing real time load against forecasted load by utilizing sophisticated load forecasting systems. Mitigating contract risks by leveraging deep commercial and legal expertise. Page 14 of 43 13 The Power of Integration

Benefits of Dover’s Generation Assets Hedge energy price volatility Hedge capacity price • High priced peaking units lead to • PJM East experiences high a more than tripling in prices. capacity prices • Dover’s generation hedges this • Dover’s generation covered 97% exposure of its capacity obligation for the – Displacing higher priced units 2007/2008 and … – Generating revenues at high prices • … will cover 87% of the capacity providing a hedge obligation for the 2008/2009 Provide emission allowances revenues • Dover’s generation provide excess NOX and SO2 allowance creating revenue for Dover. • Over last several years Dover has sold excess allowances for $1 million plus on an annual basis. Page 15 of 43 14 The Power of Integration

Impact to 2008/2009 Budget Page 16 of 43 15 The Power of Integration

Budget Variances: FY 08/09 Budget Versus FY 07/08 Budget FY 08/09 Budget Variance Relative to FY 07/08 Budget $7.00 $0.84 $0.55 $6.00 $0.51 $1.04 $5.00 $0.50 $4.91 $1.32 5.4% $4.00 $/MWh $3.00 $3.25 $2.00 $1.00 $- Power Supply Net Capacity Power Plant Plant O&M PJM Management Emission Sales (Incl Load Transmission Costs Margins Fees Following) Charges Page 17 of 43 16 The Power of Integration

Net Purchased Generation Capacity Cost Increase Capacity obligation: provide sufficient capacity to ensure reliable service for rate payers. Capacity revenue: value provided for the ability to generate when called upon $ Millions $15.0 $10.0 ($2.6) million variance $5.0 FY2008 $0.0 FY2009 ($5.0) ($10.0) $1.6 million variance ($15.0) Capacity Obligation Capacity Revenues $1 million net cost increase to city of Dover for FY 2009. Page 18 of 43 17 The Power of Integration

Effect of Dover’s Proactive Management on FY08/09 Rates • Without risk management, customers would be experiencing a 13% increase in power supply costs (budgeted market prices) however, … • … risk management contained cost increase to 5.4%. • In aggregate, the hedge positions have saved the rate payers $5.2 million on a year over budget year basis. • In addition, if generation assets were retired the rate payers would bear an additional $5 million cost and rates would have increased 20% on a year over budget year basis. • In summary, Dover has been able to manage through extraordinary energy price increases through proactive management of risk, and the optimization of the plant values. Page 19 of 43 18 The Power of Integration

Electric Cost of Service Study and Rate Adjustment Considerations Presented to the City of Dover, Delaware May 12, 2008 Page 20 of 43

Agenda • Need for Adjustments • Net Margins • Cost of Service Considerations • Potential Rate Adjustments 1 Page 21 of 43

Need for Rate Adjustments • Current Rates Implemented July 1, 2007 • Expected Additional Changes • Updated Financial Forecast • Purchased Power Costs Updated • System Capital Requirements 2 Page 22 of 43

Key Assumptions • Projected Customer Growth – Less than 1.0 percent annually • Projected Energy Sales Growth: – 0.86 percent in FY 2009 – 1.65 percent in FY 2010 • Projected Expenses Increasing: – Purchased Power Expenses – Up 10.4 Percent – Total Electric Operating Expenses – Up 7 Percent – Major Capital Improvements – $22 M in New Debt 3 Page 23 of 43

Financial Planning 4 Page 24 of 43

Financial Planning 5 Page 25 of 43

Financial Planning 6 Page 26 of 43

Financial Planning 7 Page 27 of 43

Financial Forecast • Reviewed Results • Financial Targets: – Debt Service Coverage Requirements – Maintain Positive Net Margins • Determined Revenue Adjustment – FY 2009 – 7.0 percent – FY 2010 – 4.5 percent – FY 2011 – 3.2 percent 8 Page 28 of 43

