The North Little Rock City Council voted Monday to follow the recommendation of its chief electric department administrator and allow the utility to pass on a cost recovery fee to ratepayers so it can start building up more in its financial reserves.
It voted following a presentation by NLR Electric General Manager Mike Russ who said the utility’s lack of financial reserves, also known as liquidity, has lowered its credit rating and is making it more expensive to borrow money.
With council’s vote, the charge will be included on the September bills.
He said the cost recovery fee will be calculated each month. If more is being collected than is necessary to recover electric costs paid for by the utility, then ratepayers will get the surplus back. If less is being collected to cover the fuel costs incurred by the utility, then the cost recovery rider would increase.
In the presentation, a "2011 worst case retail billing" example that was given stated a retail customer with a monthly usage of 1,000 kilowatt hours would pay about $6.14 more per month. That same customer from January through April 2012 would have paid an average of $1.62 more.
Russ said North Little Rock Electric currently has an A-minus credit rating, which added one-quarter of a percentage point in interest when the city recently agreed to borrow $37 million to restructure the utility’s debt.
"When you add a quarter of a percentage point on your interest rate on $37 million that is a lot of money," Russ said.
Russ said he wanted the utility to implement what he calls an integrated resource plan, which would improve North Little Rock Electric’s financial liquidity and make its creditors feel more secure about NLR Electric’s financial condition.
Russ outlined the troubles the utility faced in 2011 which exposes some of its structural weaknesses with respect to its finances. He pointed out how the Murray Hydro plant underperformed due to dry weather and Plum Point flooded out which resulted in less electric output.
"North Little Rock Electric’s financial risk profile is weak for the ‘A’ category and liquidity is the primary emphasis," Russ said. "In the past five years, unrestricted cash on hand, on average, equaled about 70 days of operating expenses."
He said NLR Electric usually carries reserves of between $5-$8 million, which is not enough to satisfy the concerns of potential creditors, which results in higher borrowing costs.
"We are being told that we should have liquidity of between $10 and $14 million," Russ said.
He said the utility needs a new policy to recover fuel and purchases power cost increases.
Russ said NLR Electric’s cost recovery policy needs to cover several areas, including Plum Point’s total costs, market purchases, Murray Hydro’s variable costs, Two Pines purchases and all Regional Transmission Organizations-related expenses.
Russ recommended the city adopt a cost recovery policy that represents a six-month rolling average, with three months of actual power costs and three months of budgeted power costs.
If the utility collected more money than was needed through the cost recovery charge, it could give some of it back to customers, he said.