Natural gas may be the best buy in town
Natural gas is cheaper than any other fuel except wood, according to Dan Bergmann, a consultant with Interstate Gas Services, who made his fourth presentation to the Susanville City Council on Thursday, Oct. 12.
Other topics covered in the workshop-style meeting included a report on 2006, a forecast for 2007, three possible rate revisions (construction surcharge, lower tier 2 pricing and an optional variable price), consideration of special offers for new residential customers, revising the look and simplifying the customer’s bill and a plan for debt repayment including refinancing the $24 million project.
The council took no action at the meeting and asked Bergmann to refine the report and bring back more data.
Bergmann noted the city gained 97 customers and lost 22 for a net gain of 75 customers in the 2006-2007 fiscal year. Since July, the city has gained another 29 customers.
“We’re doing great,” Bergmann said. “We are gaining customers, we’re not losing them. I would expect that would continue.”
Several members of the council wanted to find a way to lower rates for residential customers, but Bergmann said even with the rates where they are, natural gas remains the best energy source in town.
“We are still OK with regard to our residential customers — where the existing residential rate is compared to the other fields — propane probably being the most significant competitor, and the other fuels behind that,” Bergmann said. “One other thing to notice about this is when you look at the comparative wholesale cost, natural gas is in a good place for you compared to the other fuels … even though we’ve raised rates three times, you’re still better off than the other fuels.”
In a fuel cost comparison he prepared for the council, he noted the price per usable therm was $2.90 for natural gas, $3.57 for electricity from Lassen Municipal Utility District, $3.34 for propane, $3.23 for kerosene, $3.04 for heating oil and $2.51 for wood.
Those figures aside, the members of the council still expressed an interest in finding a way to lower rates, which Mayor Lino Callegari said are difficult for senior citizens to pay.
The natural gas system lost $521,000 in 2005-2006, according to Bergmann’s figures (which included interest and investments as well as depreciation and amortization). However, the Gas Enterprise Cash Balance had a positive net change of $41,000 during the same period.
According to Bergmann’s projections, the city could receive a net revenue surplus of $291,000 for the fiscal year 2006-2007, based largely on the significant decrease in the cost of natural gas and a 4 percent increase in sales.
Bergmann said the gas costs for this fiscal year were “essentially locked” at $1.6 million because the city had already purchased strips of gas for this year, except perhaps for some small purchases on the spot market.
Bergmann also recommended the city include the construction surcharge in the rate paid by the customer in a proposed streamlining of the city’s natural gas bills.
Councilman Kurt Bonham said the construction surcharge was never really a construction surcharge and if the revenue generated by the surcharge is going to be treated as revenue, it should just be part of the rate.
“The construction surcharge was put in place back in 2004,” Bergmann said, “and the way it was put in place is such that it shows up as a separate line item on the customer’s bill. What I would recommend to you at this point, to make life easier for your customers, is that you roll that component into your other rates so it’s just part of the total rate.”
Councilman Rocky Joy said he’d like to get rid of the construction surcharge and give customers a lower rate.
“The biggest discussion I’d like to have is to try to put this on a reduction based on the fact that surcharge was set there for construction purposes,” Joy said, “and if we’re able to meet our profit margin at this time, I know that surcharge is included in that, but that is still a fee that people have a difficulty with even if you roll it into the existing cost of gas.”
Bergmann told the council the way to protect the rate paid by residential customers was to lower the rates the largest commercial customers pay. One of his recommendations was to lower the second tier rate from $2.26 to $1.90 — a reduction of 36 cents.
“Along the lines of lowering rates, a second opportunity that we have, for the purpose of protecting and attracting the commercial sector is to lower the second tier charge,” Bergmann said. “The second tier charge effectively applies only to commercial customers. So let me be clear, we’re talking about commercial customers here, and lowering their rates and not residential …
“The reason you could lower that second tier rate is that the city has entered negotiations with the college, and we can expect increased revenue from the college. That increased revenue can be used someplace else. The purpose again for lowering the commercial rate is to protect and attract commercial customers.
“If you do not protect service to those larger customers, which give you a larger contribution, you will need to end up increasing your rates to the residential side, anyway. So, in a sense by retaining those commercial customers, you are protecting the rates you’re charging your residential customers.”
Bergmann also recommended the city could offer its large commercial customers a variable rate tied to the cost of other energy commodities. Such a plan should also include a “price floor” which would protect the city of Susanville and establish a long-term commitment from the customer. He said pricing information from competitors is easily available as public information.
“One of the things that is a function of being a municipal gas utility is that everything we do is public,” Bergmann said. “Right now this is public. Everything’s out there — your rates, your costs. When I was in the private sector, it’s not public.
“But we have the benefit of the county of Lassen, for example, in this area, and they’re a public agency, too. They’re a buyer not a seller. And as a result of them being a public agency and because of the way they buy their prices are transparent. So these prices for county of Lassen facilities, as of October ’05, are on the Internet in the same way I might go through your minutes or your information that is publicly available, I went through theirs and it’s right there. It’s in the public sector. These are the prices the county of Lassen paid for heating oil and propane … so we’ve got a formula that is essentially our competition.”
Bergmann said the city should offer competitive rates to its large commercial customers rather than a fixed price.
He said everyone knows the contract price for the college is $1.02 per therm, and at the time the price was negotiated, the value of oil was just over $1 per therm. But the price of natural gas and oil have both increased since then.
“So before the city of Susanville ever did that kind of deal again,” Bergmann said, “my recommendation would be, ‘Don’t fix your price. Look at what the competing prices are and index to it.’”
According to Bergmann, the city would need to collect another $244,000 a year, or about 12 cents per therm, to begin paying the principal on the loan that financed the system.
He said all the city would need would be one industrial customer or 10 median commercial customers and 67 residential customers to generate an additional $244,000 per year.
“This is very doable,” Bergmann said.
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