Switching power suppliers last year resulted in a $4 million savings in wholesale power costs for Garden City’s electric utility in 2014, and could mean a small decrease for the city’s rate-payers in the future.
The Kansas Municipal Energy Agency began supplying electricity to Garden City on Jan. 1. The city had decided roughly a year earlier to end its power supply contract with Wheatland Electric Cooperative due to concerns about future rate increases proposed by the company.
Mike Muirhead, public utilities director, said the city paid Wheatland $23,290,245 in 2013. The estimated total cost to the city for the first year of its association with KMEA is $19.2 million, which includes all costs for procuring the power supply, administrative charges, transmission service, Wheatland’s facility charge and costs to operate the Jameson Energy Center.
“We don’t have November or December’s billing from KMEA, but we feel our estimates are pretty accurate,” Muirhead told the Garden City Commission on Tuesday.
The city did not increase rates in 2014, Muirhead said. Stabilizing electric rates was one of the city commission’s primary goals in switching power providers.
“We had been told in 2012 (by Wheatland) that we would receive a 6 percent increase in wholesale power costs, and that could continue for multiple years in a row. So hats off to you guys for stable rates in 2014. We expect rates to remain stable through 2015, and more than likely through 2016 without any changes,” Muirhead said.
Initially, the city’s consultants estimated a switch to KMEA would save $2.5 to $3 million. Muirhead said additional savings were realized by taking advantage of the Day 2 integrated marketplace that went into effect in March, which changed the way those in the power business do business.
“We took advantage of some reduced costs; got some really cheap energy at certain times,” he said. “Our intention is to do that in following years.”
The numbers look good so far, Mayor Roy Cessna said.
“I think it did what we wanted it to do — to stabilize the rates. I think that’s what it did,” Cessna said.
Commissioner Dan Fankhauser said the commission also will need to decide whether to reduce rates.
“I think it’s something we ought to consider,” Fankhauser said. “You know, everybody else seems to be raising rates. If we can help by lowering rates, I think we should do it. I don’t know where — I’d say 1 or 2 percent.”
According to estimates prepared by Muirhead, each 1 percent reduction in electric rates would cost about $282,866 per year and would reduce the amount of cash carried over from one year to the next in the utility. The commission did not make a decision Tuesday about reducing rates, but may bring it up again sometime in January.
Later, the commission approved a resolution creating an electrical systems operating capital reserve account for the operation and maintenance of the Jameson Energy Center or for transmission, distribution or substation requirements in emergency situations.
When the city switched power providers at the beginning of the year, KMEA secured all the necessary power supply and transmission requirements for the city, and installed three gas-fired turbines that can produce 27 MW of generation at the center, which became operational in May.
The operation and maintenance agreement with KMEA requires the city to have adequate reserves for the JEC. Muirhead recommended setting aside $750,000 per year from the electric utility for the reserve fund, though that funding decision won’t be made until the annual budget is put together.
Muirhead said it’s important to have a healthy cash reserve available for the electric utility because of the expenses involved in repairing or replacing equipment. For instance, he said, a new substation costs about $3 million, so it’s best to plan ahead for those kinds of issues.
Utility industry standards suggest maintaining a four-month reserve of cash on hand for operating expenses, which for Garden City would be about $10.5 million. In addition to putting $750,000 per year into a capital reserve account for the the energy center, Muirhead recommended putting another $500,000 per year into an operating reserve account, which would get the city close to the $11 million reserve mark by 2019.