How much will electric rates rise in Naperville?

An electric rate study in Naperville was clear on one thing: The cost must increase for both residential and commercial customers.

The question is how much.

The electric utility has been losing money because of inaccurate expense projections and cost overruns at one of the power plants that supplies the city, and it owes the city's water utility $13.2 million to repay a loan taken out in 2014.

The utility is supposed to have between $13 million and $14 million in reserves to cover 30 days of operating expenses, but it has none. In fact, it's in the hole after losing about $3.3 million during the past fiscal year.

So officials aren't hiding it: The city's 57,000 electric customers have to pay more.

But decisions city council members soon will make about future costs for electric customers go beyond price.

Creation of an automatic rate adjustment is also on the table. The adjustment would change the consumer price every month based on whether the city's cost of providing electricity was above or below a base rate.

Finance Director Rachel Mayer said this would protect the utility from major swings in cash flow and make sure customers are paying the accurate amount to cover costs - not too little or too much.

One other major electric decision centers on whether the utility should borrow money to make more capital improvements.

Electric Director Mark Curran said capital spending has been slashed the past two years from the recommended $12 million a year to about $5 million a year.

Curran said long-term projects, such as improvements to connections between electric substations on Washington and Jefferson streets and Ogden Avenue, have been put off.

And as soon as money is available, he'd like to replace more cabling in residential subdivisions to extend the life of the electric delivery infrastructure without having to completely replace it.

Customer costs, rate adjustments and capital spending all will factor into city council considerations as members decide what to do about the need to charge more for electricity. Members will convene for a workshop Nov. 9 to address these topics. But before then, from 5 to 8 p.m. Wednesday, Oct. 21, the city will host a public open house about electric rates in meeting rooms A and B at the municipal center, 400 S. Eagle St.

Power problems

In early 2014, the city council took steps to address the cash problems the electric utility has been facing since entering into a new, 24-year power contract with the Illinois Municipal Electric Agency in 2011.

The agency is a nonprofit government unit that delivers electricity to 34 members including Naperville, and it has a 15 percent stake in the Prairie State coal power plant in southern Illinois.

City Manager Doug Krieger said some of the higher-than-expected electric costs can be attributed to extra construction costs and inefficiencies at the Prairie State plant, which cost $5 billion instead of a projected $4 billion to build and which opened 10 months behind schedule.

City officials said a variety of other reasons also have caused electric costs to top projections, including cheaper natural gas, which hurts the price of electricity, and lower-than-expected customer demand for power, partially because of mild weather.

The council in April 2014 voted to implement a 6 percent electric rate increase in 2014 and a 7 percent increase that became effective May 1, 2015, to address cost concerns. And fortunately, Mayer said, the situation at the Prairie State plant has improved. She and Curran said the plant is now running at about 80 percent efficiency, which is considered optimum to allow time for repairs and maintenance.

But Illinois Municipal Electric Agency members are still paying off debt on construction of that power plant and another one, and Krieger said more needs to be done to stabilize the finances of the city electric utility.

That's why the city commissioned a $68,000 electric rate study by consultant Utility Financial Solutions. The study has outlined seven alternatives the city will use to determine how to set electric rates for the next three years.

Rate options

Two of seven alternatives provided by Utility Financial Solutions - one that suggests doing nothing and another that suggests only implementing an automatic rate adjustment - are not reasonable, city officials said. But the remaining five will be under council consideration beginning during the Nov. 9 workshop. Here are the options:

• Increase rates all three years for both commercial and residential customers. Suggested rate increases are between 4.5 percent and 8.5 percent in 2016 and between 1.5 percent and 5.5 percent in 2017 and 2018.

• Increase rates by the same amount each year - between 2 percent and 6 percent - for both commercial and residential customers, while also borrowing $8.3 million in 2016 to provide additional funds for capital maintenance and improvements.

• Increase rates each year for both commercial and residential customers and implement an automatic rate adjustment called a purchased power adjustment. Rates would rise between 4 percent and 8 percent in 2016 and between 1 percent and 5 percent in 2017 and 2018.

• Increase rates, borrow $8.3 million in 2016 to fund capital improvements and implement a purchased power adjustment. Rates would increase for both commercial and residential customers between 1.5 percent and 5.5 percent each of the next three years.

• Increase rates, borrow $8.3 million each year in 2016 and 2017 and implement a purchased power adjustment. Rates would increase for both commercial and residential customers between 1.5 percent and 5.5 percent each of the next three years.

Rate increases could vary for commercial and residential customers because Krieger and Mayer said the study found large commercial businesses are paying more than their fair share for electricity and subsidizing customers of other sizes.

The five viable scenarios result in the electric utility having different amounts of reserves - between $13 million and $23 million - at the end of 2018.

Krieger said so far the option of increasing rates and establishing a purchased power adjustment has been getting the most serious discussion. Going that route would result in $16 million in the bank for the electric utility at the end of three years.

The scenarios are based on assumptions that the electric utility will pay back its water utility loan over five years, that power demand will stay flat and that the city will gradually increase spending on electric capital maintenance to $8.3 million in 2016, $8.3 million in 2017, $10 million in 2018 and $12 million in 2019.

Assuming flat power use keeps the estimates conservative, and Krieger said the estimates should be more accurate than in the past because they're using data gathered by the smart grid system.

If the city council chooses to implement rate increases or start a purchased power adjustment, the higher costs and varying rates could go into effect March 1, 2016.

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  Naperville's electric utility has been losing money and owes the city's water utility $13.2 million, so council members are set to begin considering rate increases that could take effect in March 2016. Scott Sanders/
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