REVIEW OF MILLERSBURG MUNICIPAL UTILITY FEASIBILITY STUDIES - L
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L DRAFT
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REVIEW OF MILLERSBURG MUNICIPAL
UTILITY FEASIBILITY STUDIES
Douglas Larson, CPA
May 19, 2014LCS Consulting was asked by Pacific Power to look at the two studies commissioned by the City of
Millersburg1 to examine the feasibility and possible benefits of the city forming a municipal electric
utility.
This report broadly relies on information and assumptions provided by the city’s consultants, from Pacific
Power, and on generally available public information dealing with issues such a wholesale energy prices.
I was asked primarily to review the two studies commissioned by the city of Millersburg. I also offer my
own analysis using sources noted above to provide my view of the likely costs to acquire the assets
needed to establish a new city utility and bottom line impacts on electricity customers within the city.
General observations
In key areas, the city’s reports make numerous assumptions regarding the costs associated with
acquisition of Pacific Power’s assets, forecasts of future rates for Pacific Power as well as the
Bonneville Power Administration, and start-up costs under different operating scenarios.
Assumptions regarding the technical issues associated with the separation of facilities in order to
create a new municipal utility system understate potential costs and risks.
Projections of rate savings under an MUD based on future Pacific Power rates are under
supported.
The lack of inclusion of risk sensitivities in both reports is striking considering the necessary
speculation required to assess future power costs, future changes in regulation and public policy,
and uncertainty of litigation, among other factors, over a span of more than a decade.
1
Feasibility Study, City of Millersburg, Oregon, Electric System Acquisition, prepared for Cable Huston by D. Hittle
and Associates, January 24, 2014 and Municipal Electric Utility Feasibility Study, EES Consulting, April 2, 2014
2The final cost the city of Millersburg would incur to acquire Pacific Power’s local distribution system
cannot be known until the end of presumed litigation in which detailed appraisal, market value and other
contributing factors are determined through the legal process.
Both consultants estimate the total acquisition costs to be roughly $14.4 million, an amount that is part of
an equation that includes projected future costs for Pacific Power and a new city utility and other
elements to project the rate savings for Millersburg customers of up to 40 percent.
Pacific Power disputes the system acquisition costs provided by the city’s consultants, primarily for
assigning very low system separation costs to allow Pacific Power to continue to serve customers outside
Millersburg who rely on a substation that would likely have to be acquired by the city to serve customers
within the city.
If Pacific Power’s estimates for system separation costs alone are added to consultants’ $14.4 million
acquisition estimate, the underlying economics change and the result for residents changes dramatically.
Under that scenario:
Total acquisition costs would be at least $56 million
Rates under a Millersburg MUD would be 13 percent higher than Pacific Power for the first three
years of operation and remain 10 percent higher when the city becomes eligible to receive Tier 1
power from the Bonneville Power Administration.
Risk analysis
The consultants’ studies provide a best-case scenario for a city utility – one in which acquisition,
litigation and system separation costs are relatively low, power costs are moderate and projected market
rates compare favorably to steeper Pacific Power rate increases the consultants assign to the future.
Objective risks that a new Millersburg MUD very likely would face, including an extreme exposure to
wholesale energy markets and a small customer base dominated by a small number of industrial
3customers, are overlooked in the studies. I am not aware of another utility that has formed under any
circumstances that would face objective risks such as these.
If at one end of the risk spectrum is the relatively straightforward and low-cost scenario presented in the
consultants’ studies, the other end of the risk spectrum for a new utility with the characteristics of a new
Millersburg municipal utility is potential financial insolvency for the city. It is not clear to me how a city
the size of Millersburg with such a small customer base could repay bonds issued to finance the creation
of utility if one or two of the large industrial plants, which would be providing the bulk of the revenue
needed to repay the bonds, should for some reason not remain a customer of the new utility. Given the
global economic and competitive pressures all industrial plants like those in Millersburg face, such
concerns should not be dismissed or not taken into account as possibilities.
Overall, I could not conclude that risks the city would face through formation of a Millersburg MUD, due
primarily to circumstances of its power supply and customer base, could justify moving forward given the
uncertainty that any benefits for electricity customers would be realized.
Five areas of focus
Rather than debate every issue in the feasibility studies, this report focuses on five main issues: (1) the
comparison of Pacific Power rates compared to Millersburg MUD rates during the first four years of a
MUD’s operation 2) market price volatility 3) the heavy presence of industrial class customers as a
percentage of the overall customer mix of a Millersburg MUD 4) the reliance on estimates of future
Pacific Power price increases in the 2020s to generate projected savings and, 5) areas where the
consultants differ on key assumptions between the studies.
4I. Rates Likely Higher Under New MUD
The city’s consultants project rate savings under a new Millersburg MUD by making a series of
assumptions regarding total estimated acquisition costs of Pacific Power’s facilities within the city. For
purposes of this analysis, LCS used the $14.4 million base acquisition costs assumed by the consultants,
although it is important to note that Pacific Power has never validated that number and no actual appraisal
has been conducted.
