Favorable Budget Leads to Changes at EBCE

A volatile energy market has resulted in a big budget surplus at EBCE, creating opportunities to cut bills and boost local programs.

Upheavals in the energy market are resulting in big changes to EBCE’s expenses and revenues — creating some big opportunities to cut rates, lower bills for low-income customers, and expand local programs.

One big energy upheaval is Russia’s invasion of Ukraine, which has disrupted global markets for oil and gas. This came just as the US finished building new export terminals for liquified natural gas (LNG), which served to link US and global natural gas prices. The boost in demand on global markets for American LNG has helped domestic gas prices to quadruple since 2020.

These higher fuel costs are carrying through to higher electricity costs. This has had a complicated effect on EBCE’s revenues and costs.

EBCE’s total expenses were $22 million higher than expected in the current fiscal year 2021-22 (ending in June), hitting $509 million. But total revenues rose $63 million over the expected level, to $565 million, creating a surplus of $55 million (based on current estimates).

“Things have gone crazy since February — the price of gasoline, the stock market,” Nick Chaset told the EBCE board. “There’s been a tremendous amount of volatility and we are seeing that in the electricity market.”

What is driving this change?

First, EBCE rates are indexed to PG&E rates. Our main product, Bright Choice, has been pegged at one percent below PG&E’s main rate. So when PG&E rates go up, so do ours. While all power providers are affected by costs on the wholesale market, PG&E is more affected than EBCE.

The second factor is the Power Cost Indifference Adjustment, or PCIA. This is the “exit fee” that EBCE customers are required to pay for PG&E contracts that are no longer needed to serve them, but are still in effect. The PCIA is set by regulators based on market conditions, and is embedded in EBCE rates. Since EBCE rates are effectively capped by that 1% savings, the cost of the PCIA can cut into EBCE net revenues. This year, with high energy prices, the cost of the PCIA went down, essentially raising EBCE’s profits.

The trend is expected to grow in FY 22-23, with total expenses rising to $607 million, but total revenues growing 36 percent to $770 million. This could lead to a surplus rising to $163 million a year from now, or even as high as $226 million with higher price forecasts.

While this might be good news for a profit-making corporation, EBCE is a non-profit public agency serving its member cities. The board has responded to the surplus with a number of steps.

The biggest use of the surplus would be to add $75 million to a reserve fund and $50 million for working capital, to protect against unforeseen risks in the future and to benefit EBCE’s financial credit rating — which lowers the cost of borrowing. One of the biggest unknowns is the cost of PCIA, which can be hard to predict.

Another unknown is the cost of energy not locked down with long-term contracts, which can vary widely based on fuel costs, demand, and other factors. Analysts expect natural gas prices to rise even higher in the near future, as drought cuts hydropower production. Although EBCE does not directly contract for any power from fossil fuel power plants, the price of fuel can carry through to the wholesale market, affecting the price of last minute purchases EBCE makes.

“We are in a period of historically high energy pricing and significant volatility,” says Chaset. “Our forecasted market energy costs in 2022 and 2023 are approximately double the historical 12-year average.”

EBCE is also using the surplus to cut rates, with Bright Choice service falling to 3 percent below PG&E rates, instead of the 1 percent discount currently. The premium for the all-wind-and-solar Renewable 100 service would fall from 1¢ to 0.75¢ per kWh above PG&E rates. These cuts would return about $35 million to EBCE customers in the coming year.

This would also slightly lower costs for the member cities that have set 100% Renewable as the default rate option for their residential and commercial customers. EBCE’s total share of renewables will rise from 45% to 54% in the coming two years, combining with large hydroelectric power to push our carbon-free portfolio up to 71%. This boost will add $3.3 million to costs, with each 1% increase costing around $667,000.

The surplus would also fund a $50 bill credit to all 124,600 customers on the CARE & FERA discount rate plans, delivering a one-time bill savings of about $6.25 million to low-income customers.

EBCE will be hiring 19 additional staff, and has purchased a building in Oakland to serve as headquarters, with a one time cost of $7 million in capital improvements.

A big change will be funding for Local Programs, rising from $8.5 million to $21.35 million next year. The largest share of the budget would be $12.75 million for vehicle electrification and charging, with another $4.7 million for building electrification. Community grants, resilience, and sponsorships would make up most of the rest. Board member Dan Kalb made a motion to increase the community grants budget to $4.2 million over three years, which was approved by the board.

EBCE is going big on vehicle electrification, with a suite of programs. EBCE’s first three public EV charging hubs are under development, with stations in Oakland, Piedmont, and Livermore. EBCE is allocating $5 million for charging infrastructure development capital. New vehicle charging infrastructure creates new revenue streams for EBCE, and will cut carbon pollution.

EBCE has also allocated $6 million for accelerating electric vehicle adoption. Funds will help member cities electrify their fleet vehicles and give incentives for “e-mobility” options, like electric bikes and scooters. Further funds will support the electrification of trucking, to cut emissions from goods movement in and around the Port of Oakland, a major source of air pollution for the region. This could involve owning a fast-charging service and providing loan guarantees for truckers to make the switch.

While this combination of market factors has created a banner year for the EBCE budget, it may not continue in the future. The budget invests the surplus in local communities and programs, while saving for future rainy days.