Last week, Southern California Edison announced plans to hike electric rates about 15 percent next year, while Pacific Gas & Electric is looking at an increase of 6 percent to 7 percent.
High natural gas prices could be a major challenge for SMUD in the future. But the District expects to get through 2006 and 2007 without having to raise rates.
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High natural gas prices could be a major challenge for SMUD in the future. But the District expects to get through 2006 and 2007 without having to raise rates.
That was the message executive managers conveyed Tuesday evening to SMUD directors at a meeting of the Board Finance Committee. As background for discussions on staff’s proposed 2006 budget, Chief Financial Officer Jim Tracy gave a presentation on SMUD’s financial outlook through 2010.
“Our bottom line is we’re seeing some pressure from natural gas prices, but not to the same degree that other California utilities are,” Tracy said. “Through 2007, not much will happen to our net income as a result of natural gas prices, provided we have normal water years.”
SMUD already has lined up all the natural gas it will need for power generation in 2006 and 90 percent of needs for 2007.
“In 2008 to 2010, gas prices prices could be more of an issue. Right now, almost 50 percent of our energy portfolio is exposed to natural gas prices in those years,” Tracy said.
A $1 change in the price of natural gas would have a $40 million annual impact on the SMUD budget in 2008 through 2010. But the market is extremely volatile, and it is premature to draw conclusions about how natural gas prices will affect the budget after 2007, Tracy said. Staff will re-evaluate the gas price outlook a year from now.
While staff foresees no need to increase rates in the next two years, the pressure from gas prices will make it very challenging for the District to reach its financial goal of achieving 20 percent customer equity by the end of 2007. The 20 percent equity level would leave 80 percent of the District’s assets financed by debt. The Board adopted the 20 percent goal two years ago to bring SMUD in line with other companies that have an ‘A’ credit rating and ensure that SMUD can continue to borrow at reasonable interest rates.
“Our objective still is to try to reach the 20 percent level,” Tracy said. “If we continue to save $5 million to $10 million a year on non-commodity operating costs compared with the budget, and we have decent water years, we may meet the 20 percent target. We are always looking for opportunities to use our power plants and other generation and transmission assets to be more efficient than we’ve budgeted for.”
The high cost of natural gas leaves SMUD vulnerable to some eye-popping costs if winters are dry enough to sharply reduce hydroelectric output from the Upper American River Project. Dry years also could mean substantial reductions in hydro power the District buys under federal contracts. Less hydro power would force SMUD to make unplanned purchases of wholesale power, and market prices for electricity have risen because California is highly dependent on gas-fired power plants.
The District has hydro hedge contracts that act like insurance, but the “deductibles” are relatively high. The net effect is that dry winters could cost SMUD $30 million to $50 million in any given year. On the upside, wet years could result in an extra $20 million to $40 million.
Natural gas is not the only big-ticket item that will affect the budget in coming years.
SMUD’s contributions to the CalPERS retirement plan will increase by an estimated $12 million next year. And beginning in 2007, staff is planning for $18 million in annual contributions that will build a fund to cover the long-term costs of retiree medical benefits.
On the plus side, Tracy said, SMUD could save up to $22 million a year on Rancho Seco decommissioning costs, beginning in 2009.
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