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Council Stabilizes City Light Finances

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In March 2010, the City Council approved legislation creating a Rate Stabilization Account (RSA) for Seattle City Light, and imposed a temporary surcharge on city Light rates as part of the funding package for the RSA.  In the year since then, the RSA has been fully funded to its projected level of $100 million, the surcharge has been eliminated, and both City Light and ratepayers are now protected against fluctuations in revenues in future years. Seattle City Light has some of the lowest rates in the country, one of the best energy conservation programs (leading to even lower bills – people pay bills, not rates), and a resource portfolio that is carbon-neutral and is based on salmon-friendly hydro resources. Unfortunately, a hydro dependent system delivers varying amounts of energy, depending on precipitation in the watershed, the amount of water that accumulates in the snowpack, and the timing of the snow melt in the spring.  The total amount of energy varies year to year, and the timing of energy production during the year does not necessarily match the need for energy in the Seattle City Light system.  City Light plans to sell large quantities of energy in good water years, but can be short of energy in bad water years. In the California energy crisis of 2001-2002, when Enron and other energy companies manipulated the market to run up energy prices, City Light was caught with the need to purchase large quantities of energy at prices that had skyrocketed.  Large surcharges were added to City Light bills, and City Light’s problems were a factor in the 2003 defeat of both the then-current and former Chairs of the Council Committee that oversees City Light. Subsequently, the Council adopted a strategy to pay off the major debt incurred in this crisis, initiate more conservative and austere financial policies, change City Light’s energy strategy to acquire new resources and generally have more power than it needed, and wound up actually reducing rates in 2004, 2005, and 2007.  Unfortunately, as the recession hit in 2008-2009, City Light now had large quantities of surplus power that it counted on for revenue, but prices plummeted with the decrease in demand associated with economic downturns.  In order to maintain City Light’s finances, the Council approved a large rate increase in the fall of 2009. At the same time, the Council began a process that resulted in creating the RSA, and in 2010 added a 4.5% surcharge to fund it.  The good news is that the RSA has been fully funded faster than we had hoped.  The Council initially designated City Light’s existing contingency fund of $25 million as the RSA seed money.  Last year City Light refinanced much of its outstanding debt, and the $57 million in savings were deposited to the RSA.  The 4.5% surcharge raised the remaining $18 million, and has now been lifted. Under the stabilization system, City Light will use conservative forecasts for revenue from surplus energy sales.  Any revenues in excess of that forecast will be deposited into the RSA, and any shortfall will be covered by the RSA.  In the event of a major shortfall, a surcharge would automatically be triggered – 1.5% if the RSA falls below $90 million, 3% if it falls below $80 million, and 4.5% if it falls below $70 million – and would remain in place until the $100 million reserve is reestablished.  If the RSA reaches a level higher than $125 million, the Council will consider a rate reduction or using the excess to pay off outstanding debt or for other purposes that would contribute to Seattle City Light’s financial health. In addition to the lifting of the surcharge, there was more good news this spring:  in the first three months, surplus sales revenues exceeded projections by $7.7 million.  City Light conservatively projects that by the end of the year, at least $5 million will be added to the RSA balance.  There will be neither a surcharge nor a financial problem for City Light in 2011. The tough decision the Council made to create the RSA is already paying off in financial stability.  We hope that 2011 is an indication that it will protect ratepayers effectively in the coming years.
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