Financial Forecast 9 Page 29 of 43

Cost-of-Service Analysis • Unbundled Revenue Requirements – Power Supply (Demand & Energy) – Transmission – Distribution – Customer • Assigned Costs to Classes – Allocation Factors • Summarized Results 10 Page 30 of 43

Cost of Service Analysis Current Breakdown of Electric Cost Components 11 Page 31 of 43

Current Electric Rates 12 Page 32 of 43

Rate Design Analysis • Need to Address Revenue Shortfalls • Rate Implementation Strategy – Adjust Rates 7 Percent July 1, 2008 – Consider Cost of Service Results • Rate Adjustments by Class May Vary 13 Page 33 of 43

Electric Cost of Service Study and Rate Adjustment Considerations Discussion and Questions 14 Page 34 of 43

City of Dover Utility Committee May 12, 2008 Rate St bili abilization Reserve Page 35 of 43

Current Policy Rate Stabilization Reserve – The City has established a rate stabilization reserve to provide for price fluctuations in the power markets. The funding source for this reserve shall consist of the following potential sources: (a) one- time non-recurring operating revenues, (b) all or some of positive carry forward balance variances (c) annual appropriations if available. The balance shall be maintained at a minimum of 3% not to exceed 10% of the purchase power cost in any given year. Page 36 of 43

Proposed Policy Rate Stabilization Reserve – Recognizing price fluctuations in the wholesale power markets the City has h established a rate bli stabilization reserve. The purpose bili of using such a reserve is to level off the fluctuations in the wholesale power supply market and in turn provide stable rates to our customers. In those instances where the actual cost of power supply and generation are less/more than the budgeted cost of power supply and generation, the City will transfer the difference to/from the Rate Stabilization Reserve. The balance shall be maintained at a minimum of 3% not to exceed 10% of the purchase power cost in any given year. Adjustment to be calculated as follows – (Budgeted $ per mgwh less Actual $ per mgwh) x actual mgwh purchased and/or generated. Policy h change to be approved by L i l egislative, Finance, & Ad i i ministrative Committee & Council. Page 37 of 43

Sample Calculation – 2008 January March Megawatts Hours Purchased 62,853 57,037 Budgeted Megawatt Hour Rate $ 90.995 $ 90.995 Actual Megawatt Hour Rate $ 96.626 $ 83.216 Difference per Megawatt Hour $ (5.631) $ 7.779 Difference between Budget and Actual Cost $ (353,925) $ 443,691 Budgeted Power Supply $ 5,719,309 $ 5,190,082 Actual Power Supply Cost $ 6,073,234 $ 4,746,391 Transfer to Rate Stabilization Reserve (353,925) 443,691 Total Reported Power Supply (as Budgeted) $ 5,719,309 $ 5,190,082 Page 38 of 43

Sample Calculation – 2008 Year to Date Megawatts Hours Purchased 586,393 Budgeted Megawatt Hour Rate $ 90.995 Actual Megawatt Hour Rate $ 87.532 Difference per Megawatt Hour $ 3.463 Difference between Budget and Actual Cost $ 2,030,679 Budgeted Power Supply $ 53,358,831 Actual Power Supply Cost $ 51,328,152 Transfer to Rate Stabilization Reserve 2,030,679 Total Reported Power Supply (as Budgeted) $ 53,358,831 Page 39 of 43

How does this help the customer? Actual Purchased Megawatts 57,037 mgwh Purchased Ahead (Hedged) 45,905 mgwh Purchased on Open Market (19.5%) 11,132 mgwh The open market power purchases are subject to market rate fluctuations. The reserve account would be used to b i ring the supply cost back into b d udget for any i given month the rate is higher/lower than budget. Using March 2008 results Page 40 of 43

Benefits • This method protects the customer from rate increases attributed to supply and generation cost fluctuations driven by market conditions. h di Thus ll allowing h the customer to better budget their energy bills. • There will be no adverse impact on the operating budget by this proposed method of funding the Rate St bili abilization Reserve. • This method of managing the power supply cost is a more appropriate procedure and preferred by outside creditors and the rating agencies. Questions Page 41 of 43

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