However, the city’s consultants assume a minimal cost of $500,000 to separate out the Pacific Power
facilities within Millersburg from the Pacific Power system that would continue to serve customers in
surrounding areas. Pacific Power has estimated significant system separation costs would be incurred by
the new city utility that would be included in the acquisition costs. Pacific Power estimates the costs to
account for the loss of the Murder Creek substation alone to be $41.5 million, in addition to other possible
costs. Simply adding the consultants estimate for system acquisition with the separation costs estimated
by Pacific Power creates a $56 million total possible acquisition cost. Using that figure, the chart below
outlines a 2014 scenario that would result in a rate increase for city of Millersburg customers.
5Millersburg Rates Under MUD Ownership
*City Ownership 10-21 percent rate increase*
Market Tier 1 Blended Market Price Increase Pacific Power
$ Per MWh $ Per MWh of $10 MWh Rates
Generation $42.00 $40.00 $47.00
Transmission
PacifiCorp OATT
BPA NT $5.00 $5.00 $5.00
Total G&T $47.00 $45.00 $52.00
Distribution $10.00 $10.00 $10.00
Taxes/Public $5.00 $5.00 $5.00
Purpose
Total $62.00 $60.00 $67.00
Separation Costs at $15.00 $15.00 $15.00
$41.5m
$77.00 $75.00 $82.00
Rate Increase over 13% 10% 21% $68.00
Pacific Power Rates
6The above chart shows:
Millersburg MUD rates being 13 percent higher than current Pacific Power rates for the first three
years of MUD operation as the utility complies with BPA’s three-year waiting period to begin
receiving Tier 1 preference power.
Millersburg MUD rates remaining 10 percent higher than Pacific Power in year four when the
MUD moves to a 30 percent Tier 1 and 70 percent market rate mix per BPA’s March 7, 2014
ruling disallowing ATI Wah Chang from receiving Tier 1 power.
Rates of a new Millersburg MUD potentially increasing to 21 percent higher than current Pacific
Power rates if wholesale energy prices increase by $10 per MWh, approximately the same
increase that occurred between the first quarter of 2013 and the first quarter of 2014.
II. Market Power Purchase Volatility
A unique feature of a new Millersburg MUD would be its broad exposure to price fluctuations of
wholesale energy markets. Typically public utilities with access to federal power through the Bonneville
Power administration receive all of their power at the Tier 1 rate. Access to this lowest-cost federal power
is the most significant cost advantage enjoyed by public power entities in the Northwest.
According to Pacific Power’s records, nearly 70 percent of the total electrical load used in the city of
Millersburg is by ATI Wah Chang for its Millersburg site. A March 7, 2014 letter from BPA
Administrator Elliot Mainzer ruled that all of ATI Wah Chang’s load is a “Contracted For or Committed
To” load of Pacific Power and therefore not eligible under the Northwest Power Act to receive Tier 1
power from a new public power entity.
7No other comparable publically-owned utility in the Pacific Northwest would have the level of wholesale
market price exposure than the proposed Millersburg MUD. Market price fluctuations will not be spread
across a large system of customers, but rather assumed in total by the small number of MUD customers.
It should also be noted that a new Millersburg MUD will receive 100 percent of its power at market-based
costs during the three year interim timeframe2 until Tier 1 rates will be available. This presents additional
and significant risk to Millersburg MUD customers.
The chart below shows the potential scope of market volatility by tracking historical prices from a key
Northwest trading hub.
Market Price Volatility 2005 - 2014
Significant Market Price Volatility between 2005 and 2014 with the largest price increase of
47.2% and the largest price decrease 57.5% year over year.
2
Based on Bonneville Power Administration Standards of Service requirements.
8III. Lack of Diverse Customer Mix
Another unique and risk-inducing feature of a new Millersburg utility is its heavy reliance on one class of
customer --- industrial – and the preponderance of the load consumed by a relatively few number of
single customers.
According to Pacific Power and consistent with the feasibility studies, Millersburg has less than 800
electricity customers overall, with 90 percent of total electricity use by four separate industrial customers.
Some 70 percent of the total for all electricity users in Millersburg is represented by just one customer ---
ATI Wah Chang.
It is unclear how MUD formation would be collateralized, given this load distribution. And, since the
utility presumably would count on electricity revenues to repay revenue bonds issued to finance formation
of the MUD, it is unclear who would have financial responsibility if a large customer shuts down, leaves
town, curtails power use or is no longer a customer of that utility for any other reason. This unique
circumstance can impact bond-rating and associated costs of finance for Millersburg utility as well.
Most utilities with a larger and more diverse customer mix would avoid this type of risk and would not be
as subject to negative effects of any single customer leaving its system.
9IV. Reliance on out-year projections to project savings
Both the D. Hittle and EES studies rely on assumptions about Pacific Power’s rates in comparison to
projected federal and market rates for a city utility in order to project savings. Pacific Power does not
provide its own rate forecasts as far out as eight to 14-years into the future, so any attempt to do so by
outside consultants should be considered highly speculative.
