Naperville recommending 6 percent electric rate increases

The $92.79 the average Naperville resident pays each month for electricity is likely to increase this spring as the city council considers rate increases to help offset recent losses.

The city-run electric utility, which finished the last budget year in April 2013 with $5 million, now is projected to have a $14 million deficit by the end of this April, City Manager Doug Krieger said Thursday.

"This coming year is the first time we're financially in the hole," Krieger said. "Now is really the time to make the change."

City staff members are recommending the council authorize 6 percent rate increases for both of the next two years to bring the electric utility closer to breaking even, at an estimated $4 million in the red by the end of April 2016.

The first rate increase could take effect May 1, with the second a year later.

The increases would replace - not add to - the 2 percent increases planned for each of the next two years under a rate study commissioned in 2011.

Before recommending rate increases, Deputy City Manager Marcie Schatz said the electric utility cut 18 percent of the costs it can control from its budget, slashing roughly $8 million over the next two years. Cuts were made to overtime, capital projects and vehicle replacement, and some vacant positions were eliminated.

The electric utility's cash problems have arisen mainly because the cost of buying power from Illinois Municipal Electric Agency, a nonprofit government unit that delivers electricity to 34 members including Naperville, has exceeded predictions used in the city's 2011 rate study.

Naperville started receiving power from the municipal electric agency, or IMEA, in 2011 under a 24-year contract.

"If we had a three-year contract with IMEA, we could have gotten a better deal buying electricity on the market. We didn't get into the deal for a three-year horizon," Krieger said. "It's a long-term commitment ... so we don't have to be subject to market volatility."

Power costs since 2011 have exceeded expectations because of three main factors, Krieger said.

First, the recession and the increasing supply of natural gas have driven electricity prices down. While that sounds good, it had the opposite effect for IMEA because the agency sells more power than it buys to supply its members.

With prices down, IMEA was not able to profit as much from the energy it sells to the wider market. And the agency only saw savings on the 24 percent of its power needs it meets through buying electricity on the market.

Second, IMEA has experienced extra costs because of construction delays and operating inefficiencies of the Prairie State coal power plant in southern Illinois, in which IMEA has a 15 percent stake. The facility cost $5 billion to build instead of the projected $4 billion, and it did not begin producing power until June 2012 - 10 months behind schedule.

Third, the city's 2011 electric rate study predicted customers would have a higher baseline demand than they actually do. The purchase price of power is set based on peak demand, which Krieger said occurs about 6 p.m. when residents begin arriving home, and on average baseline demand throughout the day. Because electric customers did not use as much electricity throughout the day as projected, and billing is based on use, the electric utility has not been able to charge enough to cover costs.

Before the next study of future electric rates, which Schatz said is planned to begin in summer 2015, staff members are recommending the council bring in more revenue from electric bills. The council will review the rate increase proposal at a workshop at 5 p.m. Monday in the municipal center, 400 S. Eagle.

Options other than consecutive 6 percent rate increases include keeping rates the same and losing $21 million over two years; raising rates 2 percent each year as originally planned and remaining about $14 million in the red by April 2016; implementing 7 percent rate increases each of the next two years to break even by April 2016; or rebuilding a reserve of $11.4 million over two years by increasing rates 9.5 percent this year and 10 percent next year.