ELIZABETHTON — The slower-than-anticipated economic growth in the nation is having an impact on Elizabethton electric revenues, particularly cash flow, which could lead to an increase in electric rates of about 2.1 percent next year.
The Elizabethton City Council held a workshop session with electric rate structure consultant Chris Mitchell on Tuesday afternoon. Mitchell, a former Tennessee Valley Authority employee, is the head of Chris Mitchell Management Consultants.
Mitchell recommended increasing the city’s electric division revenue by 2.1 percent, or $1.2 million, Jan. 1. This would probably not be an across-the-board increase, but would be set at differing rates, depending on the findings of a cost-of-service study that has not been completed.
City Manager Fred Edens started the meeting by saying “I wish I didn’t have to call this workshop, but I would be remiss in my duty to you and the citizens if I didn’t.” Edens said he was “between a rock and hard place” on the electric-revenue issue.
City staff had pointed out to the council in the summer of 2010 that a rate increase may need to be considered. During the recently completed budget discussions for the current fiscal year the council had talked about using a letter of credit, but in preparing information to obtain the letter of credit, it became apparent a rate increase would have to be made in order to receive it.
One problem in the city’s electric revenue is that the interest being paid on a $20 million loan to rebuild nine electric substations is demanding more cash than anticipated. Edens said the city, like the rest of the nation, has not experienced the economic growth that had been expected in the past year. With less new revenue coming from growth, it means a larger percentage of revenue is being siphoned off in interest payments than planned.
Mitchell’s financial analysis of long-term interest expense as a percentage of revenue minus power costs would climb from 8 percent to more than 16 percent in the next few years.
Another new problem the city is facing is the change in the TVA rate schedule has led to the need for the city to keep more cash in reserves than in the more stable days of the recent past. Edens said that historically, the city has kept 5 to 8 percent of revenue in reserves. Now the city is required to keep anywhere from 8 to 16 percent, and the new fund-balance policy requires the city to keep 15 percent in reserve.
Mayor Curt Alexander asked Mitchell if the city had “tried to do too much too soon” in rebuilding all the substations within a short period. Mitchell said he was not a system engineer, so he could not answer the question.
The consensus on the panel appeared to be that in the past the electric system had low rates but an aging infrastructure with reliability problems. As a result of the rebuild, the system now has average rates for the region with new infrastructure and better reliability.
Mitchell’s recommendation would improve projected cash balance into the recommended range and bring four key ratios into recommended levels. The rate increase also would allow the city to meet the requirements of a letter of credit. He said if national and local financial conditions improve quicker than expected, the rates could be reduced. For that reason, rates should be reviewed on an annual basis.
One of the decisions the council will have to make if rates are raised is how to distribute the increase. A cost-of-services study will assist in making that decision. Another factor may be the trend that Mitchell sees in the region to promote job creation.
Both of those factors could mean residential rates would be raised by a higher percentage than commercial or industrial.
Alexander said after the meeting the key to Mitchell’s recommendation of a $1.2 million annual increase is that rates should be raised by about $100,000 a month. He said there are 25,000 customers in the system. That works out to about a $4 increase per month per customer.