The EES study in particular relies on escalated Pacific Power rate increases between 2024 and 2028 to
project savings of between 25 and 40 percent annually for Millersburg residents under a new city MUD,
10and a substantial portion of total savings promised by municipal formation. In the years 2024 through
2028 EES projects Pacific Power rate increases of 8.39%, 9.19%, 8.63%, 8.13% and 9.33%, respectively.
Making predictions of large and specific rate increases for periods 10-14 years in the future is speculative
at best.
Pacific Power does not offer specific future rate forecasts, but has stated publicly that its rates have
flattened for the periods 2014-2016 and it expects future rate increases to more or less track with inflation
for the foreseeable future. Pacific Power’s additional public statements that recent rate increases were
driven by a capital build cycle, which historically have been followed by extended periods of minimal
rate increases as investments depreciate, are also consistent with historical trends for Pacific Power and
similar utilities.
Should Pacific Power’s rates increase at a significantly lower rate than projected by both consultants, the
bottom line benefits of a switch to a Millersburg MUD would obviously change and be reduced
accordingly.
Jefferson County case study
To underscore the inherent difficulty in projecting outcomes dependent on uncertain variables, it is
helpful to look at one very recent example of a new public utility formation in the Northwest. The chart
below demonstrates the difference between what D. Hittle and Associates projected for total acquisition
costs and rate savings for the new Jefferson County PUD in Washington, from when its report was first
issued in 2008 to when the utility began operations in 2013. The system acquisition cost alone – actual
versus estimate – is dramatic, would have changed the feasibility determination, and very likely could
have changed the decision by the residents of Jefferson County to proceed. In fact, one year into operation
of the Jefferson County PUD, customers there are paying more than they would have if they had remained
customers of Puget Sound Energy.
11D. Hittle Estimates Versus Actual in Jefferson County
PUD formation
Jefferson County Washington D. Hittle Feasibility Study for Actual
Jefferson PUDi
Total Cost to Acquire $66M $117M
Savings in Year 1 of Tier 1 rates 8% 0% *
Years to complete transaction 2 years 5 years without
litigation
Cumulative benefit for customers $23M Unknown but none
thus far
* Jefferson PUD 2014 Budget projects $200k loss under current rates.
1
D.Hittle Feasibility Study Prepared for Jefferson County Dated October 24, 2008. {http://www.jeffpud.org/wp-content/uploads/2014/04/JeffPUD-Final-102408.pdf}
V. Significant Differences Between Consultant Reports
A close look at both of the feasibility studies provided to the city by the consultants reveals significant
differences in key aspects of their analysis that should provide further caution in placing absolute
confidence in projections that depend on assumptions and unknowable variables.
The consultants differ both on their forecasts for future wholesale market prices and Pacific Power rates.
The consultants also project much different overall benefits under a new city MUD, with D. Hittle
projecting $59 million in total benefits and EES projecting $79 million in benefits.
At the same time, D. Hittle assumes that a new Millersburg MUD is able to purchase 100 percent of its
power at Tier 1 rates from the Bonneville Power Administration on day one of its operation in 2018. EES
assumes the MUD would purchase 100 percent of its power at market rates during a three-year wait
12period before it could purchase 30 percent of its power at Tier 1 rates, with the remaining 70 percent
continuing to be obtained at higher market rates.
Yet EES still projects a $20 million higher net benefit, despite expecting the new MUD to pay a much
higher price for power.
These discrepancies highlight the extent to which assumptions on issues such as future rate forecasts and
market prices can drive drastically different outcomes based on what assumptions are used.
VI. Other operational issues and considerations
The City of Millersburg would need to create an operating division to service the new proposed electric
customers. This leads to a variety of issues and costs. It can be assumed that the city would try to leverage
existing functionality of city services in areas such as customer service, billing, information technology,
and other business service type functions. It is assumed that the city would not be able to leverage
existing skilled labor and engineering staff currently employed. The city would also need to address the
equipment requirements to outfit the new operating division. The analysis of estimated operations costs
including customer service and accounting was approached from a total system prospective. Given the
size of the system, 800 customers, a system of this size will not have the economies of scale that Pacific
Power enjoys. Without economies of scale, it is highly likely the costs of providing the distribution and
customer service function will be considerably higher than those forecasted in the consultant studies.
Aside from back-office and administrative functions, the city would need to either purchase critical spare
equipment or enter into a pool that shares system spare equipment. Examples of this type of equipment
are substation transformers and distribution breakers. This would create either an upfront cost or recurring
cost that the city would need to budget for.
13About LCS Consulting and Douglas Larson
Douglas Larson is president of LCS Consulting, LLC, a consulting company specializing in regulatory
ratemaking policy, financial analysis and regulatory strategy. Larson previously served as Vice President
of Regulation for PacifiCorp, where he was responsible for all ratemaking and regulatory matters before
state and federal regulatory agencies. LCS has consulted for NW Natural Gas, PacifiCorp, and Questar.
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