Officials say a variety of factors created the $27 million difference between the optimal fund balance for Naperville’s municipal electric department and its current red ink.
Instead of meeting best practice guidelines by having cash reserves sufficient to operate for two months, about $14 million, the fund had a shortfall of $13.2 million when fiscal 2014 ended. The utility is funded by customer fees, not taxes.
The combination of variables responsible for the gap, officials say, included unstable energy prices, hikes in the cost of the utility’s power purchases, local usage that brought higher rates, and unusually temperate weather.
The city’s participation in the Illinois Municipal Electric Agency has cost more than what was envisioned when a 2011 rate study provided the basis for rate projections over the following several years. A purchasing consortium of 32 public electric systems, the IMEA added Naperville to its membership in 2007. The local utility began buying energy through the agency’s portfolio in 2011 as part of a contract that extends until 2035. Naperville, which now represents 37 percent of the agency’s buying power, has seen its energy costs exceed yearly projections since that time, by as much as 16 percent in fiscal 2014, city documents show.
Much of the city’s added IMEA expense also can be traced to higher costs related to the coal-burning Prairie State Energy Campus, which went online in southwest Illinois in 2012 and ran over its anticipated $4 billion construction budget by 25 percent. The IMEA holds 15 percent ownership of Prairie State.
The impact of the overrun, as well as that seen at the Trimble County plant in Kentucky that also furnishes fuel for the IMEA, is felt by Naperville ratepayers every month. Former City Councilman Bob Fieseler, who remains critical of the utility’s involvement in the IMEA, estimates that the average residential bill is nearly $5 larger because of Prairie State’s overruns, and city staff don’t dispute the figure.
“It’s equivalent to going to every customer every month and saying, ‘Give me $5 for the cost overruns Downstate,'” Fieseler said recently.
He thinks the IMEA should have seen it coming.
“The overruns were happening in 2007,” he said. “It was the biggest public works project in the United States at the time.”
The tumbling price of natural gas has hurt the IMEA members as well, cutting deeply into the demand for coal. When Prairie State was under construction, natural gas was selling for $15 per million British thermal units. Kevin Gaden, president and CEO of IMEA, said in a mid-2014 memo to city officials that the cost then was $4.50 per million BTUs. As of Oct. 6, the U.S. Energy Information Administration Center was reporting a price of $2.46.
Also blamed for the higher bills is Prairie State’s percentages. The facility encountered equipment problems that resulted in it operating below two-thirds of its full capacity for the first couple of years after it opened, although the plant ran at a monthly average of nearly 78.5 percent through the first three quarters of this year, according to figures provided by Prairie State. The past summer’s numbers were still better, averaging 90.4 percent, the data show.
“Prairie State is a learning organization, constantly seeking methods to advance our energy campus,” campus CEO and President Don Gaston said in a news release. “The improved coal quality in our mining operation and higher reliability at the power plant this summer are a direct result of that philosophy.”
A management change at Prairie State also gives cause for optimism, Naperville electric utility Director Mark Curran told the Public Utilities Advisory Board last week. Gaston took the agency helm last November.
“They’re doing much better in operations of the plant, so we’re really hoping that continues as we move forward,” Curran said.
Now helping boost the accuracy of projections, he said, is the wider pool of usage data collected through the city’s digital electric meters, which were installed in 2012 and 2013. Federal funds of $11 million covered nearly half of that project’s expenses.
Some variables are beyond anyone’s control, however. The weather has not been cooperative in recent summers for utilities that rely on air conditioners and hoses running to counter the usual effects of the season’s heat and sunshine.
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Records provided by the city show $40.8 million was billed to electric customers over this year’s mild summer. In the summer of 2012, one of the hottest seasons on record for the area, customers’ rates were significantly lower and the revenues came to $47.4 million. With the exception of that steamy season, summer income for the utility since 2010 has averaged $39.2 million.
Awaiting repayment of its $13 million loan to the electric division, the water department is subject to weather-related cash flow troubles of its own. The division, which generally has its income and spending in equal measures, also is seeing lowered demand for water. That’s expected when rainfall amounts exceed averages.
In 2012, when the region also saw a drought, the water utility sold 799.3 million gallons during June. This year, when that month was one of the wettest on record, city figures show sales barely topped 434 million gallons. Less rain came down in July and August, but that didn’t erase the earlier income shortfalls.
“Right now we’re not balanced,” water utility Director Jim Holzapfel said to the PUAB members.
The IMEA contract commits Naperville to remaining part of the agency for another two decades. But based on projections that have ended up far short of realities, Fieseler said the city should consider leaving the pact behind.
“The only power you have in the United States is the power to walk,” he said, although he acknowledged the utility would face substantial monetary penalties for breaking the contract.
City Manager Doug Krieger said the unmet assurances of lower costs are one of assorted defenses that could be put forth if the city were to breach the agreement, but it’s not being seriously considered at this point. Finance Director Rachel Mayer said she’s keeping an eye on how things play out in Batavia, which was dealt a setback in August when a federal court tossed its suit against Prairie State that had alleged omission and misrepresentation of quality and cost.
Also proposed by some is getting out of the electric business altogether by selling the utility. Discussed recently as part of the city’s look at liquidating some of its more valuable assets, the option isn’t being recommended by staff, but there has been talk about it.
“We’re investigating it,” Krieger said. “We’ve had a couple meetings with ComEd.”
A sale wouldn’t bring much long-term benefit, he said, although it’s too soon to know much else about the possibility, or even its likely market value.
“It’s way too preliminary to put any kind of numbers or dollars around it,” Mayer said.
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